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




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##### 



FOUNDRY NETWORKS, INC.
 Table of Contents
 EXPLANATORY NOTE
    
    
    3PART I  FINANCIAL INFORMATION
    
    
    4Item 1. Financial Statements
    
    
    4Condensed Consolidated Balance Sheets
    
    
    4Condensed Consolidated Statements of Income
    
    
    5Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4. Controls and Procedures
    
    
    43PART II  OTHER INFORMATION
    
    
    46Item 1. Legal Proceedings
    
    
    46Item 1A. Risk Factors
    
    
    46Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    58Item 3. Defaults Upon Senior Securities
    
    
    58Item 4. Submission of Matters to a Vote of Security Holders
    
    
    58Item 5. Other Information
    
    
    59Item 6. Exhibits
    
    
    59SIGNATURE
    
    
    62EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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Explanatory Note
    3




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)
    
    
    Restated (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    251,447
    
    
    $
    291,511Short-term investments
    
    
    366,767
    
    
    
    280,868Accounts receivable, net of allowances for doubtful accounts of
$1,995 and $2,387 and sales returns of $2,019 and $1,784 at June
30, 2006 and December 31, 2005, respectively
    
    
    72,825
    
    
    
    78,351Inventories
    
    
    35,835
    
    
    
    32,312Deferred tax assets
    
    
    34,523
    
    
    
    34,000Prepaid expenses and other assets
    
    
    9,280
    
    
    
    7,825Total current assets
    
    
    770,677
    
    
    
    724,867Property and equipment, net
    
    
    12,267
    
    
    
    10,986Investments
    
    
    201,370
    
    
    
    173,988Deferred tax assets
    
    
    28,000
    
    
    
    24,657Other assets
    
    
    7,255
    
    
    
    6,467Total assets
    
    $
    1,019,569
    
    
    $
    940,965LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    20,300
    
    
    $
    22,306Accrued payroll and related expenses
    
    
    23,106
    
    
    
    24,132Income taxes payable
    
    
    
    
    
    
    12,457Other accrued expenses
    
    
    14,386
    
    
    
    9,660Deferred support revenue
    
    
    43,955
    
    
    
    38,653Total current liabilities
    
    
    101,747
    
    
    
    107,208Deferred support revenue
    
    
    22,357
    
    
    
    21,827Total liabilities
    
    
    124,104
    
    
    
    129,035Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value:Authorized  5,000 shares at June 30, 2006 and December 31, 2005;
None issued and outstanding as of June 30, 2006 and December 31,
2005
    
    
    
    
    
    
    Common stock, $0.0001 par value:Authorized  300,000 shares at June 30, 2006 and December 31, 2005:Issued and outstanding  145,666 and 141,149 shares at June 30,
2006 and December 31, 2005, respectively
    
    
    15
    
    
    
    14Additional paid-in capital
    
    
    692,435
    
    
    
    622,125Deferred stock compensation
    
    
    
    
    
    
    (2,760
    )Accumulated other comprehensive income (loss)
    
    
    (302
    )
    
    
    44Retained earnings
    
    
    203,317
    
    
    
    192,507Total stockholders equity
    
    
    895,465
    
    
    
    811,930Total liabilities and stockholders equity
    
    $
    1,019,569
    
    
    $
    940,965
 
 (1)
    
    The condensed consolidated balance sheet as of December 31, 2005 has been restated to reflect
the adjustments discussed in Note 2, Restatement of Condensed Consolidated
Financial Statements, to Condensed Consolidated Financial
Statements.  4




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 (in thousands, except per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restated (1)
    
    
    
    
    
    
    Restated (1)Net revenue:Product
    
    $
    89,289
    
    
    $
    80,748
    
    
    $
    185,352
    
    
    $
    149,180Service
    
    
    19,137
    
    
    
    15,840
    
    
    
    37,074
    
    
    
    32,044Total net revenue
    
    
    108,426
    
    
    
    96,588
    
    
    
    222,426
    
    
    
    181,224Cost of revenue:Product
    
    
    40,293
    
    
    
    34,193
    
    
    
    82,787
    
    
    
    62,788Service
    
    
    2,636
    
    
    
    3,277
    
    
    
    5,068
    
    
    
    6,362Total cost of revenue
    
    
    42,929
    
    
    
    37,470
    
    
    
    87,855
    
    
    
    69,150Gross margin
    
    
    65,497
    
    
    
    59,118
    
    
    
    134,571
    
    
    
    112,074Operating expenses:Research and development
    
    
    16,997
    
    
    
    13,820
    
    
    
    37,031
    
    
    
    24,906Sales and marketing
    
    
    31,344
    
    
    
    27,831
    
    
    
    65,615
    
    
    
    50,803General and administrative
    
    
    12,117
    
    
    
    4,953
    
    
    
    23,176
    
    
    
    9,015Other charges, net
    
    
    5,680
    
    
    
    
    
    
    
    5,680
    
    
    
    Total operating expenses
    
    
    66,138
    
    
    
    46,604
    
    
    
    131,502
    
    
    
    84,724Income (loss) from operations
    
    
    (641
    )
    
    
    12,514
    
    
    
    3,069
    
    
    
    27,350Interest and other income, net
    
    
    8,471
    
    
    
    3,794
    
    
    
    15,383
    
    
    
    7,651Income before provision for
income taxes and cumulative
effect of change in accounting
principle
    
    
    7,830
    
    
    
    16,308
    
    
    
    18,452
    
    
    
    35,001Provision for income taxes
    
    
    3,421
    
    
    
    5,341
    
    
    
    8,081
    
    
    
    11,785Income before cumulative effect
of change in accounting
principle
    
    
    4,409
    
    
    
    10,967
    
    
    
    10,371
    
    
    
    23,216Cumulative effect of change in
accounting principle, net of
taxes
    
    
    
    
    
    
    
    
    
    
    439
    
    
    
    Net income
    
    $
    4,409
    
    
    $
    10,967
    
    
    $
    10,810
    
    
    $
    23,216Basic net income per share
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.17Weighted-average shares used in
computing basic net income per
share
    
    
    145,279
    
    
    
    138,627
    
    
    
    143,886
    
    
    
    138,269Diluted net income per share
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.16Weighted-average shares used in
computing diluted net income per
share
    
    
    150,968
    
    
    
    141,486
    
    
    
    150,182
    
    
    
    141,759
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements, to Condensed Consolidated Financial
Statements.  5




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FOUNDRY NETWORKS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Six Months Ended June 30,2006
    
    
    2005Restated (1)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    10,810
    
    
    $
    23,216Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    4,958
    
    
    
    4,483Stock-based compensation expense
    
    
    27,317
    
    
    
    (5,765
    )Provision for doubtful accounts
    
    
    (392
    )
    
    
    426Provision for sales returns
    
    
    236
    
    
    
    73Inventory provisions
    
    
    5,253
    
    
    
    9,067Deferred tax assets
    
    
    (3,866
    )
    
    
    3,277Tax benefit from stock option exercises
    
    
    
    
    
    
    438Excess tax benefits from stock-based compensation
    
    
    (4,662
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    5,682
    
    
    
    31,822Inventories
    
    
    (8,614
    )
    
    
    (7,597
    )Prepaid expenses and other assets
    
    
    (3,703
    )
    
    
    273Accounts payable
    
    
    (2,006
    )
    
    
    7Accrued payroll and related expenses
    
    
    (1,025
    )
    
    
    (3,404
    )Income taxes payable
    
    
    (3,818
    )
    
    
    8,122Other accrued expenses
    
    
    4,726
    
    
    
    (270
    )Deferred support revenue
    
    
    5,831
    
    
    
    (4,714
    )Net cash provided by operating activities
    
    
    36,727
    
    
    
    59,454CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale investments
    
    
    (31,150
    )
    
    
    (73,850
    )Purchases of held-to-maturity investments
    
    
    (295,629
    )
    
    
    (112,456
    )Proceeds from sales of available-for-sale investments
    
    
    25,925
    
    
    
    269,250Proceeds from maturities of held-to-maturity investments
    
    
    187,573
    
    
    
    7,035Purchases of property and equipment, net
    
    
    (5,295
    )
    
    
    (3,067
    )Net cash provided by (used in) investing activities
    
    
    (118,576
    )
    
    
    86,912CASH FLOWS FROM FINANCING ACTIVITIES:Excess tax benefits from stock-based compensation
    
    
    4,662
    
    
    
    Proceeds from issuances of common stock
    
    
    37,469
    
    
    
    9,939Net cash provided by financing activities
    
    
    42,131
    
    
    
    9,939Increase (decrease) in cash and cash equivalents
    
    
    (39,718
    )
    
    
    156,305Effect of exchange rate changes on cash
    
    
    (346
    )
    
    
    398Cash and cash equivalents, beginning of period
    
    
    291,511
    
    
    
    112,274Cash and cash equivalents, end of period
    
    $
    251,447
    
    
    $
    268,977SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net of refunds
    
    $
    17,923
    
    
    $
    202
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements, to Condensed Consolidated Financial
Statements.  6




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##### Table of Contents



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




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Accounting for Stock
Issued to Employees Accounting for Stock-Based
Compensation
       Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restated (1)
    
    
    
    
    
    
    Restated (1)Cost of revenue  Product
    
    $
    442
    
    
    $
    (44
    )
    
    $
    1,011
    
    
    $
    (183
    )Cost of revenue  Service
    
    
    518
    
    
    
    (58
    )
    
    
    994
    
    
    
    (286
    )Research and development
    
    
    3,597
    
    
    
    (421
    )
    
    
    9,507
    
    
    
    (1,769
    )Sales and marketing
    
    
    4,065
    
    
    
    (506
    )
    
    
    11,699
    
    
    
    (2,126
    )General and administrative
    
    
    2,289
    
    
    
    (367
    )
    
    
    4,545
    
    
    
    (1,472
    )Total
    
    $
    10,911
    
    
    $
    (1,396
    )
    
    $
    27,756
    
    
    $
    (5,836
    )
 
 (1)
    
    See Note 2, Restatement of Condensed Consolited
Financial Statements. Accounting for Income Taxes Intraperiod Tax Allocation of the Effect of Pretax
Income from Continuing Operations
 8




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Three months ended
    
    
    Six months endedJune 30, 2005
    
    
    June 30, 2005Restated(1)
    
    
    Restated(1)Net income
    
    $
    10,967
    
    
    $
    23,216Add: Total stock-based compensation
benefit included in reported net
income, net of tax effect
    
    
    (847
    )
    
    
    (3,519
    )Deduct: Total stock-based compensation
expense determined using the fair
value method for all awards, net of
related tax effect
    
    
    (12,573
    )
    
    
    (25,737
    )Pro forma net loss
    
    $
    (2,453
    )
    
    $
    (6,040
    )Basic net income (loss) per share:As reported
    
    $
    0.08
    
    
    $
    0.17Pro forma
    
    $
    (0.02
    )
    
    $
    (0.04
    )Diluted net income (loss) per shareAs reported
    
    $
    0.08
    
    
    $
    0.16Pro forma
    
    $
    (0.02
    )
    
    $
    (0.04
    )Weighted-average
shares used in computing basic EPS
    
    
    138,627
    
    
    
    138,269Weighted-average
shares used in computing diluted EPS
    
    
    141,486
    
    
    
    141,759
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements. Valuation of Stock-Based Compensation
   Three Months Ended June 30, 2006
    
    Six Months Ended June 30, 2006Stock Option Plan
    
    Purchase Plan
    
    Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    
    4.9
    %
    
    
    3.4
    %
    
    
    4.7
    %
    
    
    3.1
    %Expected term (in years)
    
    3.3
    years
    

    1.7
    years
    
    3.3
    years
    
    1.6
    yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    45
    %
    
    
    60
    %
    
    
    47
    %
    
    
    60
    %
 Three Months Ended June 30, 2005
    
    Six Months Ended June 30, 2005Stock Option Plan
    
    Purchase Plan
    
    Stock Option Plan
    
    Purchase PlanRisk free interest rate
    
    
    3.6
    %
    
    
    2.6
    %
    
    
    3.6
    %
    
    
    2.4
    %Expected term (in years)
    
    2.6
    years
    
       1.4
    years
    
       2.8
    years
    
    1.3
    yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility of common stock
    
    
    60
    %
    
    
    64
    %
    
    
    62
    %
    
    
    65
    %
 9




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##### Table of Contents



Risk-Free Interest Rate.
 Expected Term. .
 Expected Dividend
 Expected Volatility.
 Estimated Forfeitures.
  Accelerated Vesting of Stock Options
  Cash Equivalents and Investments
   10




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June 30, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    85,236
    
    
    $
    
    
    
    $
    
    
    
    $
    85,236Government-sponsored enterprise securities
    
    
    102,726
    
    
    
    16
    
    
    
    (34
    )
    
    
    102,708Available-for-sale:Auction rate municipal bonds
    
    
    100,100
    
    
    
    
    
    
    
    
    
    
    
    100,100Held-to-maturity:Municipal bonds
    
    
    32,626
    
    
    
    
    
    
    
    (67
    )
    
    
    32,559Government-sponsored enterprise securities
    
    
  435,412
    
    
    
    

    
    
    
    (3,099
    )
    
    
    432,313$
    756,100
    
    
    $
    16
    
    
    $
    (3,200
    )
    
    $
    752,916Cash equivalents
    
    $
    187,963
    
    
    $
    16
    
    
    $
    (35
    )
    
    $
    187,944Short-term investments
    
    
    366,767
    
    
    
    
    
    
    
    (1,471
    )
    
    
    365,296Long-term investments
    
    
    201,370
    
    
    
    
    
    
    
    (1,694
    )
    
    
    199,676$
    756,100
    
    
    $
    16
    
    
    $
    (3,200
    )
    
    $
    752,916
 December 31, 2005 (Restated) (1)Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash equivalents:Money market funds
    
    $
    125,441
    
    
    $
    
    
    
    $
    
    
    
    $
    125,441Government-sponsored enterprise securities
    
    
    102,912
    
    
    
    3
    
    
    
    (61
    )
    
    
    102,854Available-for-sale:Auction rate municipal bonds
    
    
    84,575
    
    
    
    
    
    
    
    
    
    
    
    84,575Held-to-maturity:Municipal bonds
    
    
    22,974
    
    
    
    
    
    
    
    (86
    )
    
    
    22,888Corporate bonds
    
    
    1,511
    
    
    
    
    
    
    
    (9
    )
    
    
    1,502Government-sponsored enterprise securities
    
    
    345,796
    
    
    
    
    
    
    
    (2,619
    )
    
    
    343,177$
    683,209
    
    
    $
    3
    
    
    $
    (2,775
    )
    
    $
    680,437Cash equivalents
    
    $
    228,353
    
    
    $
    3
    
    
    $
    (61
    )
    
    $
    228,295Short-term investments
    
    
    280,868
    
    
    
    
    
    
    
    (1,360
    )
    
    
    279,508Long-term investments
    
    
    173,988
    
    
    
    
    
    
    
    (1,354
    )
    
    
    172,634$
    683,209
    
    
    $
    3
    
    
    $
    (2,775
    )
    
    $
    680,437
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated Financial Statements. 11




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##### Table of Contents



Municipal and corporate bonds.
 Government-sponsored enterprise securities (GSEs).
 The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments
 Loss Less Than 12 months
    
    
    Loss Greater Than 12 months
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesMunicipal bonds
    
    $
    19,250
    
    
    $
    (51
    )
    
    $
    5,643
    
    
    $
    (16
    )
    
    $
    24,893
    
    
    $
    (67
    )Government-sponsored enterprise securities
    
    
    359,553
    
    
    
    (2,117
    )
    
    
    114,484
    
    
    
    (1,016
    )
    
    
    474,037
    
    
    
    (3,133
    )$
    378,803
    
    
    $
    (2,168
    )
    
    $
    120,127
    
    
    $
    (1,032
    )
    
    $
    498,930
    
    
    $
    (3,200
    )
  Inventories
  June 30, 2006
    
    

December 31, 2005Restated(1)Purchased parts
    
    $
    6,039
    
    
    $
    8,008Work-in-process
    
    
    15,630
    
    
    
    11,475Finished goods
    
    
    14,166
    
    
    
    12,829$
    35,835
    
    
    $
    32,312
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements.  12




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##### Table of Contents



Concentrations
   Revenue Recognition
 General.
 Revenue Arrangements with Multiple Deliverables
 Product.
  Services.
 Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts.
 13




---



##### Table of Contents



Segment and Geographic Information
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Americas
    
    
    64
    %
    
    
    66
    %
    
    
    61
    %
    
    
    65
    %EMEA
    
    
    18
    %
    
    
    18
    %
    
    
    19
    %
    
    
    18
    %Japan
    
    
    10
    %
    
    
    8
    %
    
    
    12
    %
    
    
    10
    %Asia Pacific
    
    
    8
    %
    
    
    8
    %
    
    
    8
    %
    
    
    7
    %
   Computation of Per Share Amounts
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restated(1)
    
    
    
    
    
    
    Restated(1)(in thousands, except per share amounts)Net income
    
    $
    4,409
    
    
    $
    10,967
    
    
    $
    10,810
    
    
    $
    23,216Basic:Weighted-average shares outstanding
    
    
    145,279
    
    
    
    138,627
    
    
    
    143,886
    
    
    
    138,269Basic EPS
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.17Diluted:Weighted-average shares outstanding
    
    
    145,279
    
    
    
    138,627
    
    
    
    143,886
    
    
    
    138,269Add: Weighted-average dilutive potential shares
    
    
    5,689
    
    
    
    2,859
    
    
    
    6,296
    
    
    
    3,490Weighted-average shares used in computing diluted EPS
    
    
    150,968
    
    
    
    141,486
    
    
    
    150,182
    
    
    
    141,759Diluted EPS
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.16
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements. 14




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##### Table of Contents



Stockholders Equity
 Stock-Based
Compensation Plans.
    Weighted-Average
    
    
    RemainingOptions
    
    
    Exercise
    
    
    Contractual
    
    
    AggregateOutstanding
    
    
    Price
    
    
    Life (years)
    
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Balance, December 31, 2005
    
    
    31,788
    
    
    $
    13.75Granted
    
    
    5,645
    
    
    $
    14.19Exercised
    
    
    (3,935
    )
    
    $
    8.11Forfeited/expired
    
    
    (659
    )
    
    $
    17.67Balance, June 30, 2006
    
    
    32,839
    
    
    $
    14.43
    
    
    
    5.8
    
    
    $
    38,622Vested and expected to vest at June 30, 2006
    
    
    31,354
    
    
    $
    14.49
    
    
    
    5.9
    
    
    $
    38,243Exercisable at June 30, 2006
    
    
    22,048
    
    
    $
    15.23
    
    
    
    6.0
    
    
    $
    34,559
    15




---



##### Table of Contents



Stock Award Activity.
 Restricted Stock
    
    
    Weighted-AverageOutstanding
    
    
    Grant Date Fair Value(in thousands)Balance, December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    644
    
    
    $
    14.57Vested
    
    
    0
    
    
    $
    Forfeited
    
    
    (12
    )
    
    $
    14.21Balance, June 30, 2006
    
    
    632
    
    
    $
    14.58
  Employee
Stock Purchase Plan.
   Guarantees and Product Warranties
 Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
 16




---



##### Table of Contents



Balance, December 31, 2005
    
    $
    1,511Liabilities accrued for warranties issued during the period
    
    
    417Warranty claims settled during the period
    
    
    (462
    )Balance, June 30, 2006
    
    $
    1,466
  Deferred Support Revenue
  Deferred support revenue at December 31, 2005
    
    $
    60,480New support arrangements
    
    
    41,903Recognition of support revenue
    
    
    (36,071
    )Ending balance at June 30, 2006
    
    $
    66,312
 Other Charges, Net
  Three months Ended June 30,
    
    
    Six months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Litigation settlement
    
    $
    5,380
    
    
    $
    
    
    
    $
    5,380
    
    
    $
    Stock option investigation costs
    
    
    300
    
    
    
    
    
    
    
    300
    
    
    
    Total
    
    $
    5,680
    
    
    $
    
    
    
    $
    5,680
    
    
    $
    
 Recent Accounting Pronouncements
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109
 Fair Value Measurements
 17




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##### Table of Contents



Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 2. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Stock Option Investigation
    Judgment
   18




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##### Table of Contents



Summary of Stock-Based Compensation Adjustments
  Summary of Stock Option Investigation RestatementDecrease(Increase) toPre-Tax
    
    
    Income Tax Benefit
    
    
    
    
    
    
    Capitalized in
    
    
    RetainedFiscal Year
    
    Adjustments
    
    
    (1)
    
    
    Total Impact
    
    
    Inventory (2)
    
    
    Earnings1999
    
    $
    0.3
    
    
    $
    (1.4
    )
    
    $
    (1.1
    )
    
    $
    
    
    
    $
    (1.1
    )2000
    
    
    38.0
    
    
    
    (16.5
    )
    
    
    21.5
    
    
    
    
    
    
    
    21.52001
    
    
    52.3
    
    
    
    (21.1
    )
    
    
    31.2
    
    
    
    
    
    
    
    31.22002
    
    
    24.1
    
    
    
    (9.6
    )
    
    
    14.5
    
    
    
    (0.3
    )
    
    
    14.22003
    
    
    74.8
    
    
    
    (30.1
    )
    
    
    44.7
    
    
    
    (0.7
    )
    
    
    44.0Subtotal
    
    
    189.5
    
    
    
    (78.7
    )
    
    
    110.8
    
    
    
    (1.0
    )
    
    
    109.82004
    
    
    (17.1
    )
    
    
    6.1
    
    
    
    (11.0
    )
    
    
    1.2
    
    
    
    (9.8
    )2005
    
    
    4.7
    
    
    
    (2.0
    )
    
    
    2.7
    
    
    
    (0.2
    )
    
    
    2.5Total
    
    $
    177.1
    
    
    $
    (74.6
    )
    
    $
    102.5
    
    
    $
    
    
    
    $
    102.5
 
 (1)
    
    Income Tax Benefit includes adjustments to reflect a previously unrecorded
deferred tax benefit of approximately $3.6 million related to our cheap stock
compensation expense at the time of our initial public offering, $1.8 million of which is
associated with amortization of cheap stock in 1999.(2)
    
    These amounts reflect the net effect of stock-based compensation cost capitalized in
inventory. They represent the net change to cost of product and service revenue by year based
on the compensation cost incurred as a result of the restatement and the respective inventory
turnover in each affected period.   19




---



##### Table of Contents



Common Stock &Additional Paid-In
    
    
    Deferred Stock
    
    
    
    
    
    
    Net Impact toFiscal Year
    
    Capital
    
    
    Compensation
    
    
    Retained Earnings
    
    
    Stockholders Equity1999
    
    $
    2.2
    
    
    $
    (2.3
    )
    
    $
    1.1
    
    
    $
    1.02000
    
    
    96.6
    
    
    
    (59.5
    )
    
    
    (21.5
    )
    
    
    15.62001
    
    
    12.3
    
    
    
    38.1
    
    
    
    (31.2
    )
    
    
    19.22002
    
    
    (19.1
    )
    
    
    13.1
    
    
    
    (14.2
    )
    
    
    (20.2
    )2003
    
    
    73.8
    
    
    
    (13.8
    )
    
    
    (44.0
    )
    
    
    16.0Subtotal
    
    
    165.8
    
    
    
    (24.4
    )
    
    
    (109.8
    )
    
    
    31.62004
    
    
    (42.0
    )
    
    
    17.0
    
    
    
    9.8
    
    
    
    (15.2
    )2005
    
    
    (2.6
    )
    
    
    4.6
    
    
    
    (2.5
    )
    
    
    (0.5
    )Total
    
    $
    121.2
    
    
    $
    (2.8
    )
    
    $
    (102.5
    )
    
    $
    15.9
 Tax Impact of Restatement Items
      Impact on SFAS 123 Disclosure
  20




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##### Table of Contents



Three months ended June 30, 2005
    
    
    Six months ended June 30, 2005As
    
    
    
    
    
    
    As
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet income
    
    $
    9.6
    
    
    $
    1.4
    
    
    $
    11.0
    
    
    $
    19.5
    
    
    $
    3.7
    
    
    $
    23.2Add: Total stock-based
compensation expense
(benefit) included in
reported net income, net
of tax effect
    
    
    
    
    
    
    (0.9
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (3.5
    )
    
    
    (3.5
    )Deduct: Total stock-based
compensation expense
determined using the fair
value method for all
awards, net of related
tax effect
    
    
    (8.9
    )
    
    
    (3.7
    )
    
    
    (12.6
    )
    
    
    (18.9
    )
    
    
    (6.8
    )
    
    
    (25.7
    )Pro forma net income (loss)
    
    $
    0.7
    
    
    $
    (3.2
    )
    
    $
    (2.5
    )
    
    $
    0.6
    
    
    $
    (6.6
    )
    
    $
    (6.0
    )Basic net income (loss)
per share:As reported
    
    $
    0.07
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    
    
    
    
    $
    0.17Pro forma
    
    $
    0.00
    
    
    
    
    
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    
    
    
    
    $
    (0.04
    )Diluted net income (loss)
per shareAs reported
    
    $
    0.07
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    
    
    
    
    $
    0.16Pro forma
    
    $
    0.00
    
    
    
    
    
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    
    
    
    
    $
    (0.04
    )
 21




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##### Table of Contents



Effect of Restatement Adjustments
  December 31, 2005AsReported
    
    
    Adjustments
    
    
    As RestatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    291.5
    
    
    $
    
    
    
    $
    291.5Short-term investments
    
    
    280.9
    
    
    
    
    
    
    
    280.9Accounts receivable, net
    
    
    78.4
    
    
    
    
    
    
    
    78.4Inventories
    
    
    32.3
    
    
    
    
    
    
    
    32.3Deferred tax assets
    
    
    29.3
    
    
    
    4.7
    
    
    
    34.0Prepaid expenses and other assets
    
    
    7.8
    
    
    
    
    
    
    
    7.8Total current assets
    
    
    720.2
    
    
    
    4.7
    
    
    
    724.9Property and equipment, net
    
    
    11.0
    
    
    
    
    
    
    
    11.0Investments
    
    
    174.0
    
    
    
    
    
    
    
    174.0Deferred tax assets
    
    
    10.3
    
    
    
    14.4
    
    
    
    24.7Other assets
    
    
    6.4
    
    
    
    
    
    
    
    6.4Total assets
    
    $
    921.9
    
    
    $
    19.1
    
    
    $
    941.0LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    22.3
    
    
    $
    
    
    
    $
    22.3Accrued payroll and related expenses
    
    
    23.4
    
    
    
    0.7
    
    
    
    24.1Income taxes payable
    
    
    10.2
    
    
    
    2.3
    
    
    
    12.5Other accrued expenses
    
    
    9.5
    
    
    
    0.2
    
    
    
    9.7Deferred support revenue
    
    
    38.6
    
    
    
    
    
    
    
    38.6Total current liabilities
    
    
    104.0
    
    
    
    3.2
    
    
    
    107.2Deferred support revenue
    
    
    21.9
    
    
    
    
    
    
    
    21.9Total liabilities
    
    
    125.9
    
    
    
    3.2
    
    
    
    129.1Stockholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    500.9
    
    
    
    121.2
    
    
    
    622.1Deferred stock compensation
    
    
    
    
    
    
    (2.8
    )
    
    
    (2.8
    )Accumulated other comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    Retained earnings
    
    
    295.1
    
    
    
    (102.5
    )
    
    
    192.6Total stockholders equity
    
    
    796.0
    
    
    
    15.9
    
    
    
    811.9Total liabilities and stockholders equity
    
    $
    921.9
    
    
    $
    19.1
    
    
    $
    941.0
 22




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##### Table of Contents



Three months ended June 30, 2005
    
    
    Six months ended June 30, 2005As
    
    
    
    
    
    
    As
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet revenue
    
    $
    96.6
    
    
    $
    
    
    
    $
    96.6
    
    
    $
    181.2
    
    
    $
    
    
    
    $
    181.2Cost of revenue
    
    
    37.8
    
    
    
    (0.3
    )
    
    
    37.5
    
    
    
    69.7
    
    
    
    (0.5
    )
    
    
    69.2Gross margin
    
    
    58.8
    
    
    
    0.3
    
    
    
    59.1
    
    
    
    111.5
    
    
    
    0.5
    
    
    
    112.0Operating expenses:Research and development
    
    
    14.2
    
    
    
    (0.4
    )
    
    
    13.8
    
    
    
    26.6
    
    
    
    (1.7
    )
    
    
    24.9Sales and marketing
    
    
    28.3
    
    
    
    (0.5
    )
    
    
    27.8
    
    
    
    52.9
    
    
    
    (2.1
    )
    
    
    50.8General and administrative
    
    
    5.4
    
    
    
    (0.4
    )
    
    
    5.0
    
    
    
    10.6
    
    
    
    (1.6
    )
    
    
    9.0Total operating expenses
    
    
    47.9
    
    
    
    (1.3
    )
    
    
    46.6
    
    
    
    90.1
    
    
    
    (5.4
    )
    
    
    84.7Income from operations
    
    
    10.9
    
    
    
    1.6
    
    
    
    12.5
    
    
    
    21.4
    
    
    
    5.9
    
    
    
    27.3Interest and other income, net
    
    
    3.8
    
    
    
    
    
    
    
    3.8
    
    
    
    7.6
    
    
    
    
    
    
    
    7.6Income before provision for
income taxes
    
    
    14.7
    
    
    
    1.6
    
    
    
    16.3
    
    
    
    29.0
    
    
    
    5.9
    
    
    
    34.9Provision for income taxes
    
    
    5.1
    
    
    
    0.2
    
    
    
    5.3
    
    
    
    9.5
    
    
    
    2.2
    
    
    
    11.7Net income
    
    $
    9.6
    
    
    $
    1.4
    
    
    $
    11.0
    
    
    $
    19.5
    
    
    $
    3.7
    
    
    $
    23.2Basic net income per share
    
    $
    0.07
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    
    
    
    
    $
    0.17Weighted-average shares used
in computing basic net income
per share (in thousands)
    
    
    138,627
    
    
    
    
    
    
    
    138,627
    
    
    
    138,269
    
    
    
    
    
    
    
    138,269Diluted net income per share
    
    $
    0.07
    
    
    
    
    
    
    $
    0.08
    
    
    $
    0.14
    
    
    
    
    
    
    $
    0.16Weighted-average shares used
in computing diluted net
income per share (in
thousands)
    
    
    141,109
    
    
    
    
    
    
    
    141,486
    
    
    
    141,511
    
    
    
    
    
    
    
    141,759
 23




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##### Table of Contents



Six months ended June 30, 2005As Reported
    
    
    Adjustments
    
    
    As RestatedCASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    19.4
    
    
    $
    3.8
    
    
    $
    23.2Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    4.5
    
    
    
    
    
    
    
    4.5Stock-based compensation expense
    
    
    
    
    
    
    (5.8
    )
    
    
    (5.8
    )Provision for doubtful accounts
    
    
    0.5
    
    
    
    
    
    
    
    0.5Provision for sales returns
    
    
    0.1
    
    
    
    
    
    
    
    0.1Inventory provisions
    
    
    9.1
    
    
    
    
    
    
    
    9.1Deferred tax assets
    
    
    
    
    
    
    3.3
    
    
    
    3.3Tax benefit from stock option exercises
    
    
    1.2
    
    
    
    (0.8
    )
    
    
    0.4Changes in operating assets and liabilities:Accounts receivable
    
    
    31.8
    
    
    
    
    
    
    
    31.8Inventories
    
    
    (7.4
    )
    
    
    (0.2
    )
    
    
    (7.6
    )Prepaid expenses and other assets
    
    
    0.3
    
    
    
    
    
    
    
    0.3Accounts payable
    
    
    
    
    
    
    
    
    
    
    Accrued payroll and related expenses
    
    
    (3.4
    )
    
    
    
    
    
    
    (3.4
    )Income taxes payable
    
    
    
    
    
    
    8.1
    
    
    
    8.1Other accrued expenses
    
    
    7.8
    
    
    
    (8.1
    )
    
    
    (0.3
    )Deferred support revenue
    
    
    (4.7
    )
    
    
    
    
    
    
    (4.7
    )Net cash provided by operating activities
    
    
    59.2
    
    
    
    0.3
    
    
    
    59.5CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of available-for-sale investments
    
    
    (73.9
    )
    
    
    
    
    
    
    (73.9
    )Purchases of held-to-maturity investments
    
    
    (112.4
    )
    
    
    
    
    
    
    (112.4
    )Proceeds from sales of available-for-sale investments
    
    
    269.3
    
    
    
    
    
    
    
    269.3Proceeds from maturities of held-to-maturity investments
    
    
    7.0
    
    
    
    
    
    
    
    7.0Purchases of property and equipment, net
    
    
    (3.1
    )
    
    
    
    
    
    
    (3.1
    )Net cash provided by investing activities
    
    
    86.9
    
    
    
    
    
    
    
    86.9CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuances of common stock
    
    
    10.2
    
    
    
    (0.3
    )
    
    
    9.9Net cash provided by financing activities
    
    
    10.2
    
    
    
    (0.3
    )
    
    
    9.9Increase in cash and cash equivalents
    
    
    156.3
    
    
    
    
    
    
    
    156.3Effect of exchange rate changes on cash
    
    
    0.4
    
    
    
    
    
    
    
    0.4Cash and cash equivalents, beginning of period
    
    
    112.3
    
    
    
    
    
    
    
    112.3Cash and cash equivalents, end of period
    
    $
    269.0
    
    
    $
    
    
    
    $
    269.0SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for income taxes, net of refunds
    
    $
    0.2
    
    
    $
    
    
    
    $
    0.2
 24




---



##### Table of Contents



3. COMPREHENSIVE INCOME (LOSS)
  4. COMMITMENTS AND CONTINGENCIES
 Purchase Commitments with Suppliers and Third-Party Manufacturers
  Litigation
 Intellectual Property Proceedings.
      25




---



##### Table of Contents



Securities Litigation. In re Foundry Networks, Inc. Initial Public
    Offering Securities Litigation No. 01-CV-10640 related to In re Initial Public Offering
    Securities Litigation
  In re Initial Public Offering Securities
    Litigation
 Watkins v.
    Johnson, et al. No. 1-06-CV Rosenbaum v. Johnson, et al. No. 1-06 In re Foundry Networks, Inc. Derivative
    Litigation and/or
 26




---



##### Table of Contents



Patel v. Akin, et al. No. 1-07-CV Patel Patel
 Desai v. Johnson, et al. No. C-06-05598 , McDonald v. Johnson, et al. Jackson v. Akin, et al. Edrington v. Johnson, Jr., et al. In
    re Foundry Networks, Inc. Derivative Litigation No. 5:06-CV-05598-RMW. Edrington v. Johnson, Jr., et al.
 SEC Informal Inquiry.
 United States Attorneys Office Subpoena for Production
    of Documents.
 The Nasdaq Stock Market Proceedings, Docket # 5181N-06
     27




---



##### Table of Contents



General. Accounting for Contingencies
 5. INCOME TAXES
    28




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
should be read together with our condensed consolidated financial statements and related notes
appearing elsewhere in this Form 10-Q . This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors,
including, but not limited to, those discussed in Part II, Item 1A. Risk Factors. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect
managements opinions only as of the date hereof. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. Readers should carefully
review the risk factors described in this document as well as in other documents we file from time
to time with the SEC. All public reports filed by us with the SEC are available free of charge on
our website at www.foundrynetworks.com or from the SEC at www.sec.gov as soon as practicable after
we electronically file such reports with the SEC.
  Overview
  Restatement
of Previously-Issued Financial Statements
      29




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##### Table of Contents



Background of Our Stock Option Investigation.
     Summary of Stock Option Investigation RestatementDecrease (Increase) toPre-Tax
    
    
    Income Tax Benefit
    
    
    
    
    
    
    Capitalized in
    
    
    RetainedFiscal Year
    
    Adjustments
    
    
    (1)
    
    
    Total Impact
    
    
    Inventory (2)
    
    
    Earnings1999
    
    $
    0.3
    
    
    $
    (1.4
    )
    
    $
    (1.1
    )
    
    $
    
    
    
    $
    (1.1
    )2000
    
    
    38.0
    
    
    
    (16.5
    )
    
    
    21.5
    
    
    
    
    
    
    
    21.52001
    
    
    52.3
    
    
    
    (21.1
    )
    
    
    31.2
    
    
    
    
    
    
    
    31.22002
    
    
    24.1
    
    
    
    (9.6
    )
    
    
    14.5
    
    
    
    (0.3
    )
    
    
    14.22003
    
    
    74.8
    
    
    
    (30.1
    )
    
    
    44.7
    
    
    
    (0.7
    )
    
    
    44.0Subtotal
    
    
    189.5
    
    
    
    (78.7
    )
    
    
    110.8
    
    
    
    (1.0
    )
    
    
    109.82004
    
    
    (17.1
    )
    
    
    6.1
    
    
    
    (11.0
    )
    
    
    1.2
    
    
    
    (9.8
    )2005
    
    
    4.7
    
    
    
    (2.0
    )
    
    
    2.7
    
    
    
    (0.2
    )
    
    
    2.5Total
    
    $
    177.1
    
    
    $
    (74.6
    )
    
    $
    102.5
    
    
    $
    
    
    
    $
    102.5
 
 (1)
    
    Income Tax Benefit includes adjustments to reflect a previously unrecorded
deferred tax benefit of approximately $3.6 million related to our cheap stock
compensation expense at the time of our initial public offering, $1.8 million of which is
associated with amortization of cheap stock in 1999.(2)
    
    These amounts reflect the net effect of stock-based compensation cost capitalized in
inventory. They represent the net change to cost of product and service revenue by year based
on the compensation cost incurred as a result of the restatement and the respective inventory
turnover in each affected period. 30




---



##### Table of Contents



Findings of the Special Committee.
    Impact of Judgments and Interpretations on Restatement Values.
 Accounting for
Stock Issued to Employees
 
 31




---



##### Table of Contents



1)
    
    ten granting actions related to persons elected or appointed to the
Board of Directors (Director Grants);2)
    
    133 granting actions related to newly hired employees and routine
employee promotion or bonus grants (End-of-Month Grants);3)
    
    30 granting actions made in connection with broad-based awards to
non-officer employees for retention purposes (Employee Retention Grants);4)
    
    15 granting actions for awards to officers and other executive
employees (Officer Grants), including three granting actions for awards to our
Chief Executive Officer (CEO Grants); and5)
    
    one granting action deemed modified by our August 2002 tender
offer.
  (1) Director Grants
  32




---



##### Table of Contents



(2) End-of-Month
Grants
    (3) Employee
Retention Grants
  33




---



##### Table of Contents



(4) Officer
Grants
   34




---



##### Table of Contents



(5) CEO
Grants
 Grant Modified by Tender Offer
     1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    TotalDirector Grants
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.1
    
    
    $
    4.3
    
    
    $
    (2.2
    )
    
    $
    0.1
    
    
    $
    2.3End-of-Month Grants
    
    
    0.3
    
    
    
    24.1
    
    
    
    22.0
    
    
    
    12.5
    
    
    
    3.5
    
    
    
    
    
    
    
    0.9
    
    
    
    63.3Employee Retention Grants
    
    
    
    
    
    
    10.4
    
    
    
    22.9
    
    
    
    8.7
    
    
    
    13.1
    
    
    
    7.9
    
    
    
    2.8
    
    
    
    65.8Officer Grants
    
    
    
    
    
    
    3.5
    
    
    
    7.0
    
    
    
    2.1
    
    
    
    16.7
    
    
    
    (7.7
    )
    
    
    0.4
    
    
    
    22.0CEO Grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Grant Modified by Tender Offer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    36.9
    
    
    
    (15.5
    )
    
    
    0.4
    
    
    
    22.5Other, net (1)
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    1.2Pre-tax stock-based
compensation expense
adjustments (2)
    
    
    0.3
    
    
    
    38.0
    
    
    
    52.3
    
    
    
    24.1
    
    
    
    74.8
    
    
    
    (17.1
    )
    
    
    4.7
    
    
    
    177.1Income tax (benefit)/expense
    
    
    (1.4
    )
    
    
    (16.5
    )
    
    
    (21.1
    )
    
    
    (9.6
    )
    
    
    (30.1
    )
    
    
    6.1
    
    
    
    (2.0
    )
    
    
    (74.6
    )Net stock-based compensation
expense/(benefit) adjustments
    
    $
    (1.1
    )
    
    $
    21.5
    
    
    $
    31.2
    
    
    $
    14.5
    
    
    $
    44.7
    
    
    $
    (11.0
    )
    
    $
    2.7
    
    
    $
    102.5
 35




---



##### Table of Contents



(1)
    
    Other, net represents related employment tax charges and other stock-based compensation charges.(2)
    
    Includes the following amounts attributable to the impact of variable accounting:
1999, $0; 2000, $0; 2001, $0; 2002, $0.9 million; 2003, $59.4 million; 2004, $(27.0) million; 2005,
$0.9 million; total, $34.2 million. We determined that as a result of revised
measurement, eleven granting actions required both a revised
measurement dates and the application of
variable accounting. Generally, variable accounting resulted because strong evidence indicated
that the grant was approved at an earlier date (often a Board meeting). However, the granting
action was not recorded at that date, and was instead recorded at a subsequent grant date at a
lower price than the earlier date that we determined to be when the grant was originally awarded. Share-Based
Payment
  Common Stock &Additional Paid-In
    
    
    Deferred Stock
    
    
    
    
    
    
    Net Impact toFiscal Year
    
    Capital
    
    
    Compensation
    
    
    Retained Earnings
    
    
    Stockholders Equity1999
    
    $
    2.2
    
    
    $
    (2.3
    )
    
    $
    1.1
    
    
    $
    1.02000
    
    
    96.6
    
    
    
    (59.5
    )
    
    
    (21.5
    )
    
    
    15.62001
    
    
    12.3
    
    
    
    38.1
    
    
    
    (31.2
    )
    
    
    19.22002
    
    
    (19.1
    )
    
    
    13.1
    
    
    
    (14.2
    )
    
    
    (20.2
    )2003
    
    
    73.8
    
    
    
    (13.8
    )
    
    
    (44.0
    )
    
    
    16.0Subtotal
    
    
    165.8
    
    
    
    (24.4
    )
    
    
    (109.8
    )
    
    
    31.62004
    
    
    (42.0
    )
    
    
    17.0
    
    
    
    9.8
    
    
    
    (15.2
    )2005
    
    
    (2.6
    )
    
    
    4.6
    
    
    
    (2.5
    )
    
    
    (0.5
    )Total
    
    $
    121.2
    
    
    $
    (2.8
    )
    
    $
    (102.5
    )
    
    $
    15.9
 Tax Impact of Restatement Items
    36




---



##### Table of Contents



Critical Accounting Policies and Use of Estimates
  Stock-Based Compensation
  Income Taxes
  37




---



##### Table of Contents



Results of Operations
 Net Revenue
   Three Months Ended June 30,2006
    
    
    2005% of Net
    
    
    
    
    
    
    % of Net$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    89,289
    
    
    
    82
    %
    
    $
    80,748
    
    
    
    84
    %
    
    $
    8,541
    
    
    
    11
    %Service
    
    
    19,137
    
    
    
    18
    %
    
    
    15,840
    
    
    
    16
    %
    
    
    3,297
    
    
    
    21
    %Total net revenue
    
    $
    108,426
    
    
    
    100
    %
    
    $
    96,588
    
    
    
    100
    %
    
    $
    11,838
    
    
    
    12
    %Net product revenue:Chassis
    
    
    60,717
    
    
    
    68
    %
    
    
    52,021
    
    
    
    64
    %
    
    
    8,696
    
    
    
    17
    %Stackable
    
    
    28,572
    
    
    
    32
    %
    
    
    28,727
    
    
    
    36
    %
    
    
    (155
    )
    
    
    (1
    )%Total net product revenue
    
    $
    89,289
    
    
    
    100
    %
    
    $
    80,748
    
    
    
    100
    %
    
    $
    8,541
    
    
    
    11
    %
 Six Months Ended June 30,2006
    
    
    2005% of Net
    
    
    
    
    
    
    % of Net$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeNet revenue:Product
    
    $
    185,352
    
    
    
    83
    %
    
    $
    149,180
    
    
    
    82
    %
    
    $
    36,172
    
    
    
    24
    %Service
    
    
    37,074
    
    
    
    17
    %
    
    
    32,044
    
    
    
    18
    %
    
    
    5,030
    
    
    
    16
    %Total net revenue
    
    $
    222,426
    
    
    
    100
    %
    
    $
    181,224
    
    
    
    100
    %
    
    $
    41,202
    
    
    
    23
    %Net product revenue:Chassis
    
    
    128,921
    
    
    
    70
    %
    
    
    98,212
    
    
    
    66
    %
    
    
    30,709
    
    
    
    31
    %Stackable
    
    
    56,431
    
    
    
    30
    %
    
    
    50,968
    
    
    
    34
    %
    
    
    5,463
    
    
    
    11
    %Total net product revenue
    
    $
    185,352
    
    
    
    100
    %
    
    $
    149,180
    
    
    
    100
    %
    
    $
    36,172
    
    
    
    24
    %
 38




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Americas
    
    
    64
    %
    
    
    66
    %
    
    
    61
    %
    
    
    65
    %EMEA
    
    
    18
    %
    
    
    18
    %
    
    
    19
    %
    
    
    18
    %Japan
    
    
    10
    %
    
    
    8
    %
    
    
    12
    %
    
    
    10
    %Asia Pacific
    
    
    8
    %
    
    
    8
    %
    
    
    8
    %
    
    
    7
    %
    Gross Margins
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Gross$
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    
    Margin %
    
    
    $
    
    

Margin
%Restated(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restated(1)Gross margins:Product
    
    $
    48,996
    
    
    
    55
    %
    
    $
    46,555
    
    
    
    58
    %
    
    $
    102,565
    
    
    
    55
    %
    
    $
    86,392
    
    
    
    58
    %Service
    
    
    16,501
    
    
    
    86
    %
    
    
    12,563
    
    
    
    79
    %
    
    
    32,006
    
    
    
    86
    %
    
    
    25,682
    
    
    
    80
    %Total gross margins
    
    $
    65,497
    
    
    
    60
    %
    
    $
    59,118
    
    
    
    61
    %
    
    $
    134,571
    
    
    
    61
    %
    
    $
    112,074
    
    
    
    62
    %
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements, to Condensed Consolidated Financial
Statements.  39




---



##### Table of Contents



Operating Expenses
  Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    
    
    
    
    2006
    
    2005% of Net
    
    
    
    % of Net
    
    %
    
    
    
    
    
    % of Net
    
    
    
    % of Net
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    Change
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    ChangeRestated(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restated(1)Research and development
    
    $
    16,997
    
    
    
    16
    %
    
    $
    13,820
    
    
    
    14
    %
    
    
    23
    %
    
    $
    37,031
    
    
    
    17
    %
    
    $
    24,906
    
    
    
    14
    %
    
    
    49
    %Sales and marketing
    
    
    31,344
    
    
    
    29
    %
    
    
    27,831
    
    
    
    29
    %
    
    
    13
    %
    
    
    65,615
    
    
    
    29
    %
    
    
    50,803
    
    
    
    28
    %
    
    
    29
    %General and administrative
    
    
    12,117
    
    
    
    11
    %
    
    
    4,953
    
    
    
    5
    %
    
    
    145
    %
    
    
    23,176
    
    
    
    10
    %
    
    
    9,015
    
    
    
    5
    %
    
    
    157
    %Other charges, net
    
    
    5,680
    
    
    
    5
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    
    5,680
    
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
 
 (1)
    
    See Note 2, Restatement of Condensed Consolidated
Financial Statements, to Condensed Consolidated Financial
Statements.     40




---



##### Table of Contents




    
    Litigation settlement charges of $5.4 million were recognized in the three and six
months ended June 30, 2006, respectively, in connection with settlement agreements
reached separately, by Foundry with Lucent and Alcatel-Lucent. Litigation
settlement charges pertained primarily to the accrual of fees earned by Lucent and
Alcatel-Lucent related to past periods.
    
    For the three and six months ended June 30, 2006, costs of $0.3 million were incurred
for the independent review of our stock option practices, which began in June 2006. In
June 2006 our Audit Committee formed a Special Committee and with the assistance of
independent legal counsel and outside accounting experts commenced a review of our stock
option practices and accounting. As of June 30, 2006, the investigation was not
complete and additional costs of $7.1 million were incurred through the remainder of
2006.
 Interest and Other Income, Net
  Provision for Income Taxes
   41




---



##### Table of Contents



Liquidity and Capital Resources
     Off-Balance Sheet Arrangements and Contractual Obligations
 Contractual Commitments
  Less Than
    
    
    1-3
    
    
    3-5
    
    
    More ThanTotal
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating leases of facilities
    
    $
    16,330
    
    
    $
    5,792
    
    
    $
    9,995
    
    
    $
    543
    
    
    $
    Purchase commitments with contract manufacturers
    
    
    45,642
    
    
    
    45,642
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    61,972
    
    
    $
    51,434
    
    
    $
    9,995
    
    
    $
    543
    
    
    $
    
  Off-Balance Sheet Arrangements
  42




---



##### Table of Contents



Indemnifications
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
   Stock Options Granting Practices Review and Restatement Related to Stock Options
   43




---



##### Table of Contents




    
    Grants were often effected by written actions that contained Effective as of language
to indicate the grant date, rather than being effected at meetings of the Board of
Directors or committees of the Board of Directors, or using a written action that was
manually dated and effecting a granting action with the grant date based on the date of
the manual signatures.
    
    Grants to non-officers were delegated to a sole member Stock Option Committee
consisting of our CEO, which made it more difficult to confirm that the actions of the
sole member committee were taken on the dates indicated on the granting actions.
    
    Minutes of meetings where granting actions were made were not prepared on a
contemporaneous basis, which made it more difficult to confirm that the persons identified
as receiving grants, and the number of shares covered by such grant, had been finally
determined at the time of the meeting where the granting actions were made.
    
    We lacked a formal policy for issuing stock options, which contributed to our lack of
contemporaneous documentation and to inadequate attention to process considerations.
  Remedial
Measures Instituted by Foundry
    
    
    Our General Counsel or his designee takes the minutes of Compensation Committee
meetings.
    
    Details of grant recommendations are circulated in advance of each meeting, and the
Compensation Committee approves the grantee names and share amounts at the meeting.
    
    The exercise price of each stock option grant is the closing price of our common stock
on the date that the Compensation Committee approved the grant.
    
    Stock option grants are made only after they are approved by the Compensation Committee
and no changes are made after the Compensation Committees approval.
    
    All grants are communicated to employees within a relatively short period after the
grant date, as required by applicable accounting rules.
 44




---



##### Table of Contents




    
    The Executive Committee determined that the positions of the Chairman of the Board and
Chief Executive Officer should be held by different persons. Accordingly, on January 19,
2007, Mr. Johnson resigned as Chairman of the Board, and the Board of Directors elected
director Alfred J. Amoroso as Chairman. Mr. Amoroso has served as a member of our Board
of Directors since October 2000. He also serves as President and Chief Executive Officer
of Macrovision Corporation and as a member of its Board of Directors. Mr. Johnson
continues to serve as a member of our Board of Directors, and as our President and CEO.
    
    The Board of Directors accepted the resignation of Mr. Heffner as Vice President,
Finance and Administration and Chief Financial Officer on January 19, 2007, and Mr.
Heffner assumed a new role as Vice President of Corporate Development. His role as Vice
President of Corporate Development does not involve accounting or financial reporting
responsibilities. Mr. Heffner has repaid us the net after-tax difference between the
initial exercise price for two options he exercised for which the measurement date has
been changed, and the price of the shares on the new measurement dates, an amount of
approximately $162,000. All unexercised options which he holds which have been remeasured
were repriced to reflect the price of our stock on the new measurement dates.
    Inherent Limitations of Internal Controls
  45




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
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the
financial statements.
  Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 The
    matters relating to our Special Committee investigation into our
    stock option granting practices and the restatement of our
    financial statements have exposed us to civil litigation claims,
    regulatory proceedings and government proceedings which could
    burden Foundry and have a material adverse effect on
    us.
    and/or
 46




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We have
not been in compliance with The Nasdaq Global Select Markets continued listing requirements and
remain subject to the risk of our stock being delisted from The
Nasdaq Global Select Market, which would
have a material adverse effect on us and our stockholders.
  The
process of restating our financial statements, the associated
disclosures, and complying with SEC requirements are subject to
uncertainty and evolving requirements.
  A number of our current and former executive officers and directors have been named as parties
to several derivative action lawsuits arising from our internal option review, and there is a
possibility of additional lawsuits, all of which could require significant management time and
attention and result in significant legal expenses.
  Ongoing
government inquiries relating to our past stock option practices may
be time consuming and
expensive and could result in injunctions, fines and penalties that may have a material adverse
effect on
our financial condition and results of operations.
  47




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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.
   48




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We depend on large, recurring purchases from
certain significant customers, and a loss, cancellation or delay in purchases by these customers
could negatively affect our revenue.
   
    
    our reseller agreements generally do not require minimum purchases;
    
    our customers can stop purchasing and our resellers can stop marketing our products at any time; and
    
    our reseller agreements generally are not exclusive and are for one-year terms, with no
obligation of the resellers to renew the agreements.
  The United States government is a significant customer and has been one key to our financial
success. However, government demand is unpredictable and there is no guarantee of future contract
awards.
  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.
  49




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If we fail to protect our intellectual property, our business and ability to compete could suffer.
   Our ability to increase our revenue depends on expanding our direct sales operations and reseller
distribution channels and providing excellent customer support.
   50




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We are required to expense equity compensation given to our employees, which has reduced our
reported earnings, will significantly impact our operating results in future periods and may reduce
our stock price and our ability to effectively utilize equity compensation to attract and retain
employees.
  Because our financial results are difficult to predict and may fluctuate significantly, we may
not meet quarterly financial expectations, which could cause our stock price to decline.
       51




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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.
   52




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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.
   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.
  53




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
    
    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.
   Due to the lengthy sales cycles of some of our products, the timing of our revenue is difficult to
predict and may cause us to fail to meet our revenue expectations.
  As a result of our delayed filing of our periodic SEC reports, our inability to maintain our Form
S-3 eligibility may adversely affect our ability to raise future capital or complete acquisitions.
 54




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If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage and grow our business may be harmed.
  We had a material weakness in internal control over financial reporting in the past and cannot
assure you that additional material weaknesses will not be identified in the future. If our
internal control over financial reporting or disclosure controls and procedures are not effective,
there may be errors in our financial statements that could require a restatement or our filings may
not be timely and investors may lose confidence in our reported financial information, which could
lead to a decline in our stock price.
     55




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The timing of the adoption of industry standards may negatively affect widespread market acceptance
of our products.
  If our products do not interoperate with our customers networks, installations will be delayed or
cancelled and could harm our business.
  If our products contain undetected software or hardware errors, we could incur significant
unexpected expenses and lost sales and be subject to product liability claims.
  
    
    negative customer reactions;
    
    product liability claims;
    
    negative publicity regarding us and our products;
    
    delays in or loss of market acceptance of our products;
    
    product returns;
    
    lost sales; and
    
    unexpected expenses to remedy defects or errors.
 We may incur liabilities that are not subject to maximum loss clauses.
  56




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Our products may not continue to comply with the regulations governing their sale, which may harm
our business.
  We may engage in acquisitions that could result in the dilution of our stockholders, disrupt our
operations, cause us to incur substantial expenses and harm our business if we cannot successfully
integrate the acquired business, products, technologies or personnel.
  
    
    difficulties in the assimilation of products, operations, personnel and technologies of the acquired companies;
    
    diversion of managements attention from other business concerns;
    
    disruptions to our operations, including potential difficulties in completing ongoing projects in a timely manner;
    
    risks of entering geographic and business markets in which we have no or limited prior experience; and
    
    potential loss of key employees of acquired organizations.
  Our stock price has been volatile historically, which may make it more difficult to sell shares
when needed at attractive prices.
  57




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Anti-takeover provisions could make it more difficult for a third party to acquire us.
  Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist
acts or other catastrophic events.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Name of Director Nominee
    
    For
    
    Withheld
    
    AbstainBobby R. Johnson, Jr.
    
    
    127,737,009
    
    
    
    0
    
    
    
    3,430,906Alfred J. Amoroso
    
    
    129,062,050
    
    
    
    0
    
    
    
    2,105,865C. Nicholas Keating
    
    
    121,560,438
    
    
    
    0
    
    
    
    9,607,477J. Steven Young
    
    
    121,547,095
    
    
    
    0
    
    
    
    9,593,820Alan L. Earhart
    
    
    128,959,271
    
    
    
    0
    
    
    
    2,208,644
  Number of VotesFor
    
    Against
    
    AbstainRatification of appointment
    
    
    130,906,406
    
    
    
    231,682
    
    
    
    29,827
 58




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##### Table of Contents



Number of VotesFor
    
    
    Against
    
    
    Abstain
    
    
    Broker Non-VotesApproval of the 2006 Stock Incentive Plan
    
    
    69,479,912
    
    
    
    41,390,776
    
    
    
    150,171
    
    
    
    20,147,056
 
 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.).10
.1

1996 Stock Plan.*(1)10
.2

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

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

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

Form of Indemnification Agreement.
    (2)10
.6

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

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

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

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

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

Confidential Settlement Agreement
    and Release, effective October 25, 2004, by and between Nortel
    Networks Limited, Nortel Networks, Inc., Foundry Networks, Inc.,
    Bobby R. Johnson, Jr., H. Earl Ferguson, deceased, and Jeffrey
    Prince. (7) 59




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Number

Description10
.12

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

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

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

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

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

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

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

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

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

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

Certification of Chief Financial
    Officer pursuant to Section 18 U.S.C. Section 1350.     *
    
    Indicates management contract or compensatory plan or
    arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock
    Option Agreement incorporated herein by reference to the exhibit
    filed with registrants Registration Statement on
    Form S-1
    (Commission File No.
    333-82577).
    Copy of 1996 Stock Plan reflecting the amendments approved at
    the 2000 Annual Meeting of Stockholders incorporated by
    reference to registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of 1996 Stock Plan reflecting the amendments for approval
    at the 2002 Annual Meeting of Stockholders incorporated by
    reference to registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of Form of Restricted Stock Purchase Agreement under the
    1996 Stock Plan is incorporated herein by reference to the
    exhibit filed with registrants Annual Report on
    Form 10-K for the year ended December 31, 2005
    (Commission File No. 000-26689)(2)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577).(3)
    
    Incorporated herein by reference to the exhibit filed with
    the Companys Annual Report on
    Form 10-K
    for the year ended December 31, 2006.(4)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-1
    (Commission File
    No. 333-82577);
    Confidential treatment has been granted by the Securities and
    Exchange Commission with respect to this exhibit.(5)
    
    Incorporated herein by reference to the exhibit filed with
    registrants Registration Statement on
    Form S-8
    filed on October 25, 2000 (Commission File
    No. 333-48560).(6)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended September 30, 1999 (Commission File
    No.
    000-26689).(7)
    
    Incorporated by reference from registrants Annual Report
    on
    Form 10-K
    filed on March 11, 2005 (Commission File
    No. 000-26689). 60




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##### Table of Contents



(8)
    
    Incorporated herein by reference to the exhibit filed with
    registrants
    Form 10-Q
    for the quarter ended March 31, 2005 (Commission File No.
    000-26689).(9)
    
    Copy of 2006 Stock Incentive Plan approved at the 2006 Annual Meeting of
    Stockholders incorporated by reference to the exhibits filed
    with registrants
    Form 8-K
    on June 22, 2006 (Commission File
    No. 000-26689). 61




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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)  62




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Exhibit Index
 Number

Description3
.1

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

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

1996 Stock Plan.*(1)10
.2

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

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

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

Form of Indemnification Agreement.
    (2)10
.6

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Certification of Chief Financial
    Officer pursuant to Section 18 U.S.C. Section 1350.  
 *
    
    Indicates management contract or compensatory plan or
    arrangement.(1)
    
    Copy of original 1996 Stock Plan and related form of Stock
    Option Agreement incorporated herein by reference to the exhibit
    filed with registrants Registration Statement on
    Form S-1
    (Commission File No.
    333-82577).
    Copy of 1996 Stock Plan reflecting the amendments approved at
    the 2000 Annual Meeting of Stockholders incorporated by
    reference to registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of 1996 Stock Plan reflecting the amendments for approval
    at the 2002 Annual Meeting of Stockholders incorporated by
    reference to registrants Definitive Proxy Statement for
    such meeting (Commission File
    No. 000-26689).
    Copy of Form of Restricted Stock Purchase Agreement under the
    1996 Stock Plan is incorporated herein by reference to the
    exhibit filed with registrants Annual Report on
    Form 10-K for the year ended December 31, 2005
    (Commission File No. 000-26689)




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##### Table of Contents



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