exv99w2

Exhibit 99.2

FOUNDRY NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)


	March 31,			December 31,
	2008			2007
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	386,821		$	331,961
Short-term investments		449,589			575,645
Accounts receivable, net of allowances for doubtful accounts of $2,249 and $2,107 and sales returns of $2,400 and $2,626 at March 31, 2008 and December 31, 2007, respectively		109,606			124,234
Inventories		49,394			42,384
Deferred tax assets		45,246			44,207
Prepaid expenses and other assets		10,497			12,439

Total current assets		1,051,153			1,130,870
Property and equipment, net		8,596			9,658
Investments		110,538			58,062
Deferred tax assets		37,650			35,007
Other assets		4,981			5,234

Total assets	$	1,212,918		$	1,238,831

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,033		$	23,892
Accrued payroll and related expenses		32,352			50,806
Income taxes payable		8,172			—
Other accrued expenses		12,100			12,382
Deferred revenue		63,318			52,981

Total current liabilities		138,975			140,061
Deferred support revenue		28,079			27,786
Income taxes payable		12,531			11,860
Other long-term liabilities		532			475

Total liabilities		180,117			180,182

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized - 5,000 shares at March 31, 2008 and December 31, 2007; None issued and outstanding as of March 31, 2008 and December 31, 2007		—			—
Common stock, $0.0001 par value:
Authorized - 300,000 shares at March 31, 2008 and December 31, 2007:
Issued and outstanding – 145,674 and 148,700 shares at March 31, 2008 and December 31, 2007, respectively		15			15
Additional paid-in capital		854,282			829,910
Accumulated other comprehensive loss		(5,003	)		(789	)
Retained earnings		183,507			229,513

Total stockholders’ equity		1,032,801			1,058,649

Total liabilities and stockholders’ equity	$	1,212,918		$	1,238,831


(1)		Derived from audited consolidated financial statements as of December 31, 2007.

The accompanying notes are an integral part of these condensed consolidated financial statements.

FOUNDRY NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)


	Three Months Ended March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,906		$	9,091
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,839			2,777
Stock-based compensation expense		14,001			9,622
Provision for doubtful accounts		142			(242	)
Provision for sales returns		(226	)		(617	)
Inventory provisions		2,442			1,818
Benefit for deferred income taxes		(3,682	)		(3,895	)
Excess tax benefits from stock-based compensation		(245	)		(2	)
Changes in operating assets and liabilities:
Accounts receivable		14,712			(13,245	)
Inventories		(9,425	)		(4,328	)
Prepaid expenses and other assets		1,481			(2,688	)
Accounts payable		(859	)		984
Accrued payroll and related expenses		(18,454	)		(1,165	)
Income taxes payable		8,458			8,891
Other accrued expenses		(226	)		(1,381	)
Deferred revenue		10,629			8,187

Net cash provided by operating activities		35,493			13,807

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investments		(25,950	)		(12,050	)
Purchases of held-to-maturity investments		(142,974	)		(169,389	)
Proceeds from sales of available-for-sale investments		25,300			29,675
Proceeds from maturities of held-to-maturity investments		213,234			116,160
Purchases of property and equipment, net		(1,054	)		(2,508	)

Net cash provided by (used in) investing activities		68,556			(38,112	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock under stock plans, net of repurchases		10,721			(587	)
Repurchase and retirement of common stock		(59,912	)		—
Excess tax benefits from stock-based compensation		245			2

Net cash used in financing activities		(48,946	)		(585	)

Decrease in cash and cash equivalents		55,103			(24,890	)
Effect of exchange rate changes on cash		(243	)		(3	)
Cash and cash equivalents, beginning of period		331,961			258,137

Cash and cash equivalents, end of period	$	386,821		$	233,244

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds	$	838		$	722

The accompanying notes are an integral part of these condensed consolidated financial statements.

FOUNDRY NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(information for the three months ended March 31, 2008 and 2007 is unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Founded in 1996, Foundry Networks, Inc. (“Foundry” or the “Company”) designs, develops, manufactures, markets and sells a comprehensive, end-to-end suite of high performance data networking solutions, including Ethernet Layer 2-7 switches and Metro and Internet routers. Foundry sells its products and services worldwide through its own direct sales force, resellers and integration partners. The Company’s customers include Internet Service Providers (ISPs), Metro Service Providers, government agencies and various enterprises including education, healthcare, entertainment, technology, energy, financial services, retail, aerospace, transportation, and e-commerce companies.

Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared by Foundry in accordance with United States generally accepted accounting principles and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and include the accounts of Foundry and its wholly-owned subsidiaries (collectively “Foundry”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and Notes thereto included in the Foundry Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC.

The unaudited condensed consolidated financial statements included herein reflect all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The condensed consolidated results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2008.

Principles of Consolidation

The condensed consolidated financial statements reflect the operations of Foundry and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Reclassifications

Certain prior period amounts on the condensed consolidated balance sheets and condensed consolidated statements of cash flows have been reclassified to conform to the March 31, 2008 presentation.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Actual results could differ from those estimates. Estimates, judgments and assumptions are used in the recognition of revenue, stock-based compensation, accounting for allowances for doubtful accounts and sales returns, inventory provisions, product warranty liability, income taxes, deferred tax assets, contingencies and similar items. Estimates, judgments, and assumptions are reviewed periodically by management and the effects of revisions are reflected in the condensed consolidated financial statements in the period in which they are made.

Revenue Recognition

General. Foundry generally sells its products through its direct sales force and value-added resellers. The Company generates the majority of its revenue from sales of chassis and stackable-based networking equipment, with the remainder of its revenue primarily coming from customer support fees. The Company applies the principles of SEC Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, and recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Evidence of an arrangement generally consists of customer purchase orders and, in certain instances, sales contracts or agreements. Typically, customer purchase orders are treated as separate arrangements based on the nature of Foundry’s business. Shipping terms and related documents, or written evidence of customer acceptance, when applicable, are used to verify delivery or performance. The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. Foundry assesses collectibility based on the creditworthiness of the customer as determined by its credit checks and the customer’s payment history. It is Foundry’s practice to identify an end-user prior to shipment to a value-added reseller.

When sales arrangements contain multiple elements (e.g., hardware and support), the Company applies the provisions of EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, (“EITF 00-21”), to determine the separate units of accounting that exist within the arrangement. If more than one unit of accounting exists, the arrangement consideration is allocated to each unit of accounting using either the relative fair value method or the residual fair value method as prescribed by EITF 00-21. Revenue is recognized for each unit of accounting when the revenue recognition criteria described in the preceding paragraph have been met for that unit of accounting.

Product. Product revenue is generally recognized upon transfer of title and risk of loss, which is generally upon shipment. If an acceptance period or other contingency exists, revenue is recognized upon the earlier of customer acceptance or expiration of the acceptance period, or upon satisfaction of the contingency. Shipping and handling charges billed to customers are included in product revenue and the related shipping costs are included in cost of product revenue.

Services. Service revenue consists primarily of fees for customer support services. Foundry’s suite of customer support programs provides customers access to technical assistance, unspecified software updates and upgrades on a when-and-if available basis, hardware repair and replacement parts.

Support services are offered under renewable, fee-based contracts. Revenue from customer support contracts is deferred and recognized ratably over the contractual support period, in accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts. Support contracts generally range from one to five years.

Returns. Foundry provides a provision for estimated customer returns at the time product revenue is recognized as a reduction to product revenue. Its provision is based primarily on historical sales returns and return policies. Foundry’s resellers generally do not have a right of return, and contracts with original equipment manufacturers only provide for rights of return in the event its products do not meet its published specifications or there is an epidemic failure, as defined in the contracts.

Cash Equivalents and Investments

The Company considers all investments with insignificant interest rate risk and with original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents consist of corporate and government debt securities, and cash deposited in checking and money market accounts. The Company’s investments are maintained and managed at three major financial institutions. Its investment portfolio, excluding auction rate securities, is classified as held-to-maturity and is recorded at amortized cost, and includes only securities with original maturities of less than two years and with secondary or resale markets to ensure portfolio liquidity.

Investments with original maturities greater than 90 days that mature less than one year from the consolidated balance sheet date are classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments. Auction rate securities are classified based on an assessment of their liquidity on the Company’s most recent balance sheet date. These investments typically have fixed reset dates within one year designed to allow investors to exit these instruments at par even though the underlying municipal note may have an original maturity of as much as 40 years. However, auction rate securities recently began to fail in auctions, and, as a result, the Company’s ability to exit these instruments in the short-term is not guaranteed. A failed auction is generally considered an auction with more sellers than buyers or an auction with no buyers at all. An assessment is performed for auction rate securities with failed auctions and the instruments are classified based on the forecasted recovery of fair value.

Foundry’s auction rate securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, if any, are recorded as a component of accumulated other comprehensive income. All other investments, which include municipal bonds, corporate bonds, and federal agency securities, are classified as held-to-maturity and are stated at amortized cost. The Company does not recognize changes in the fair value of held-to-maturity investments in income unless a decline in value is considered other-than-temporary.

The Company monitors its investments for impairment on a quarterly basis and determines whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the security’s issuer, the length of time an investment’s fair value has been below its carrying value, the interval between auction periods, whether or not there have been any failed auctions, and the Company’s ability and intent to hold investments to maturity. If an investment’s decline in fair value is caused by factors other than changes in interest rates and is deemed to be other-than-temporary, the Company would reduce the investment’s carrying value to its estimated fair value, as determined based on quoted market prices or liquidation values. Declines in value judged to be other-than-temporary, if any, are recorded in the Company’s statement of income as incurred.

Valuation of Investments

In valuing investments, Foundry predominantly uses market data or data derived from market sources. When market data is not available, such as when the investment is illiquid, the Company employs a cash-flow-based modeling technique to arrive at the recorded fair value. This process involves incorporating assumptions about the anticipated term and the yield that a market participant would require to purchase the security in the marketplace.

Fair Value Measurement

Effective January 1, 2008, Foundry adopted certain of the provisions of FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also requires for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. In February 2008, the FASB issued Staff Position (“FSP”) 157-2, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company elected to delay the adoption date for the portions of SFAS 157 impacted by FSP 157-2 and, as a result, it adopted a portion of the provisions of SFAS 157. The partial adoption of SFAS 157 was prospective and did not have a significant effect on the Company’s consolidated results of operations and financial condition as the result of adoption. The Company determined that upon adoption, SFAS 157 would impact the disclosure requirements of its cash equivalents and investment portfolio.

In determining fair value, the Company uses various valuation approaches, including market, income and/or cost approaches. SFAS 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

•		Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Foundry’s cash equivalents and investments utilizing Level 1 inputs include U.S. Government Treasuries and money market funds.

•		Level 2—Valuations based on quoted prices in markets that are not considered to be active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Foundry’s cash equivalents and investments utilizing Level 2 inputs include government sponsored securities and municipal bonds.

•

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Investments utilizing Level 3 inputs are the Company’s auction rate securities that are not traded in active markets or are subject to transfer restrictions. Valuations are performed to adjust for illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors including the type of instrument and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3. Refer to Note 3. “Fair Value Disclosures” in the Notes to Condensed Consolidated Financial Statements for the disclosure of the Levels of inputs used to determine fair value and the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of instruments that were reclassified between Levels.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment, (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options, restricted stock, restricted stock units and employee purchases under the Company’s 1999 Employee Stock Purchase Plan based on estimated fair values.

Valuation of Stock-Based Compensation

SFAS 123R requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. Foundry has selected the Black-Scholes option-pricing model to value stock-based payments under SFAS 123R. The Black-Scholes option-pricing model includes assumptions regarding expected stock price volatility, option lives, dividend yields, and risk-free interest rates. These assumptions reflect Foundry’s best estimates, but involve uncertainties based on market conditions generally outside of the Company’s control.

The fair value of stock option grants and employee stock purchases for the three months ended March 31, 2008, were estimated using the following weighted-average assumptions:


	Three Months Ended March 31, 2008						Three Months Ended March 31, 2007
	Stock Option Plan			Purchase Plan			Stock Option Plan			Purchase Plan
Risk free interest rate		2.0	%		3.5	%		4.7	%		4.9	%
Expected term (in years)	3.0 years			1.6 years			3.5 years			1.3 years
Dividend yield		0	%		0	%		0	%		0	%
Volatility of common stock		42	%		42	%		39	%		43	%
Weighted-average fair value	$	3.88		$	4.68		$	4.91		$	3.67

Expected Term. Prior to fiscal year 2006, the expected term of options granted was based on historical experience as well as the contractual terms and vesting periods of the options. For options granted during 2006 and 2007, the expected term of the options was derived from the average midpoint between vesting and the contractual term, as described in SAB 107. The midpoint approach was used during 2006 and 2007 because the expected life of the options could not be estimated due to the fact that the terms of the options were significantly changed in 2005. In 2005, the Company began granting stock option awards that have a contractual life of five years from the date of grant. Prior to 2005, stock option awards generally had a ten year contractual life from the date of grant. In

2008, the Company deemed that it has sufficient historical information on which to base its expected life assumption. The change to using historic experience as the basis for the estimated expected life was not material for options granted during the three months ended March 31, 2008.

Expected Volatility. Based on guidance provided in SFAS 123R and SAB 107, the volatility assumptions for the three months ended March 31, 2008 and 2007 were based on a combination of historical and implied volatility. The expected volatility of stock options is based upon equal weightings of the historical volatility of Foundry’s stock and the implied volatility of traded options, having a life of at least six months, on Foundry’s stock. Management believes that a blend of implied volatility and historical volatility is more reflective of market conditions and a better indicator of expected volatility than using purely historical volatility.

Expected Dividend. The Company has never paid cash dividends on its capital stock and does not expect to pay cash dividends in the foreseeable future.

Risk-Free Interest Rate. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

Estimated Forfeitures. Compensation expense recognized is based on awards ultimately expected to vest and reflects estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. During the three months ended March 31, 2008, the Company revised its estimate of forfeitures to 7% based on actual historical option forfeitures from its previously estimated forfeiture rate of 11% in fiscal year 2007. The Company recorded an additional $0.9 million of stock based compensation during the three months ending March 31, 2008 resulting from the change in estimate.

Computation of Per Share Amounts

Basic earnings per share (“EPS”) has been calculated using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted EPS has been calculated using the weighted-average number of shares of common stock outstanding during the period and potentially dilutive weighted-average common stock equivalents. Weighted-average common stock equivalents include the potentially dilutive effect of in-the-money stock options and restricted stock, determined based on the average share price for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be received assuming the exercise of all in-the-money stock options and restricted stock are assumed to be used to repurchase shares in the open market. Certain common stock equivalents were excluded from the calculation of diluted EPS because the exercise price of these common stock equivalents was greater than the average market price of the common stock for the respective period and, therefore, their inclusion would have been anti-dilutive.

Income Taxes

Foundry adopted Financial FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. In accordance with Foundry’s accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the Company’s adoption of FIN 48.

Recent Accounting Pronouncements

Effective January 1, 2008, Foundry adopted EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The adoption did not have a material impact on the Company’s consolidated results or operations or financial condition.

Effective January 1, 2008, Foundry adopted certain provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which the FASB issued in September 2006. SFAS 157 establishes specific criteria for the fair value measurement of financial and

nonfinancial assets and liabilities that are already subject to fair value under current accounting rules. SFAS 157 also requires expanded disclosures related to fair value measurements. In February 2008, the FASB issued Staff Position (“FSP”) 157-2, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value on at least an annual basis. The Company elected to delay the adoption date for the portions of SFAS 157 impacted by FSP 157-2 and, as a result, it adopted a portion of the provisions of SFAS 157. The partial adoption of SFAS 157 was prospective and did not have a significant effect on the Company’s consolidated results of operations and financial condition as the result of adoption. The Company is currently evaluating the impact of measuring the remaining nonfinancial assets and nonfinancial liabilities under FSP No. 157-2 on its results of operations and financial condition.

Effective January 1, 2008, the Company adopted FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 (“SFAS 159”), which the FASB issued in February 2007. SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, an entity may elect to use fair value to measure accounts receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and other eligible items. The fair value option may be elected generally on an instrument-by-instrument basis as long as it is applied to the instrument in its entirety, even if an entity has similar instruments that it elects not to measure based on fair value. The Company did not elect to adopt the fair value option under SFAS 159.

2. CASH EQUIVALENTS AND INVESTMENTS

Cash equivalents and investments consist of the following (in thousands):


	March 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Cash equivalents:
Money market funds	$	94,679	$	—	$	—		$	94,679
U.S. Treasuries and Government-sponsored enterprise securities		255,752		58		(5	)		255,805
Available-for-sale:
Auction rate municipal bonds		83,150		—		(3,971	)		79,179
Held-to-maturity:
Municipal bonds		36,370		247		—			36,617
Government-sponsored enterprise securities		444,577		1,759		(44	)		446,292

	$	914,528	$	2,064	$	(4,020	)	$	912,572


Cash equivalents	$	350,431	$	58	$	(5	)	$	350,484
Short-term investments		449,588		1,704		(44	)		451,248
Long-term investments		114,509		302		(3,971	)		110,840

	$	914,528	$	2,064	$	(4,020	)	$	912,572


	December 31, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Cash equivalents:
Money market funds	$	158,080	$	—	$	—		$	158,080
Government-sponsored enterprise securities		114,445		29		—			114,474
Available-for-sale:
Auction rate municipal bonds		82,500		—		—			82,500
Held-to-maturity:
Municipal bonds		42,362		133		—			42,495
Government-sponsored enterprise securities		508,845		551		(9	)		509,387

	$	906,232	$	713		(9	)	$	906,936

Cash equivalents	$	272,525		29		—		$	272,554
Short-term investments		575,645		550		(9	)		576,186
Long-term investments		58,062		134		—			58,196

	$	906,232	$	713	$	(9	)	$	906,936

US Treasuries and Government-sponsored enterprise securities (“GSEs”). Foundry’s U.S. Treasuries and GSE portfolio includes direct debt obligations of United States Treasury, Federal Home Loan Bank, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Federal Farm Credit Bank agencies. Unrealized losses as of March 31, 2008 were caused by interest rate movements. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. As of March 31, 2008, the issuers of Foundry’s GSEs had a credit rating of AAA.

Auction rate municipal bonds (“auction rate securities”). Foundry’s auction rate securities primarily consist of student loan debt obligations whose underlying assets are primarily Federal Family Education Loan Program (“FFELP”) guaranteed. As a result of recent auction failures, actual market prices or relevant observable inputs were not readily available to determine the fair value of the Company’s auction rate securities. The current market conditions required the Company to use discounted cashflow valuation models that depend on management’s assumptions to value its auction rate securities. Based on the Company’s valuation model, the Company recorded an unrealized other comprehensive loss of $4.0 million in the quarter ended March 31, 2008. During the first quarter of 2008, the Company reclassified $76.7 million of adjustable rate securities to long-term investments from short-term investments based on the estimated period when recovery of fair value is likely to occur.

The Company expects to liquidate its auction rate securities without significant loss primarily due to the government guarantees of a large portion of the underlying securities. The Company has determined that these securities are temporarily impaired, mostly due to changes in interest rates and liquidity factors and not credit quality, and because the Company has the ability and intent to hold its $79.2 million of auction rate securities that it held as of March 31, 2008, until market stability is restored with respect to these securities. However, it could take until the final maturity of the underlying notes (up to 33 years) to realize the investments’ recorded value. Refer to the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

In accordance with Emerging Issues Task Force (“EITF”) Abstract No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, (“EITF 03-1”), the following table summarizes the fair value and gross unrealized losses related to Foundry’s available-for-sale and held-to-maturity securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2008 (in thousands):


	Loss Less Than 12 months					Loss Greater Than 12 months				Total
			Gross					Gross				Gross
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
Available-for-sale:
Auction rate municipal bonds	$	76,679	$	(3,971	)		—		—	$	76,679	$	(3,971	)
Held-to-maturity:
U.S. Treasuries and Government-sponsored enterprise securities		154,137		(49	)		—		—		154,137		(49	)

	$	230,816	$	(4,020	)	$	—	$	—	$	230,816	$	(4,020	)

Because the decline in the market value of Foundry’s investments is attributable to changes in interest rates and liquidity factors and not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of its amortized cost, it does not consider these investments to be other-than-temporarily impaired at March 31, 2008.

3. FAIR VALUE DISCLOSURES

Fair Value Measurements

The fair value of the Company’s cash equivalents and investments has been categorized based upon a fair value hierarchy in accordance with SFAS No. 157. Refer to Note 1. “Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements for a discussion of the Company’s policies regarding this hierarchy. The Company records its held-to-to maturity cash equivalents and investments at amortized cost and records its available-for-sale auction rate securities at fair value.

The measurements used to determine fair value of Foundry’s cash equivalent and investment portfolio during the three months ended March 31, 2008 consisted of the following (in thousands):


			Fair Value Measurements at Reporting Date Using
			Quoted Prices In
			Active Markets		Significant		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	3/31/2008		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:
Money market funds	$	94,679	$	94,679	$	—	$	—
U.S. Treasuries and Government-sponsored enterprise securities		255,805		170,934		84,871		—
Available-for-sale:
Auction rate municipal bonds		79,179		—		—		79,179
Held-to-maturity:
Municipal bonds		36,617		—		36,617		—
Government-sponsored enterprise securities		446,292		—		446,292		—

Total	$	912,572	$	265,613	$	567,780	$	79,179

The table below provides a reconciliation of Foundry’s financial assets measured at fair value on a reoccurring basis, consisting of auction rate securities, using significant unobservable inputs (Level 3) for the three months ended March 31, 2008 (in thousands):


	Fair Value Measurements
	Using Significant
	Unobservable Inputs (Level 3)
	Available-for-sale
Beginning Balance	$	—
Total realized gains or (losses) included in net income		—
Total unrealized losses included in other comprehensive income		(3,971	)
Purchases, sales and settlements, net		—
Transfers in Level 3		83,150

Ending balance	$	79,179


The total amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	—

Gains and losses (realized and unrealized) included in earnings during the three months ended March 31, 2008 are reported in interest and other income as follows (in thousands):


	Interest and other
	income, net
Total gains included in earnings	$	12

Change in unrealized gains or (losses) relating to assets still held at the reporting date	$	—

4. CONCENTRATIONS

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash equivalents, short and long-term investments, and accounts receivable. Foundry seeks to reduce credit risk on financial instruments by investing in high-quality debt issuances and, by policy, limits the amount of credit exposure with any one issuer or fund. Additionally, the Company grants credit only to customers deemed credit worthy in the judgment of management. As of March 31, 2008 and December 31, 2007, ten customers accounted for approximately 33% and 38%, respectively, of Foundry’s net outstanding trade receivables.

Certain components, including integrated circuits and power supplies, used in Foundry’s products are purchased from sole sources. Such components may not be readily available from other suppliers as the development period required to fabricate such components can be lengthy. The inability of a supplier to fulfill the Company’s production requirements, or the time required for Foundry to identify new suppliers if a relationship is terminated, could negatively affect the Company’s future results of operations.

5. INVENTORIES

Inventories are stated on a first-in, first-out basis at the lower of cost or estimated net realizable value, and include purchased parts and subassemblies, labor and manufacturing overhead. Inventories consist of the following (in thousands):


	March 31, 2008		December 31, 2007
Purchased parts	$	6,667	$	4,279
Work-in-process		20,357		17,195
Finished goods		22,370		20,910

	$	49,394	$	42,384

Compensation cost capitalized as part of inventory as of March 31, 2008 and December 31, 2007 was $0.2 million for both of the respective periods.

6. DEFERRED REVENUE

Amounts billed in excess of revenue recognized are included as deferred revenue in the accompanying consolidated balance sheets. Product deferred revenue includes shipments to direct end-users, resellers and integration partners. Below is a breakdown of the Company’s deferred revenue (in thousands):


	March 31, 2008		December 31, 2007
Product	$	5,860	$	3,095
Support		85,537		77,672

Total	$	91,397	$	80,767


Reported as:
Current	$	63,318	$	52,981
Non Current		28,079		27,786

Total	$	91,397	$	80,767

Foundry offers its customers renewable support arrangements, including extended warranties, that generally have terms of one or five years. However, the majority of Foundry’s support contracts have one year terms. The change in the Company’s deferred support revenue balance was as follows for the three months ended March 31, 2008 (in thousands):


Deferred support revenue at December 31, 2007	$	77,672
New support arrangements		31,591
Recognition of support revenue		(23,726	)

Ending balance at March 31, 2008	$	85,537

7. COMMITMENTS AND CONTINGENCIES

Purchase Commitments with Suppliers and Third-Party Manufacturers

Foundry uses contract manufacturers to assemble certain parts for its chassis and its stackable products. The Company also utilizes third-party OEMs to manufacture certain Foundry-branded products. In order to reduce lead-times and ensure an adequate supply of inventories, Foundry’s agreements with some of these manufacturers allow them to procure long lead-time component inventory on the Company’s behalf based on a rolling production forecast provided by Foundry. The Company is contractually obligated to purchase long lead-time component inventory procured by certain manufacturers in accordance with its forecasts although it can generally give notice of order cancellation at least 90 days prior to the delivery date. In addition, the Company issues purchase orders to its component suppliers and third-party manufacturers that may not be cancelable. As of March 31, 2008, Foundry had approximately $69.6 million of open purchase orders with its component suppliers and third-party manufacturers that may not be cancelable.

Guarantees and Product Warranties

The Company has indemnification obligations contained in commercial agreements, including customary intellectual property indemnifications for the Company’s products contained in agreements with its resellers and end-users. The Company has not recorded a liability related to these indemnification provisions and its indemnification arrangements have not had any significant impact on the Company’s financial position, results of operations, or cash flows.

The Company provides customers with a standard one or five year hardware warranty, depending on the type of product purchased, and a 90-day software warranty. Customers can upgrade and/or extend the warranty by purchasing one of Foundry’s customer support programs. The Company’s warranty accrual represents its best estimate of the amount necessary to settle future and existing claims as of the balance sheet date. Foundry accrues for warranty costs based on estimates of the costs that may be incurred under our warranty obligations including material and labor costs. The warranty accrual is included in its cost of revenues and is recorded at the time revenue is recognized. Factors that affect its warranty liability include the number of installed units, estimated material costs and estimated labor costs. The Company periodically assesses the adequacy of its warranty accrual and adjusts the amount as considered necessary.

Changes in product warranty liability for the three months ended March 31, 2008 were as follows (in thousands):


Balance, December 31, 2007	$	2,251
Liabilities accrued for warranties issued during the period		327
Warranty claims settled during the period		(353	)
Changes in liabilities for pre-existing warranties during the period, including changes in estimates		(358	)

Balance, March 31, 2008	$	1,867

In the ordinary course of business, Foundry enters into contractual arrangements under which it may agree to indemnify the counter-party from losses relating to a breach of representations and warranties, a failure to perform certain covenants, or claims and losses arising from certain external events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. No amounts were reflected in the Company’s condensed consolidated financial statements as of March 31, 2008 or December 31, 2007 related to these indemnifications.

Litigation

Intellectual Property Proceedings. On June 21, 2005, Enterasys Networks, Inc. (“Enterasys”) filed a lawsuit against Foundry (and Extreme Networks) in the United States District Court for the District of Massachusetts alleging that certain of our products infringe six of Enterasys’ patents and seeking injunctive relief, as well as unspecified damages. On August 22, 2005, Foundry filed a response to the complaint denying the allegations. On November 3, 2005 the court severed Enterasys’ claim against Foundry and Extreme into two separate cases. The discovery process began, and proceeded through August 2007. Opening briefs for a Markman claim construction hearing were filed on August 17, 2007, which was to be held on October 15, 2007. However, on August 28, 2007, before responsive Markman briefs were filed by the parties, Foundry filed a motion to stay the case, which was assented to by Enterasys, because of petitions that Foundry had filed with the U.S. Patent and Trademark Office ( the “USPTO”) requesting that the USPTO reexamine the validity of five of the six Enterasys patents in view of certain prior art. On August 28, 2007, the court granted Foundry’s motion to stay the case. All activity in the case is now on hold while the USPTO reexamination process proceeds. On March 24, 2008, the USPTO issued an Office Action with respect to the first of the five Enterasys patents being re-examined. In the Office Action, the USPTO rejected the claims of the patent as being invalid over the prior art cited by Foundry. Enterasys now has an opportunity to respond to the rejections. The reexamination proceedings are ex parte, meaning that Foundry cannot participate in the re-examination proceeding between Enterasys and the USPTO concerning the rejections. It is expected that the USPTO will continue issuing Office Actions concerning the merits of the petitions (i.e., assessing the validity of the patents over the prior art cited by Foundry) over the next six months to a year. At some point in the future, the stay of the case may be lifted by the court, depending mainly on the results of the reexamination process. At that time, the court would issue a new scheduling order for the case. The Company is vigorously defending itself against Enterasys’ claims.

On September 6, 2006, Chrimar Systems, Inc. (“Chrimar”) filed a lawsuit against the Company in the United States District Court for the Eastern District of Michigan alleging that certain of Foundry’s products infringe Chrimar’s U.S. Patent 5,406,260 and seeking injunctive relief, as well as unspecified damages. The Company filed an answer denying the allegations and counterclaim on September 27, 2006. Subsequently, pursuant to an order of the court, Chrimar identified claim 17 of the patent as the exemplary claim

being asserted against Foundry. No trial date has been set. The court appointed a special master for the case, Professor Mark Lemley of Stanford University Law School. On March 6, 2008, the Special Master held a Markman claim construction hearing and, on March 31, 2008, the Special Master filed a report and recommendation with the court on how the claims should be construed. On May 1, 2008, the parties filed objections to the Special Master’s report. The court can accept, reject or modify, the Special Master’s recommended claim construction and issue an order construing the claims. It is expected that, after the issuance of a claim construction order, the court will set a further schedule for the case. The Company is vigorously defending itself against Chrimar’s claims.

On February 7, 2008, Network-1 Security Solutions, Inc. (“Network-1”) filed a lawsuit against Foundry and other networking companies, namely, Cisco Systems, Inc., Cisco-Linksys, LLC, Adtran, Inc., Enterasys Networks, Inc., Extreme Networks, Inc., Netgear, Inc, and 3Com Corporation in the United States District Court for the Eastern District of Texas, Tyler Division, alleging that certain of Foundry’s products infringe Network-1’s U.S. Patent No 6,218,930 and seeking injunctive relief, as well as unspecified damages. On March 3, 2008, Foundry filed an answer to the complaint denying the allegations, and asserting various counterclaims. The other defendants filed answers in April 2008. On May 8, 2008, the court scheduled a Markman hearing for December 3, 2009, and a trial for July 6, 2010. The Company is committed to vigorously defending itself against Network-1’s claims.

On February 26, 2008, Fenner Investments, Ltd. (“Fenner”) filed a lawsuit against Foundry, 3Com Corporation, Extreme Networks, Inc., Netgear, Inc., Zyxel Communications, Inc., D-Link Systems, Inc., and SMC Networks, Inc. in the United States District Court for the Eastern District of Texas, Tyler Division, alleging that certain of Foundry’s products infringe Fenner’s U.S. Patent No. 7,145,906 and seeking injunctive relief, as well as unspecified damages. On February 28, 2008, Fenner filed an amended complaint that added three additional defendants, namely, Tellabs, Inc., Tellabs North America, Inc., and Enterasys Networks, Inc. Subsequently, on May 5, 2008, Fenner filed a second amended complaint, which added infringement claims concerning a second Fenner patent, U.S. Patent No. 5,842,224, against Foundry and the other defendants. Foundry’s answer to the second amended complaint is due to be filed by May 15, 2008. The Company is committed to vigorously defending itself against Fenner’s claims.

Securities Litigation. Foundry remains a defendant in a class action lawsuit filed on November 27, 2001 in the United States District Court for the Southern District of New York (the “District Court”) on behalf of purchasers of Foundry’s common stock alleging violations of federal securities laws. The case was designated as In re Foundry Networks, Inc. Initial Public Offering Securities Litigation, No. 01-CV-10640 (SAS)(S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS)(S.D.N.Y.). The case is brought purportedly on behalf of all persons who purchased Foundry’s common stock from September 27, 1999 through December 6, 2000. The operative amended complaint names as defendants the Company and two current and one former Foundry officer (the “Foundry Defendants”), including the Company’s Chief Executive Officer and former Chief Financial Officer, and investment banking firms that served as underwriters for Foundry’s initial public offering in September 1999 (the “IPO”). The amended complaint alleged violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the IPO failed to disclose that (i) the underwriters agreed to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriters, and (ii) the underwriters arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false or misleading analyst reports were issued and seeks unspecified damages. Similar allegations were made in lawsuits challenging over 300 other initial public offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes.

In 2004, the Company accepted a settlement proposal presented to all issuer defendants. Under the terms of this settlement, the plaintiffs would have dismissed and released all claims against the Foundry Defendants in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases and for the assignment or surrender of control of certain claims we may have against the underwriters. However, the settlement required approval by the District Court. Prior to a final decision by the District Court, the Second Circuit Court of Appeals vacated the class certification of plaintiffs’ claims against the underwriters in six cases designated as focus or test cases. In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. Dec. 5, 2006). In response, on December 14, 2006, the District Court ordered a stay of all proceedings in all of the lawsuits pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. In view of that decision, the parties withdrew the prior settlement. The plaintiffs have filed amended complaints in an effort to comply with the Second Circuit decision. The Company, and the previously named officers, are still named defendants in the amended complaint. On March 26, 2008, the District Court issued an order granting in part and denying in part defendants’ motions to dismiss the amended complaints in the six focus cases. In particular, the District Court denied the motions to dismiss as to the Section 10(b) claims. The District Court also denied the motions to dismiss as to the Section 11 claims except for those claims raised by two different classes of plaintiffs. More specifically, the District Court dismissed the Section 11 claims raised by (1) those plaintiffs who had no conceivable damages because they sold their securities above the offering price; and (2) those plaintiffs whose claims were time barred because they purchased their securities outside the previously certified class period. If an

amended or modified settlement is not reached, and thereafter approved by the District Court, the Company intends to defend the lawsuit vigorously. Because of the inherent uncertainty of litigation, however, Foundry cannot predict its outcome.

In August and September 2006, purported Foundry stockholders filed two putative derivative actions against certain of Foundry’s current and former officers, directors and employees in the Superior Court of the State of California County of Santa Clara. Both actions were consolidated into In re Foundry Networks, Inc. Derivative Litigation, Superior Court of the State of California, Santa Clara County, Lead Case. No. 1-06-CV 071651 (the “Consolidated Action”). On February 5, 2007, plaintiffs served a Consolidated Amended Shareholder Derivative Complaint (the “CAC”). The CAC names 19 defendants and Foundry as a nominal defendant. In general, the CAC alleges that certain stock option grants made by Foundry were improperly backdated and that such alleged backdating resulted in alleged violations of generally accepted accounting principles, the dissemination of false financial statements and potential tax ramifications. The CAC asserts 11 causes of action against certain and/or all of the defendants, including, among others, breach of fiduciary duty, unjust enrichment and violations of California Corporations Code Sections 25402 and 25403. On February 13, 2007, the Company filed a motion to stay the CAC pending resolution of a substantially similar derivative action pending in the United States District Court for the Northern District of California, San Jose Division. On March 20, 2007, the court granted the motion to stay. The action continues to be stayed.

On March 9, 2007, a purported Foundry stockholder served our registered agent for service of process with a putative derivative action against Foundry and certain of its current and former officers, directors and employees. The action was filed on February 28, 2007, in the Superior Court of the State of California, Santa Clara County, and captioned Patel v. Akin, et al. (Case No. l-07-CV 080813). The Patel action generally asserted similar claims as those in the Consolidated Action as well as a cause of action for violation of Section 1507 of the California Corporations Code which is not asserted in the Consolidated Action. On April 4, 2007 the plaintiff filed a Request for Voluntary Dismissal of the action. On June 19, 2007, plaintiff re-filed the action Patel v. Akin, et al. (Civil Action No. 3036-VCL), in the Court of Chancery of the State of Delaware, New Castle County. The complaint again generally asserts similar claims as those in the Consolidated Action and seeks judgment against the individual defendants for damages purportedly sustained by the Company as a result of the alleged misconduct, as well as unspecified equitable relief to remedy the individual defendants’ alleged breaches of fiduciary duties. The complainant further seeks an award of attorney’s fees and costs, accountants’ and experts’ fees, cost and expenses, and such other relief as the Court might deem proper. The parties have engaged in settlement discussions, which are ongoing. Because of the inherent uncertainty of litigation, however, Foundry cannot predict whether a settlement will be reached or the outcome of the litigation.

In September and October 2006, purported Foundry stockholders filed four putative derivative actions against Foundry and certain of its current and former officers, directors and employees in the United States District Court for the Northern District of California. The four actions were captioned Desai v. Johnson, et al. (Case No. C-06-05598 PVT), McDonald v. Johnson, et al. (Case No. C06 06099 HRL), Jackson v. Akin, et al. (C06 06509 JCS) and Edrington v. Johnson, Jr., et al. (C06 6752 RMW). On December 8, 2006, the actions were consolidated into In re Foundry Networks, Inc. Derivative Litigation, U.S.D.C. No. Dist. Cal. (San Jose Division), Case No. 5:06-CV-05598-RMW. A hearing on certain plaintiffs’ motion to appoint lead plaintiff and lead counsel was held on February 2, 2007, and, on February 12, 2007, the court appointed lead plaintiff and lead counsel. On February 15, 2007, Edrington v. Johnson, Jr., et al was voluntarily dismissed. Pursuant to a stipulation among the parties, on March 26, 2007, plaintiffs filed and served a Consolidated Derivative Complaint (the “CDC”). The CDC generally alleges that certain stock option grants made by Foundry were improperly backdated and that such alleged backdating resulted in alleged violations of generally accepted accounting principles, dissemination of false financial statements and potential tax ramifications. The CDC pleads a combination of causes of action, including, among others, breach of fiduciary duty, unjust enrichment and violations of Sections 10(b), 14(a) and 20(a) of the Securities and Exchange Act of 1934. On May 10, 2007, Foundry filed a motion to dismiss the CDC. Pursuant to a stipulation among the parties, the individual defendants named in the CDC are not required to answer or otherwise respond to the CDC unless the court denies Foundry’s motion to dismiss. On June 25, 2007, plaintiffs filed an opposition to Foundry’s motion to dismiss, and, on August 2, 2007, Foundry filed a reply to plaintiffs’ opposition. Pursuant to a stipulation among the parties and an order of the Court, the hearing on Foundry’s motion to dismiss currently is now scheduled for May 23, 2008. The parties have engaged in settlement discussions, which are ongoing. Because of the inherent uncertainty of litigation, however, Foundry cannot predict whether a settlement will be reached or the outcome of the litigation.

On October 3, 2007, a purported Foundry stockholder filed a lawsuit naming Foundry as a nominal defendant in the United States District Court, Western District of Washington in Seattle. The action is captioned Vanessa Simmonds v. Deutsche Bank AG, Merrrill Lynch & Co and JPMorgan Chase & Co. Defendants, and Foundry Networks, Inc., Nominal Defendant (Case No. 2:07-CV-01566-JCC). On February 28, 2008, the plaintiff filed a first amended complaint. The action alleges that Deutsche Bank, Merrill Lynch and JPMorgan profited from transactions in Foundry stock by engaging in short-swing trades. By stipulation and order of the court, the Company is not required to answer or otherwise respond to the first amended complaint.

SEC Information Inquiry. In 2006, the SEC initiated an informal inquiry into Foundry’s historical stock option granting practices. At the SEC’s request, the Company voluntarily produced certain documents to the SEC in this matter. The Company cooperated with the SEC and on March 21, 2008, the SEC informed the Company by letter that its investigation had been terminated and that no enforcement action was recommended to the SEC. Foundry considers the SEC inquiry to be closed.

United States Attorney’s Office Subpoena for Production of Documents. On June 26, 2006, Foundry received a subpoena from the United States Attorney’s Office for the production of documents relating to its historical stock option granting practices. The Company has produced certain documents to the United States Attorney’s Office in October of 2006, but has not received correspondence from the United States Attorney’s Office since the Company’s production of documents. The Company has cooperated with the United States Attorney’s Office and will continue to do so if requested by the United States Attorney’s Office.

General. From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and/or other intellectual property rights. From time to time, third parties assert patent infringement claims against the Company in the form of letters, lawsuits and other forms of communication. In addition, from time to time, the Company receives notification from customers claiming that they are entitled to indemnification or other obligations from the Company related to infringement claims made against them by third parties. In accordance with SFAS No. 5, Accounting for Contingencies, (“SFAS 5”), the Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews the need for any such liability on a quarterly basis and records any necessary adjustments to reflect the effect of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. At March 31, 2008, the Company has not recorded any such liabilities in accordance with SFAS 5. The Company believes it has valid defenses with respect to the legal matters pending against it. In the event of a determination adverse to Foundry, the Company could incur substantial monetary liability and be required to change its business practices. Any unfavorable determination could have a material adverse effect on Foundry’s financial position, results of operations, or cash flows.

8. STOCKHOLDERS EQUITY

Share Repurchase Program. In July 2007, the Company’s Board of Directors approved a share repurchase program authorizing the Company to purchase up to $200 million of its common stock. In April 2008, the Company’s Board of Directors approved an increase to the size of the share repurchase program of an additional $100 million. This approval expands the share repurchase program to $300 million. The number of shares to be purchased and the timing of purchases will be based on several factors, including the price of Foundry’s stock, general business and market conditions, and other investment opportunities. The share repurchase program is scheduled to expire on December 31, 2008.

The stock repurchase activity under the stock repurchase program during the three months ended March 31, 2008 is summarized as follows (in thousands, except per share amounts):


	Total Number		Average Price
	of Shares		Paid per		Amount of
Three Months Ended March 31, 2008	Purchased		Share		Repurchases
Cumulative balance at December 31, 2007		4,381	$	18.93	$	82,930
Repurchase of common stock		4,420		13.56		59,912

Cumulative balance at March 31, 2008		8,801	$	16.23	$	142,842

The purchase price for the repurchased shares in the table above is reflected as a reduction to retained earnings. Subsequent to March 31, 2008 to May 8, 2008, the Company repurchased an additional 1.2 million shares of its common stock through open market purchases at an average price of $12.84 per share for a total purchase price of $15.7 million. The purchase price for the repurchased shares will be reflected as a reduction to retained earnings during the second quarter of 2008. Common stock repurchases under the program are recorded based upon the settlement date of the applicable trade for accounting purposes. All shares of common stock repurchased under this program are retired.

Other Repurchases of Common Stock. The Company also repurchases shares in settlement of employee tax withholding obligations due upon the vesting of restricted stock or stock units.

Stock-Based Compensation Plans. The Company has adopted stock-based compensation plans that provide for the grant of stock-based awards to employees and directors, including stock options and restricted stock awards which are designed to reward employees

for their long-term contributions to the Company and provide an incentive for them to remain with Foundry. As of March 31, 2008, the Company had three stock-based compensation plans: the 2006 Stock Incentive Plan (the “2006 Stock Plan”), the 1999 Directors’ Stock Option Plan, and the 2000 Non-Executive Stock Option Plan.

On June 16, 2006, stockholders approved the adoption of the 2006 Stock Plan replacing the 1996 Stock Plan. No further grants will be made under the 1996 Stock Plan. Under the 2006 Stock Plan, the stockholders authorized the issuance of up to 26,000,000 shares of common stock to Foundry’s employees, consultants and non-employee directors. The 2006 Stock Plan has a fixed number of shares and will terminate on December 31, 2009. The 2006 Stock Plan is not an “evergreen” plan. The number of shares of Foundry’s common stock available for issuance under the 2006 Stock Plan will be reduced by one share for every one share issued pursuant to a stock option or stock appreciation right and by 2.3 shares for every one share issued as a restricted stock or restricted stock unit. Stock options and stock appreciation rights must be granted with an exercise price of not less than 100% of the fair market value on the date of grant. Repricing of stock options and stock appreciation rights is prohibited without stockholder approval. Awards under the 2006 Stock Plan may be made subject to performance conditions as well as conditions based on time.

Under the 1996 Stock Plan, the 1999 Directors’ Stock Option Plan, and the 2000 Non-Executive Stock Option Plan, stock options generally have an exercise price equal to the fair market value of Foundry’s common stock on the date of grant. Options vest over a vesting schedule determined by the Board of Directors, generally one to five years. Options granted prior to January 1, 2005 expire 10 years from the date of grant for all stock-based compensation plans. Options granted after January 1, 2005 expire 5 years from the date of grant for the 2006 Stock Plan, the 1996 Stock Plan and the 2000 Non-Executive Stock Option Plan. Options granted after January 1, 2005 expire 10 years from the date of grant for the 1999 Directors’ Stock Option Plan. On April 21, 2008, the Company’s Board of Directors resolved to discontinue further equity award grants from the 2000 Non-Executive Stock Option Plan. The last grant from the 2000 Non-Executive Stock Option Plan was on April 29, 2005.

A summary of Foundry’s stock option activity for all stock option plans for the three months ended March 31, 2008 is set forth in the following table (which excludes restricted stock awards and restricted stock units):


				Weighted-
				Average		Remaining
	Options			Exercise		Contractual		Aggregate
	Outstanding			Price		Life (years)		Intrinsic Value
								(in thousands)
Balance, December 31, 2007		30,528,237		$	16.38
Granted		857,250		$	12.70
Exercised		(141,516	)	$	9.17
Forfeited/expired		(197,921	)	$	16.39

Balance, March 31, 2008		31,046,050		$	16.31		4.19	$	29,667

Vested and expected to vest at March 31, 2008		29,568,908		$	16.35		4.20	$	29,431

Exercisable at March 31, 2008		21,973,820		$	16.62		4.18	$	28,427

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Foundry’s closing stock price on the last trading day of the first quarter of 2008 and the exercise price for all in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2008.

As of March 31, 2008, there was $42.3 million of total unrecognized compensation cost related to stock options granted under the Company’s stock-based compensation plans. That cost is expected to be recognized over a weighted-average period of 2.52 years.

Restricted Stock Awards. A summary of the Company’s restricted stock award activity and related information for the three months ended March 31, 2008 is set forth in the following table:


	Restricted Stock			Weighted Average
	Outstanding			Grant Date Fair Value
	(in thousands)
Balance, December 31, 2007		953		$	16.59
Granted		—		$	—
Vested		(159	)	$	15.03
Forfeited		—		$	—

Balance, March 31, 2008		794		$	16.90

As of March 31, 2008, there was $7.3 million of total unrecognized compensation cost related to restricted stock awards granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.79 years.

Restricted Stock Units. The following schedule summarizes information about the Company’s restricted stock units (“RSUs”) as of March 31, 2008:


				Remaining
				Contractual		Aggregate
	Shares			Life (years)		Intrinsic Value
	(in thousands)					(in thousands)
Balance, December 31, 2007		1,639
Awarded		—
Released		—
Forfeited/expired		(14	)

Balance, March 31, 2008		1,625			1.43	$	18,817

Vested and expected to vest at March 31, 2008		1,399			1.38	$	16,200

Exercisable at March 31, 2008		—			—	$	—

None of the awarded RSUs were vested as of March 31, 2008. These RSUs have been deducted from the shares available for grant under the Company’s stock option plans at a rate of 2.3 shares for every one share issued in the 2006 plan.

As of March 31, 2008, approximately $21.1 million of total unrecognized compensation cost related to RSUs is expected to be recognized over a weighted-average period of 2.43 years.

Employee Stock Purchase Plan. Under Foundry’s 1999 Employee Stock Purchase Plan (the “ESPP”), employees are granted the right to purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value of the shares at (i) the beginning of a rolling two-year offering period or (ii) the end of each semi-annual purchase period, subject to a plan limit on the number of shares that may be purchased in a purchase period. During the three months ended March 31, 2008, the Company issued an aggregate of 1,162,809, shares under the ESPP at an average per share price of $8.95. The Company issued no shares under the ESPP during the three months ended March 31, 2007. A total of 5,465,967 shares of common stock were reserved for issuance under the ESPP as of March 31, 2008.

Stock-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2008 and 2007 was $14.0 million and $9.6 million, respectively.

Stock-based compensation relates to the following categories by period (in thousands):


	Three Months Ended March 31,
	2008		2007
Cost of revenue — Product	$	475	$	315
Cost of revenue — Service		970		449
Research and development		4,880		3,338
Sales and marketing		5,478		3,695
General and administrative		2,198		1,825

Total	$	14,001	$	9,622

Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. Approximately $0.2 million and $2,000 of excess tax benefits for the three months ended March 31, 2008 and 2007, respectively, have been classified as a financing cash inflow.

9. NET INCOME PER SHARE

The following table presents the calculation of basic and diluted net income per share:


	Three Months Ended March 31,
	2008		2007
	(in thousands, except per share amounts)
Net income	$	13,906	$	9,091

Basic:
Weighted-average shares outstanding		147,235		147,202

Basic EPS	$	0.09	$	0.06

Diluted:
Weighted-average shares outstanding		147,235		147,202
Add: Weighted-average dilutive potential shares		4,036		6,184

Weighted-average shares used in computing diluted EPS		151,271		153,386

Diluted EPS	$	0.09	$	0.06

There were 21.1 million and 14.6 million anti-dilutive common stock equivalents for the three months ended March 31, 2008 and 2007, respectively.

10. COMPREHENSIVE INCOME

Comprehensive income consisted of the following (in thousands):


	Three Months Ended March 31,
	2008			2007
Net income	$	13,906		$	9,091
Other comprehensive income:
Net unrealized loss on available-for-sale securities		(3,971	)		—
Foreign currency translation adjustments		(243	)		(3	)

Total comprehensive income	$	9,692		$	9,088

11. SEGMENT AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision-maker, in deciding how to allocate resources and in assessing performance. Foundry is organized as, and operates in, one reportable segment: the design, development, manufacturing, marketing and sale of a comprehensive, end-to-end suite of high-performance data networking solutions, including Ethernet Layer 2-7 switches, Metro routers and Internet traffic management products. Foundry’s chief operating decision-maker reviews consolidated financial information, accompanied by information about revenue by geographic region and configuration type. The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, gross margin or net income. In addition, Foundry’s assets are primarily located in its corporate office in the United States and are not allocated to any specific region. Therefore, geographic information is presented only for net product revenue.

Foundry manages its business based on four geographic regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (“EMEA”); Asia Pacific; and Japan. Foundry’s foreign offices conduct sales, marketing and support activities. Because some of Foundry’s customers, such as the United States government and multinational companies, span various geographic locations, the Company determines revenue by geographic region based on the billing location of the customer. Net product revenue by region as a percentage of net product revenue was as follows:


	Three Months Ended March 31,
	2008			2007
Americas		63	%		67	%
EMEA		22	%		15	%
Asia Pacific		10	%		10	%
Japan		5	%		8	%

Sales to the United States government accounted for approximately 19% of the Company’s total net revenue for the three months ended March 31, 2008 and 2007.

Other than the United States government, no individual customer accounted for more than 10% of the Company’s net product revenue for the three months ended March 31, 2008 and 2007.

12. INCOME TAXES

The Company’s interim effective income tax rate is based on its best estimate of our annual effective income tax rate. The effective income tax rates for the three months ended March 31, 2008 and 2007 were 37% and 39%, respectively. These rates reflect applicable federal and state tax rates, offset primarily by the tax impact of state research and development tax credits, tax-exempt interest income, and the US production activities deduction. The lower effective tax rate for the three months ended March 31, 2008 compared to the same period in the prior year was primarily due to a decrease in the non-deductible expense generated from qualified equity plans, offset by the expiration of the federal reserve credit.

When an employee exercises a stock option issued under a nonqualified plan, or has a disqualifying disposition related to a qualified plan, the Company receives an income tax benefit for the difference between the fair market value of the stock issued at the time of the exercise or disposition and the employee’s option price, tax effected. As the Company cannot record the tax benefit for stock-based compensation expense associated with qualified stock options until the occurrence of future disqualifying dispositions of the underlying stock, the Company’s future quarterly and annual effective tax rates will be subject to volatility and, consequently, the Company’s ability to reasonably estimate its future quarterly and annual effective tax rates will be adversely affected.

Management believes the Company will likely generate sufficient taxable income in the future to realize the tax benefits arising from its existing net deferred tax assets as of March 31, 2008, although there can be no assurance that it will be able to do so. A portion or all of Foundry’s deferred tax assets relating to stock-based compensation may not ultimately be realized. To the extent the deferred tax benefit is more than the actual tax benefit realized, the difference may impact the income tax expense if the Company does not have a sufficient hypothetical additional paid in capital (“APIC”) pool under SFAS 123R to absorb that difference.

At December 31, 2007, Foundry had a liability for gross unrecognized tax benefits of $16.6 million, of which $6.9 million, if recognized, would affect the Company’s effective tax rate. During the first quarter of 2008, there was no material change in the amount of the liability for gross unrecognized tax benefits.

At December 31, 2007, Foundry had a liability for accrued interest and penalties related to the unrecognized tax benefits of $1.8 million. During the first quarter of 2008, there was no material change in the total amount of the liability for accrued interest and penalties related to the unrecognized tax benefits.

Foundry conducts business globally and, as a result, the Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. It is possible that the amount of the liability for unrecognized tax benefits may change within the next 12 months, although no specific amount of future change is known at this time and no estimate of a range of possible change can be quantified.

In general, Foundry is no longer subject to United States federal income tax examinations for years before 2004 and state and local income tax examinations for years before 2003, except to the extent that tax attributes from the earlier closed years are carried forward to years remaining open for audit.


	Three Months Ended March 31,
	2008		2007
Net revenue:
Product	$	125,863	$	115,218
Service		24,192		20,595

Total net revenue		150,055		135,813

Cost of revenue:
Product		48,415		51,137
Service		8,183		5,466

Total cost of revenue		56,598		56,603

Gross margin		93,457		79,210

Operating expenses:
Research and development		21,729		21,250
Sales and marketing		47,135		40,090
General and administrative		11,839		10,933
Other charges, net		—		2,533

Total operating expenses		80,703		74,806

Income from operations		12,754		4,404
Interest and other income, net		9,299		10,383

Income before provision for income taxes		22,053		14,787
Provision for income taxes		8,147		5,696

Net income	$	13,906	$	9,091

Basic net income per share	$	0.09	$	0.06

Weighted-average shares used in computing basic net income per share		147,235		147,202

Diluted net income per share	$	0.09	$	0.06

Weighted-average shares used in computing diluted net income per share		151,271		153,386