8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): December 23, 2008 (December 18, 2008)

BROCADE COMMUNICATIONS SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware	000-25601	77-0409517
(State or other jurisdiction	(Commission File Number)	(I.R.S. Employer
of incorporation)		Identification Number)

1745 Technology Drive
San Jose, CA 95110

(Address, including zip code, of principal executive offices)

(408) 333-8000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

EX-23.1

EX-99.1

EX-99.2

EX-99.3

     On December 23, 2008, Brocade Communications Systems, Inc. (“Brocade or the “Company”) filed a Current Report on Form 8-K to report the closing of the acquisition of Foundry Networks, Inc. (“Foundry”), a Delaware corporation, pursuant to the Agreement and Plan of Merger, dated as of July 21, 2008, as amended by Amendment No.1 thereto, dated as of November 7, 2008 (the “Merger Agreement”), among Brocade, Falcon Acquisition Sub, Inc., a wholly-owned subsidiary of Brocade (“Merger Sub”), and Foundry (the “Merger”). As a result of the Merger, Foundry is now a wholly-owned subsidiary of the Company. The Merger closed and became effective on December 18, 2008. As indicated in the original Form 8-K, this Form 8-K/A is being filed to provide the financial statements and pro forma financial statements required by Item 9.01 as set forth below, in accordance with Item 9.01(a) and Item 9.01(b) of Form 8-K, no later than 71 days after the original Form 8-K was required to be filed. The financial statements and pro forma financial statements are filed as Exhibits 99.1, 99.2 and 99.3, and are incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits.

     (a) Financial Statements of Businesses Acquired.

1)

Foundry’s historical audited consolidated balance sheets as of December 31, 2006 and 2007, and Foundry’s historical audited consolidated statements of income, cash flows and stockholders’ equity for each of the years ended December 31, 2005, 2006 and 2007 previously filed by Foundry in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007 with the Securities and Exchange Commission on February 26, 2008 are attached hereto as Exhibit 99.1, and are incorporated herein by reference.

2)

Foundry’s historical unaudited condensed consolidated balance sheet as of September 30, 2008, and Foundry’s historical unaudited condensed consolidated statements of income and cash flows for the three and nine months ended September 30, 2007 and 2008 previously filed by Foundry in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 with the Securities and Exchange Commission on November 6, 2008 are attached hereto as Exhibit 99.2 and are incorporated herein by reference.

     (b) Pro Forma Financial Information.

The required pro forma financial information as of and for the twelve months ended October 25, 2008 is attached hereto as Exhibit 99.3 and is incorporated herein by reference.

     (d) Exhibits.

Exhibit
Number	Description of Document
23.1	Consent of Independent Registered Public Accounting Firm.
99.1	Audited consolidated financial statements of Foundry as of December 31, 2006 and 2007, and for each of the three years ended December 31, 2005, 2006 and 2007.
99.2	Unaudited condensed consolidated financial statements of Foundry as of September 30, 2008, and for the three and nine months ended September 30, 2007 and 2008.
99.3	Unaudited pro forma financial information as of and for the twelve months ended October 25, 2008.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	BROCADE COMMUNICATIONS SYSTEMS, INC.
Dated: February 24, 2009	By:	/s/ Richard Deranleau
		Richard Deranleau
		Chief Financial Officer and Vice President, Finance

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use of our report dated February 26, 2008 with respect to the consolidated financial statements of Foundry Networks, Inc., which report appears in the Annual Report on Form 10-K of Foundry Networks, Inc., and is included in the Current Report on Form 8-K/A under the Securities Exchange Act of 1934 of Brocade Communications Systems, Inc. and is incorporated by reference in:

• Registration Statements on Form S-8 of Brocade Communications Systems, Inc., Registration Nos. 333-143053, 333-140334, 333-129909, 333-129908, 333-117897, 333-103571, 333-100797, 333-72480, 333-64260, 333-53734, 333-39126, 333-95653, 333-85187, 333-156413 and 333-156140; and

• Registration Statements on Form S-3 of Brocade Communications Systems, Inc., Registration Nos. 333-153208, 333-143109, and 333-84698.

/s/ Ernst & Young LLP

San Jose, California
February 23, 2009

EX-99.1

Exhibit 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Foundry Networks, Inc.

     We have audited the accompanying consolidated balance sheets of Foundry Networks, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Foundry Networks, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

     As discussed in Note 2 to the consolidated financial statements, Foundry Networks, Inc. adopted Statement of Financial Accounting Standards No. 123R, Share Based Payment on January 1, 2006, and Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes on January 1, 2007.

/s/ ERNST & YOUNG LLP

San Jose, California
February 26, 2008

FOUNDRY NETWORKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
	2007		2006		2005
	(In thousands, except per share data)
Net revenue:
Product	$	517,637	$	395,701	$	338,784
Service		89,568		77,579		65,072
Total net revenue		607,205		473,280		403,856
Cost of revenue:
Product		215,060		174,526		143,414
Service		21,358		13,927		11,921
Total cost of revenue		236,418		188,453		155,335
Gross margin		370,787		284,827		248,521
Operating expenses:
Research and development		77,052		70,658		53,041
Sales and marketing		160,220		128,985		105,701
General and administrative		44,935		43,854		27,765
Other charges, net		5,714		12,807		—
Total operating expenses		287,921		256,304		186,507
Income from operations		82,866		28,523		62,014
Interest and other income, net		43,536		34,407		18,078
Income before provision for income taxes and cumulative effect of change in accounting principle		126,402		62,930		80,092
Provision for income taxes		45,259		24,671		26,530
Income before cumulative effect of change in accounting principle		81,143		38,259		53,562
Cumulative effect of change in accounting principle, net of taxes		—		439		—
Net income	$	81,143	$	38,698	$	53,562
Basic net income per share:
Before cumulative effect of change in accounting principle	$	0.55	$	0.26	$	0.38
Cumulative effect of change in accounting principle		—		0.01		—
Net income per share — basic	$	0.55	$	0.27	$	0.38
Weighted-average shares used in computing basic net income per share		148,143		145,167		139,176
Diluted net income per share:
Before cumulative effect of change in accounting principle	$	0.52	$	0.25	$	0.37
Cumulative effect of change in accounting principle		—		0.01		—
Net income per share — diluted	$	0.52	$	0.26	$	0.37
Weighted-average shares used in computing diluted net income per share		155,520		150,509		143,974

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

FOUNDRY NETWORKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

													Accumulated
							Additional			Deferred			Other						Total
	Common Stock						Paid-In			Stock			Comprehensive			Retained			Stockholders’			Comprehensive
	Shares			Amount			Capital			Compensation			Income (Loss)			Earnings			Equity			Income
	(In thousands)
BALANCES AT DECEMBER 31, 2004		137,226			14			591,560			(7,405	)		(451	)		138,945			722,663		$	57,294
Issuances of common stock under stock plans		3,923			—			28,425			—			—			—			28,425
Stock-based compensation —		—			—			(39	)		4,645			—			—			4,606
Tax benefit from stock option exercises		—			—			2,179			—			—			—			2,179
Foreign currency translation adjustments		—			—			—			—			495			—			495		$	495
Net income		—			—			—			—			—			53,562			53,562			53,562
BALANCES AT DECEMBER 31, 2005		141,149		$	14		$	622,125		$	(2,760	)	$	44		$	192,507		$	811,930		$	54,057
Elimination of unearned deferred compensation upon adoption of SFAS 123R		—			—			(2,760	)		2,760			—			—			—
Issuances of common stock under stock plans		5,885			1			47,091			—			—			—			47,092
Stock-based compensation		—			—			50,855			—			—			—			50,855
Tax benefit from stock option exercises		—			—			10,486			—			—			—			10,486
Cumulative effect of change in accounting principle		—			—			(439	)		—			—			—			(439	)
Foreign currency translation adjustments		—			—			—			—			(527	)		—			(527	)	$	(527	)
Net income		—			—			—			—						38,698			38,698			38,698
BALANCES AT DECEMBER 31, 2006		147,034		$	15		$	727,358		$	—		$	(483	)	$	231,205		$	958,095		$	38,171
Cumulative effect upon adoption of FIN 48		—			—			(4,182	)		—			—			777			(3,405	)
Cumulative effect upon adoption of EITF 06-02		—			—			—			—			—			(683	)		(683	)
Repurchases and retirement of common stock		(4,381	)		(1	)		—			—			—			(82,929	)		(82,930	)
Issuances of common stock under stock plans, net of repurchases		6,047			1			54,888			—			—			—			54,889
Stock-based compensation		—			—			40,219			—			—			—			40,219
Tax benefit from stock option exercises		—			—			11,627			—			—			—			11,627
Foreign currency translation adjustments		—			—			—			—			(306	)		—			(306	)	$	(306	)
Net income		—			—			—			—						81,143			81,143			81,143
BALANCES AT DECEMBER 31, 2007		148,700		$	15		$	829,910		$	—		$	(789	)	$	229,513		$	1,058,649		$	80,837

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

FOUNDRY NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2007			2006			2005
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	81,143		$	38,698		$	53,562
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,135			10,190			9,124
Stock-based compensation expense		46,021			50,269			4,549
Provision for doubtful accounts		(386	)		106			(730	)
Provision for sales returns		(283	)		1,126			157
Inventory provisions		6,385			9,414			15,116
(Benefit)/provision for deferred income taxes		(8,781	)		(15,948	)		3,181
Tax benefit from stock option exercises		—			—			2,179
Excess tax benefits from stock-based compensation		(8,895	)		(6,001	)		—
Changes in operating assets and liabilities:
Accounts receivable		(45,079	)		1,727			13,725
Inventories		(13,838	)		(11,811	)		(8,865	)
Prepaid expenses and other assets		(4,867	)		(3,581	)		(3,274	)
Accounts payable		(1,366	)		2,951			4,069
Accrued payroll and related expenses		15,486			3,746			1,770
Income taxes payable		19,034			3,690			10,598
Other accrued expenses		(1,880	)		5,521			497
Deferred support revenue		12,108			5,084			4,247
Net cash provided by operating activities		105,937			95,181			109,905
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investments		(48,925	)		(85,625	)		(150,700	)
Purchases of held-to-maturity investments		(954,053	)		(665,511	)		(256,022	)
Proceeds from sales of available-for-sale investments		59,200			87,725			314,625
Proceeds from maturities of held-to-maturity investments		938,367			489,971			142,408
Purchases of property and equipment, net		(7,096	)		(8,273	)		(9,900	)
Net cash provided by (used in) investing activities		(12,507	)		(181,713	)		40,411
CASH FLOWS FROM FINANCING ACTIVITIES:
Excess tax benefits from stock-based compensation		8,895			6,001			—
Proceeds from issuances of common stock under stock plans, net of repurchases		54,735			47,684			28,426
Repurchase and retirement of common stock		(82,930	)		—			—
Net cash provided by (used in) financing activities		(19,300	)		53,685			28,426
Increase (decrease) in cash and cash equivalents		74,130			(32,847	)		178,742
Effect of exchange rate changes on cash		(306	)		(527	)		495
Cash and cash equivalents, beginning of year		258,137			291,511			112,274
Cash and cash equivalents, end of year	$	331,961		$	258,137		$	291,511
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds	$	37,489		$	36,914		$	10,813

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

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   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, Metro and Internet routers. We sell our products and services worldwide through our own direct sales efforts, resellers and integration partners. Our customers include Internet Service Providers (ISPs), Metro Service Providers, and enterprises including government agencies, education, healthcare, entertainment, automotive, energy, retail, financial services, aerospace, technology, transportation, and e-commerce companies.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Foreign Currency Translation

Our consolidated financial statements reflect the operations of Foundry and our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. The functional currency of our foreign subsidiaries is deemed to be the local country’s currency. Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate in effect at the applicable balance sheet date, and revenue and expenses are translated into U.S. dollars using average exchange rates prevailing during that period. Translation adjustments have not been material to date and are included as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Our foreign currency translation adjustment for the years ended December 31, 2007, 2006 and 2005 was $(0.3) million, $(0.5) million and $0.5 million, respectively.

Reclassifications

Certain prior period amounts on the Consolidated Balance Sheet and Consolidated Statements of Cash Flows have been reclassified to conform to the December 31, 2007 presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 consolidated financial statements in the period in which they are made.

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 short-term and long-term 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 debt securities are classified as short-term investments because they have fixed reset dates within one year designed to allow investors

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to exit these instruments at par even though the underlying municipal note may have an original maturity of as much as 40 years.

Foundry’s auction rate securities are classified as available-for-sale and are carried at fair value which approximates cost. Unrealized gains and losses, if any, are recorded as a component of accumulated other comprehensive income (loss). There have been no material unrealized gains or losses recorded to date. 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 operations as incurred.

As of December 31, 2007, we held $82.5 million of municipal notes investments, classified as short-term investments, with an auction reset feature (“adjustable rate securities”) whose underlying assets were primarily in student loans and which had an AAA credit rating. We assess impairment of our adjustable rate securities by evaluating whether the underlying securities of our adjustable rate securities are guaranteed by the government and whether the auction rate securities with auction failures had successful auction resets subsequent to December 31, 2007. Refer to “8. Subsequent Events” footnote for further discussion regarding our adjustable rate securities.

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	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

	December 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Cash equivalents:
Money market funds	$	89,299	$	—	$	—		$	89,299
Government-sponsored enterprise securities		104,425		32		—			104,457
Available-for-sale:
Auction rate municipal bonds		92,774		—		—			92,774
Held-to-maturity:
Municipal bonds		46,377		13		(29	)		46,361
Government-sponsored enterprise securities		500,092		8		(1,145	)		498,955
	$	832,967	$	53		(1,174	)	$	831,846
Cash equivalents	$	204,671		32		(6	)	$	204,697
Short-term investments		434,182		2		(860	)		433,324
Long-term investments		194,114		19		(308	)		193,825
	$	832,967	$	53	$	(1,174	)	$	831,846

Government-sponsored enterprise securities (“GSEs”).  Foundry’s GSE portfolio includes direct debt obligations of Federal Home Loan Bank, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Federal Farm Credit Bank agencies. Unrealized losses as of December 31, 2007 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 December 31, 2007, the issuers of Foundry’s GSEs had a credit rating of AAA.

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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 December 31, 2007 (in thousands):

	Loss Less Than					Loss Greater Than
	12 months					12 months				Total
			Gross					Gross				Gross
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
Government-sponsored enterprise securities		63,073		(9	)		—		—		63,073		(9	)
	$	63,073	$	(9	)	$	—	$	—	$	63,073	$	(9	)

Because the decline in the market value of our investments is attributable to changes in interest rates and not credit quality, and because we have the ability and intent to hold these investments until a recovery of our amortized cost, which will be at maturity, we do not consider these investments to be other-than-temporarily impaired at December 31, 2007.

Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectibility. Accounts receivable are not typically sold or factored. Exposure to credit risk is controlled through credit approvals, credit limits, and continuous monitoring procedures. Customers are subject to a credit review process that evaluates their financial position and ability to pay. Specific allowances for bad debts are recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy filings or a significant deterioration in financial position. Estimates are used in determining allowances for all other customers based on factors such as current economic and industry trends, the extent to which receivables are past due and historical collection experience. Accounts are deemed past due once they exceed the due date on the invoice. Foundry mitigates some collection risk by requiring certain international customers to secure letters of credit or bank guarantees prior to placing an order with the Company. If circumstances change, estimates regarding the collectibility of receivables would be adjusted.

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, labor and manufacturing overhead. Inventories consist of the following (in thousands):

	December 31,
	2007		2006
Purchased parts	$	4,279	$	5,758
Work-in-process		17,195		13,193
Finished goods		20,910		15,905
	$	42,384	$	34,856

The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards. Foundry’s inventory purchases and commitments are made based on anticipated demand for the Company’s products, as estimated by management, and the Company’s expected service requirements. Foundry performs an assessment of its inventory each quarter, which includes a review of, among other factors, demand requirements based on a one year forecast, purchase

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

commitments, product life cycles and development plans, product pricing and quality issues. Based on this analysis, the Company estimates the amount of excess and obsolete inventory on hand and makes adjustments to record inventory at the lower of cost or estimated net realizable value. Once a specific item in inventory has been written down to the lower of cost or estimated net realizable value, it is reflected on Foundry’s balance sheet at its new carrying value until it is sold or otherwise disposed. Inventory provisions of $6.4 million, $9.4 million and $15.1 million were recorded for the years ended December 31, 2007, 2006, and 2005, respectively. Our gross margin benefited by $1.9 million or 0.5% and $2.9 million or 1.0% from the sale of fully reserved inventory during the years ended December 31, 2007 and 2006, respectively.

Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accrued compensation, and other accrued liabilities, approximates fair market value due to the relatively short period of time to maturity. The fair value of investments is determined using quoted market prices for those securities or similar financial instruments.

Concentrations

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash equivalents, short and long-term investments, and accounts receivable. We seek to reduce credit risk on financial instruments by investing in high-quality debt issuances and, by policy, we limit the amount of credit exposure with any one issuer or fund. Additionally, we grant credit only to customers deemed credit worthy in the judgment of management. As of December 31, 2007 and 2006, ten customers accounted for approximately 38% and 30%, respectively, of our 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.

Property and Equipment

Property and equipment are stated at cost. Depreciation expense is recorded using the straight-line method over the estimated useful lives of the assets, which are two years for computers, software, and equipment and three years for furniture and fixtures. Leasehold improvements are amortized over the shorter of their estimated useful life or the lease term.

Property and equipment consisted of the following (in thousands):

	December 31,
	2007			2006
Computers, software and equipment	$	53,070		$	46,052
Leasehold improvements		5,518			5,440
Furniture and fixtures		109			109
		58,697			51,601
Less accumulated depreciation		(49,039	)		(40,498	)
Property and equipment, net	$	9,658		$	11,103

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Purchased Intangible Assets

Intangible assets acquired by direct purchase or in the settlement of litigation are accounted for based on the fair value of assets received. Identifiable intangible assets are primarily comprised of patent rights and cross license-agreements. Patent rights are recorded in long-term other assets. Cross-license agreements are recorded within prepaid and other assets and long-term other assets depending on when the economic benefit is used. Purchased intangibles with finite lives are generally amortized on a straight-line basis, which typically approximates the economic benefit of the intangible assets, over the respective estimated useful lives of up to five years.

The following table presents details of the purchased intangible assets which relate to patent cross-license agreements and patents acquired during fiscal 2007 and 2006 (in thousands, except years):

	Weighted-Average
	Useful Life
Year Acquired:	(in Years)		Amount
2007		5.0	$	3,421
2006		5.0	$	1,883

The following table presents detail of the Company’s total purchased intangible assets (in thousands):

	Gross				Net
	Carrying		Accumulated		Carrying
As of December 31, 2007:	Amount		Amortization		Amount
Purchased intangible assets	$	2,371	$	196	$	2,175
Patent cross-license agreements		9,633		6,095		3,538
Total	$	12,004	$	6,291	$	5,713

	Gross				Net
	Carrying		Accumulated		Carrying
As of December 31, 2006:	Amount		Amortization		Amount
Purchased intangible assets	$	150	$	—	$	150
Patent cross-license agreements		8,433		3,698		4,735
Total	$	8,583	$	3,698	$	4,885

As of December 31, 2007, expected future intangible asset amortization is as follows (in thousands):

Fiscal Years:
2008	$	2,434
2009		1,061
2010		1,061
2011		859
2012		298
	$	5,713

Amortization expense related to purchased intangible assets of $0.2 million in 2007 was included in general and administrative expense, and amortization expense of patent cross-license agreements of $2.4 million, $2.0 million and $1.4 million was included in cost of product revenue in 2007, 2006 and 2005, respectively.

Impairment

The Company evaluates long-lived assets held-for-use for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. No long lived assets were considered impaired as of December 31, 2007.

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 our 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.

At the time product revenue is recognized, Foundry estimates the amount of warranty costs to be incurred and records the amount as a cost of product revenue. Foundry’s standard warranty period extends one or five years from the date of sale, depending on the type of product purchased. Foundry’s estimate of the amount necessary to settle warranty claims is based primarily on its past experience.

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.  We provide a provision for estimated customer returns at the time product revenue is recognized as a reduction to product revenue. Our provision is based primarily on historical sales returns and our return policies. Our resellers generally do not have a right of return, and our contracts with original equipment manufacturers only

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

provide for rights of return in the event our products do not meet its published specifications or there is an epidemic failure, as defined in the contracts.

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 for the years ended December 31:

	2007		2006		2005
Americas		67%		63%		64%
EMEA		18%		18%		18%
Japan		9%		11%		10%
Asia Pacific		6%		8%		8%

Sales to the United States government accounted for approximately 18%, 17% and 19% of our total revenue in 2007, 2006 and 2005, respectively.

For the years ended December 31, 2007, 2006 and 2005 no other individual customer accounted for 10% or more of our net product revenue.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2007, 2006 and 2005 were $3.5 million, $4.2 million and $5.7 million, respectively.

Sales Taxes

We account for taxes charged to our customers and collected on behalf of the taxing authorities and recognize revenue on a net basis.

Income Taxes

Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from temporary differences and carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company regularly assesses the likelihood that its deferred tax assets will be realized from recoverable income taxes or recovered from future

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

taxable income based on the realization criteria set forth under SFAS 109, “Accounting for Income Taxes,” and records a valuation allowance to reduce its deferred tax assets to the amount that it believes to be more likely than not realizable. The Company believes it is more likely than not that forecasted income together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes potential liabilities based on its estimate of whether, and the extent to which, additional taxes will be due.

We adopted Financial Accounting Standards Board (“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 is an interpretation of FASB Statement 109, Accounting for Income Taxes, and it 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 our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of our adoption of FIN 48.

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. As of December 31, 2007 and 2006 there were 2,592,375 shares and 627,750 shares, respectively, subject to repurchase. 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. There were 10.5 million, 15.1 million and 13.5 million anti-dilutive common stock equivalents for the years ended December 31, 2007, 2006 and 2005, respectively.

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Year Ended December 31,
	2007		2006		2005
	(In thousands, except per share amounts)
Net income	$	81,143	$	38,698	$	53,562
Basic:
Weighted-average shares outstanding		148,143		145,167		139,176
Basic EPS	$	0.55	$	0.27	$	0.38
Diluted:
Weighted-average shares outstanding		148,143		145,167		139,176
Add: Weighted-average dilutive potential shares		7,377		5,342		4,798
Weighted-average shares used in computing diluted EPS		155,520		150,509		143,974
Diluted EPS	$	0.52	$	0.26	$	0.37

Stock-Based Compensation

On January 1, 2006, Foundry adopted 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 purchases under the Company’s 1999 Employee Stock Purchase Plan based on estimated fair values. SFAS 123R supersedes the previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”), as allowed under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), for periods beginning in 2006. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”) which provides supplemental implementation guidance for SFAS 123R. The Company applied the provisions of SAB 107 in its adoption of SFAS 123R.

Foundry adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006. Upon adoption of SFAS 123R on January 1, 2006, the Company adjusted retained earnings by approximately $439,000. This adjustment reflects the cumulative effect of adoption of SFAS 123R on retained earnings and represents the Company’s estimate of previously recognized stock-based compensation expense that will be reversed when stock options granted prior to December 31, 2006 are forfeited.

SFAS 123R requires companies to estimate the fair value of stock-based awards on the date of grant using an option-pricing model. We use the Black-Scholes option pricing model and a single option award approach to determine the fair value of stock options under SFAS 123R, consistent with that used for pro forma disclosures under SFAS 123. The fair value of restricted stock is equivalent to the market price of our common stock on the grant date. The value of the portion of the stock-based award that is ultimately expected to vest is recognized as expense over the requisite service period, which is generally the vesting period, in our Consolidated Statement of Income.

In accordance with SFAS 123R, 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. Excess tax benefits of $8.9 million and $6.0 million for the years ended December 31, 2007 and 2006, respectively, have been classified as a financing cash inflow. Prior to the adoption of SFAS 123R, tax benefits from employee stock plans were presented as operating cash flows. Pursuant to SFAS 123R, SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), and EITF Topic No. D-32, Intraperiod Tax Allocation of the Effect of Pretax Income from Continuing Operations, we have elected to recognize excess income tax benefits from stock option exercises in additional paid-in capital only if an incremental income tax benefit would be realized after considering all other tax attributes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

presently available to us. In addition, we account for the indirect effects of stock-based compensation, such as research and development tax credits and domestic manufacturing deduction, through the statement of income.

We have elected the “long method” of computing our hypothetical APIC pool pursuant to the income tax provisions included in SFAS 123R.

Stock-based compensation expense recognized in our Consolidated Statement of Income for the year ended December 31, 2006 included (i) compensation expense for stock-based awards granted prior to, but not yet vested as of, December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123 and (ii) compensation expense for the stock-based awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Compensation expense for all expected-to-vest stock-based awards will continue to be recognized using the straight-line attribution method provided that the amount of compensation cost recognized at any date is no less than the portion of the grant-date value of the award that is vested at that date. In our stock-based compensation expense required under APB 25 and the pro forma information required under SFAS 123 for the periods prior to 2006, we accounted for forfeitures as they occurred.

Prior to the adoption of SFAS 123R, stock-based compensation expense was recognized in our Consolidated Statement of Income under the provisions of APB 25. Compensation expense under APB 25 was recognized using the accelerated, multiple-option method. In accordance with APB 25, no compensation expense was recognized under our 1999 Employee Stock Purchase Plan. Stock-based compensation expense of $4.6 million was recognized in 2005 related to employee stock-based awards. As a result of adopting SFAS 123R, stock-based compensation expense recorded for 2006 was $50.8 million, or $47.2 million higher than which would have been reported had we continued to account for stock-based compensation under APB 25. Net income for 2006 was approximately $28.7 million lower than that which would have been reported had we continued to account for stock-based compensation under APB 25. Basic and diluted earnings per share would have been $0.20 and $0.19 higher, respectively, had we continued to account for stock-based compensation under APB 25. Unamortized deferred compensation associated with employee stock-based awards of $2.8 million has been reclassified to additional paid-in capital in our consolidated balance sheet upon the adoption of SFAS 123R on January 1, 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the pro forma net income (loss) and earnings (loss) per share, net of related tax effect, had the Company applied the fair value recognition provisions of SFAS 123 to employee stock benefits (in thousands, except per share amounts):

	Year Ended
	December 31,
	2005
Net income	$	53,562
Add: Total stock-based compensation expense (benefit) included in reported net income, net of tax effect		2,852
Deduct: Total stock-based compensation expense determined using the fair value method for all awards, net of related tax effect		(60,922	)
Pro forma net loss	$	(4,508	)
Basic net income (loss) per share:
As reported	$	0.38
Pro forma	$	(0.03	)
Diluted net income (loss) per share
As reported	$	0.37
Pro forma	$	(0.03	)
Weighted-average shares for basic EPS		139,176
Weighted-average shares for diluted EPS		143,974

Valuation of Stock-Based Compensation

Foundry applies 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 were estimated using the following weighted-average assumptions:

	Stock Option Plan									Employee Stock Purchase Plan
	Year Ended December 31,									Year Ended December 31,
	2007			2006			2005			2007			2006			2005
Average risk free interest rate		4.31	%		4.71	%		3.72	%		4.89	%		4.40	%		2.48	%
Average expected life of the options		3.6 years			3.4 years			3.0 years			1.3 years			1.4 years			1.3 years
Dividend yield		0	%		0	%		0	%		0	%		0	%		0	%
Volatility of common stock		39.6	%		46.6	%		61.9	%		41.8	%		48.3	%		63.2	%
Estimated annual forfeitures		11	%		11	%		—			11	%		11	%		—
Weighted average fair value	$	6.24		$	5.44		$	4.33		$	3.88		$	3.96		$	4.33

Expected Term.  Prior to the first quarter of 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 after the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

beginning of the first quarter of 2006, the expected term of options granted was derived from the average midpoint between vesting and the contractual term, as described in SAB 107.

Expected Volatility.  Based on guidance provided in SFAS 123R and SAB 107, the volatility assumptions was 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 on Foundry’s stock having a life of at least six months. Management determined 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.  The Company estimates forfeitures based on an analysis of historical option forfeitures. In our stock-based compensation expense required under APB 25 for the periods prior to 2006, we accounted for forfeitures as they occurred.

Recent Accounting Pronouncements

In June 2007, the FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, (“EITF 07-3”). EITF 07-03 provides that nonrefundable advance payments for goods or services that will be used or provided for future research and development activities should be deferred and capitalized and that such amounts should be recognized as an expense as the related goods are delivered or the related services are performed, and provides guidance with respect to evaluation of the expectation of goods to be received or services to be provided. The provisions of EITF 07-03 will be effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. The effects of applying the consensus of EITF 07-03 are to be reported prospectively for new contracts entered into on or after the effective date. We do not expect EITF 07-3 to have a material impact on our consolidated results of operations or financial condition.

In September 2006, the 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 requests for expanded information about the extent to which company’s 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. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS 157 will have on our consolidated financial position and results of operations.

In February 2007, the 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”). 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. SFAS 159 is required to be adopted by us in the first quarter of fiscal 2008. We currently are determining whether fair value accounting is appropriate for any of our eligible items and cannot estimate the impact, if any, which SFAS 159 will have on our consolidated results of operations and financial condition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In the first quarter of 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FASB issued FIN 48 to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of adoption, we have recorded an increase to retained earnings of $0.8 million as of January 1, 2007. In addition, we recorded a decrease to deferred tax assets of $2.9 million, a decrease to additional paid-in capital of $4.2 million and an increase to taxes payable of $0.5 million in the first quarter of 2007.

In the first quarter of 2007, we adopted EITF Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, (“EITF 06-2”). EITF 06-2 requires companies to accrue the cost of such compensated absences over the service period. We adopted EITF 06-2 through a cumulative-effect adjustment, resulting in an additional liability of $1.1 million, additional deferred tax assets of $439,000, and a reduction to retained earnings of $683,000 in the first quarter of 2007.

3.   COMMITMENTS AND CONTINGENCIES

Guarantees and Product Warranties

We provide 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 for up to five years by purchasing one of our customer support programs. Our warranty accrual represents our best estimate of the amount necessary to settle future and existing claims as of the balance sheet date. We accrue 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 our cost of revenues and is recorded at the time revenue is recognized. Factors that affect our warranty liability include the number of installed units, estimated material costs and estimated labor costs. We periodically assess the adequacy of our warranty accrual and adjust the amount as considered necessary.

Changes in our product warranty liability for the year ended December 31, 2007 were as follows (in thousands):

Balance, December 31, 2006	$	1,546
Liabilities accrued for warranties issued during the period		2,413
Warranty claims settled during the period		(1,708	)
Balance, December 31, 2007	$	2,251

We offer our customers renewable support arrangements, including extended warranties, that generally have terms of one or five years, however, the majority of our support contracts have one year terms. We do not separate extended warranty revenue from routine support service revenue, as it is not practical to do so. The change in our deferred support revenue balance was as follows for the year ended December 31, 2007 (in thousands):

Deferred support revenue at December 31, 2006	$	65,564
New support arrangements		99,858
Recognition of support revenue		(87,750	)
Ending balance at December 31, 2007	$	77,672

In the ordinary course of business, we enter into contractual arrangements under which we 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,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 are reflected in our consolidated financial statements as of December 31, 2007 or 2006 related to these indemnifications as, historically, payments made related to these indemnifications have not been material to our consolidated financial position or results of operations.

Leases

We lease our facilities and office buildings under operating leases that expire at various dates through July 2012. Our headquarters for corporate administration, research and development, sales and marketing, and manufacturing currently occupy approximately 110,000 square feet of office space in San Jose, California under lease through January 2011 and 141,000 square feet in Santa Clara, California under lease through May 2010. We continue to utilize the San Jose location for our manufacturing operations and utilize the Santa Clara location for our corporate administration, research and development, and sales and marketing functions. Rent expense under all operating leases was $6.2 million, $6.1 million and $6.7 million in 2007, 2006 and 2005, respectively. At December 31, 2007, future minimum lease payments under all noncancelable operating leases were as follows (in thousands):

	Operating
	Leases
2008	$	5,777
2009		5,130
2010		3,734
2011		675
2012		100
Thereafter		—
Total lease payments	$	15,416

Purchase Commitments with Suppliers and Third-Party Manufacturers

We use contract manufacturers to assemble certain parts for our chassis and stackable products. We also utilize third-party OEMs to manufacture certain Foundry-branded products. In order to reduce manufacturing lead-times and ensure an adequate supply of inventories, our agreements with some of these manufacturers allow them to procure long lead-time component inventory on our behalf based on a rolling production forecast provided by us. We are contractually obligated to purchase long lead-time component inventory procured by certain manufacturers in accordance with our forecasts. Although, we can generally give notice of order cancellation at least 90 days prior to the delivery date. In addition, we issue purchase orders to our component suppliers and third-party manufacturers that may not be cancelable. As of December 31, 2007, we had approximately $70.1 million of open purchase orders with our component suppliers and third-party manufacturers that may not be cancelable.

Settlement and Patent License Agreements

On May 27, 2003, Lucent filed a lawsuit against us in the United States District Court for the District of Delaware alleging that certain of our products infringe four of Lucent’s patents and seeking injunctive relief, as well as unspecified damages. On February 6, 2004, we filed a lawsuit against Lucent in the United States District Court for the Eastern District of Texas, Marshall Division. The lawsuit alleged that certain of Lucent’s products infringed one of our patents. On May 31, 2006, before either case went to trial, Foundry and Lucent entered into a settlement agreement that resulted in a dismissal of all litigation pending between them, a mutual release, a cross-license, and a covenant not to sue extending into the future.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On June 21, 2005, Alcatel USA Resources, Inc. and Alcatel Internetworking, Inc., which are now subsidiaries of Alcatel-Lucent (collectively “Alcatel-Lucent”) filed a complaint, and later, an amended complaint, seeking injunctive relief, as well as unspecified damages, against us in the United States District Court for the District of Delaware. Alcatel-Lucent alleged that certain of our products infringed nine of its patents. Alcatel-Lucent also sought a declaratory judgment that one of our patents was invalid and not infringed by Alcatel-Lucent. We subsequently filed a counterclaim alleging infringement of our patent by Alcatel-Lucent. In February 2007, the parties entered into a settlement agreement that resulted in a dismissal of all litigation pending between them, a mutual release, a cross-license, and a covenant not to sue extending into the future.

As part of the May 2006 and February 2007 settlement agreements described above, we made total payments of $8.4 million. Based on management’s judgment and the results of a third-party valuation analysis, we recorded a $5.4 million charge in other charges, net in the second quarter of 2006. The remaining value under these agreements represents consideration for license rights to current and future Alcatel-Lucent patents and is amortized ratably over five years to the cost of product revenue. At December 31, 2007, the remaining value of the settlement agreements of $2.2 million is included within prepaid expenses and other assets and long-term other assets in the accompanying consolidated balance sheet.

We also agreed to provide credits in the sum of $2.0 million against future purchases of Foundry products and services at the rate of 25% of the invoice price until the $2.0 million of credits are exhausted. During the years ended December 31, 2007 and 2006, we have recorded a reduction of our total net revenue in the accompanying consolidated statement of income of $1.2 million and $0.8 million, respectively, as a result of these credits. As of December 31, 2007 and December 31, 2006, we recorded a reduction in our deferred support revenue of $21,000 and $0.3 million, respectively, in the accompanying consolidated balance sheets for the credits related to service contracts. The $21,000 represents a reduction in future revenue for unrecognized support revenue. The credits were exhausted as of March 31, 2007.

On September 30, 2005, we entered into a patent cross-license agreement with IBM Corporation (“IBM”). Pursuant to the agreement, we paid $4.5 million to IBM in the third quarter of 2005. Based on management’s judgment and the results of a third-party valuation analysis, we recorded a $2.6 million charge in general and administrative expenses in the accompanying consolidated statements of income in the third quarter of 2005. The remaining value under this agreement represents consideration for license rights to current and future IBM patents and is amortized ratably over three years to the cost of product revenue.

Litigation

Intellectual Property Proceedings.  On June 21, 2005, Enterasys Networks, Inc. (“Enterasys”) filed a lawsuit against the Company in the United States District Court for the District of Massachusetts alleging that certain of Foundry’s products infringe six of Enterasys’ patents and seeking injunctive relief, as well as unspecified damages. On August 28, 2007, Foundry filed a motion to stay the case, in view of petitions that Foundry had filed with the U.S. Patent and Trademark Office (USPTO) requesting that 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. Foundry 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. Professor Lemley is scheduled to hold a Markman claim construction hearing on March 6, 2008, after

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

which he will make recommendations to the Court for construing the claims. The Company is vigorously defending itself against Chrimar’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 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 initial public offering (“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 Foundry may have against the underwriters. However, the settlement required approval by the 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 might 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 now filed amended complaints in an effort to comply with the Second Circuit decision. The Company, and the previously named officers, are still named as defendants in the amended complaint. The District Court has not issued a decision concerning the refiled lawsuits. Should the District Court allow the refiled lawsuits to proceed, there is no assurance that the settlement will be amended, renegotiated or approved. If the settlement is not amended or renegotiated and then approved, the Company intends to defend the lawsuit vigorously.

In August and September 2006, purported Foundry shareholders 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, accounting, 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

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 shareholder served the Company’s registered agent for service of process with a putative derivative action against certain of the Company’s current and former officers, directors and employees. The complaint named Foundry as a nominal defendant. The action was filed on February 28, 2007, in the Superior Court of the State of California, Santa Clara County, and is captioned Patel v. Akin, et al. (Case No. 1-07-CV 080813). The Patel action generally asserted similar claims as those in the Consolidated Action. In addition, it asserted a cause of action for violation of Section 1507 of the California Corporations Code. On April 27, 2007, Plaintiff Patel voluntarily dismissed the Patel action without prejudice. On June 19, 2007, Plaintiff Patel filed another putative derivative action in the Court of Chancery of the State of Delaware, New Castle County, against certain of the Company’s current and former officers, directors and employees. The action is captioned Patel v. Akin, et al. (Civil Action No. 3036-VCL) and names Foundry as a nominal defendant. The complaint again generally asserts similar claims as those in the Consolidated Action relating to allegations that certain stock option grants made by Foundry were improperly backdated. The complaint asserts seven causes of action against certain and/or all of the defendants, including, among others, breach of fiduciary duty, accounting, unjust enrichment, rescission and corporate waste. Foundry and the individual defendants have filed a motion to dismiss or stay the action. The parties are in settlement negotiations. Given the derivative nature of the action, any settlement amount would go to the Company. Because of the inherent uncertainty of litigation, however, we cannot predict whether a settlement will be reached.

In September and October 2006, purported Foundry shareholders filed four putative derivative actions against certain of Foundry’s current and former officers, directors and employees in the United States District Court for the Northern District of California. The complaints named Foundry as a nominal defendant. 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). 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. The hearing on Foundry’s motion to dismiss currently is scheduled for March 14, 2008. The parties are in settlement discussions. Given the derivative nature of the action, any settlement amount would go to the Company. Because of the inherent uncertainty of litigation, however, we cannot predict whether a settlement will be reached.

On October 3, 2007, a purported Foundry shareholder filed a lawsuit in the United States District Court, Western District of Washington in Seattle naming Foundry as a nominal defendant. The action is captioned Vanessa Simmonds v. Deutsche Bank AG, Merrill Lynch & Co and JPMorgan Chase & Co. Defendants, and Foundry Networks, Inc., Nominal Defendant (Case No. 2:07-CV-01566-JCC). The action alleges that Deutsche Bank, Merrill Lynch and JPMorgan Chase profited from the transactions in Foundry Networks stock by engaging in short-swing trades. The plaintiff has moved to consolidate this action with approximately 55 other cases. Because of the inherent uncertainty of litigation, we cannot predict the outcome of the litigation.

On February 7, 2008, Network-1 Security Solutions, Inc. (“Network-1”) filed a lawsuit against the Company (and 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

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

injunctive relief, as well as unspecified damages. The Company has not yet had an opportunity to evaluate the factual basis of the allegations.

SEC Information Inquiry.  The SEC has 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 is cooperating with the SEC and expects to continue to do so.

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. The Company is cooperating with the United States Attorney’s Office and expects to continue to do so.

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. Regardless of the merits of the Company’s position, litigation is always an expensive and uncertain proposition. 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 December 31, 2007, 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.

4.   INCOME TAXES

We account for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 provides for an asset and liability approach to accounting for income taxes, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Components of our deferred tax assets were as follows at December 31 (in thousands):

	December 31,
	2007		2006
Deferred Tax Assets:
Accrued payroll and related expenses	$	3,858	$	3,034
Inventory valuation reserve		17,735		17,574
Accrued warranty		884		605
Allowance for doubtful accounts		828		976
Write-down of minority interest		—		979
Depreciation		3,496		2,953
Stock-based compensation		33,553		28,196
Research and development credits		4,827		7,866
Deferred support revenue		8,728		7,687
Other temporary differences		5,305		6,536
Total deferred tax assets		79,214		76,406
Valuation allowance		0		(979	)
Total deferred tax assets, net of valuation allowance		79,214		75,427
Deferred Tax Liability:
Litigation settlement tax liability		—		(822	)
Net deferred tax assets	$	79,214	$	74,605

During 2007 the tax benefit associated with a capital loss, which was incurred in 2002 from the sale of stock held in another company as a minority interest, expired without being utilized and the related valuation allowance, which had been recorded in a prior year to reduce the amount of the deferred tax asset to zero, was released.

At December 31, 2007, we had state research and development tax credit carryforwards of $7.7 million, all of which can be carried forward indefinitely.

Our provision for income taxes consisted of the following for the years ended December 31 (in thousands):

	2007			2006			2005
Current:
Federal	$	46,876		$	37,240		$	30,758
Foreign		517			366			405
State		7,145			5,754			4,583
Total current		54,538			43,360			35,746
Deferred:
Federal		(7,791	)		(16,132	)		(8,459	)
Foreign and state		(1,488	)		(2,557	)		(757	)
Total deferred		(9,279	)		(18,689	)		(9,216	)
Total provision	$	45,259		$	24,671		$	26,530

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our provision for income taxes and effective tax rate differs from the statutory U.S. federal income tax rate as follows for the years ended December 31 (in thousands):

	2007					2006					2005
Provision at U.S. statutory rate of 35%	$	44,241		35.0	%	$	22,025		35.0	%	$	28,032		35.0	%
State income taxes, net of federal benefit		5,268		4.2	%		2,728		4.3	%		3,444		4.3	%
Federal and state research and development credits		(4,470	)	(3.5	)%		(3,161	)	(5.0	)%		(2,665	)	(3.3	)%
Nondeductible stock compensation		2,333		1.8	%		5,482		8.7	%		—		—
Export sales incentive		—		—			(1,373	)	(2.2	)%		(1,654	)	(2.1	)%
Tax-exempt interest		(4,168	)	(3.3	)%		(1,465	)	(2.3	)%		(1,523	)	(1.9	)%
U.S. production activities deduction		(944	)	(0.8	)%		(165	)	(0.3	)%		(400	)	(0.5	)%
Other		2,999		2.4	%		600		1.0	%		1,297		1.6	%
Total	$	45,259		35.8	%	$	24,671		39.2	%	$	26,531		33.1	%

The tax benefits associated with stock option exercises and the employee stock purchase plan that were credited to additional paid-in capital were $11.6 million, $10.5 million, and $2.2 million for the years ended December 31, 2007, 2006, and 2005, respectively.

Foundry adopted the provisions of FIN 48 on January 1, 2007. As a result of adoption, the Company has recorded an increase to retained earnings of $0.8 million as of January 1, 2007. In addition, the Company recorded a decrease to deferred tax assets of $2.9 million, a decrease to additional paid-in capital of $4.2 million and an increase to taxes payable of $0.5 million. As part of the FIN 48 adoption, the Company reclassified $9.4 million from current taxes payable to non-current taxes payable.

A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows (in thousands):

Balance at January 1, 2007	$	14,134
Increase related to prior year tax positions		1,661
Decrease related to prior year tax positions		(1,002	)
Increase related to current year tax positions		1,975
Settlements with tax authorities		—
Lapse of statute of limitations		(149	)
Balance at December 31, 2007	$	16,619

Included in the balance of total unrecognized tax benefits at December 31, 2007, are potential benefits of $6.9 million, if recognized, would affect the effective rate on income from continuing operations.

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, but quantification of an estimated range cannot be made at this time.

Foundry is no longer subject to United States federal income tax examinations before 2003 and state income tax examinations for years before 2002, except to the extent that tax attributes in earlier years were carried forward to years remaining open for audit.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the year ended December 31, 2007, Foundry accrued additional interest expense of $1.0 million relating to unrecognized tax benefits. As of December 31, 2007, Foundry had recorded liabilities for interest expense related to uncertain tax provisions in the amount of $1.8 million. The Company recognizes interest accrued and penalties, if incurred, related to unrecognized tax benefits as a component of income tax expense. This policy did not change as a result of the adoption of FIN 48.

5.   STOCKHOLDERS’ EQUITY

Share Repurchase Program

In July 2007, our Board of Directors approved a share repurchase program authorizing us to purchase up to $200 million of our common stock. The shares may be purchased from time to time in the open market or through privately negotiated transactions at management’s discretion, depending upon market conditions and other factors, in accordance with SEC requirements. The authorization to repurchase Company stock expires on December 31, 2008. During the year ended December 31, 2007, we repurchased 4.4 million shares of its common stock via open market purchases at an average price of $18.93 per share. The total purchase price of $82.9 million was reflected as a decrease to retained earnings in the year ended December 31, 2007. Common stock repurchases under the program were recorded based upon the settlement date of the applicable trade for accounting purposes. All shares of common stock repurchased under this program have been retired.

Preferred Stock

We are authorized to issue up to 5,000,000 shares of preferred stock, with a par value of $0.0001 per share. Preferred stock may be issued from time to time in one or more series. Our Board of Directors is authorized to determine the rights, preferences, privileges and restrictions on these shares. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of Foundry without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. No shares of preferred stock were outstanding as of December 31, 2007 and 2006.

Common Stock

We had 148,700,370 and 147,034,193 shares of common stock issued and outstanding at December 31, 2007 and 2006, respectively.

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.

The following shares of common stock have been reserved and are available for future issuance as of December 31, 2007:

2006 Stock Incentive Plan	24,361,991
1999 Directors’ Stock Option Plan	2,862,750
1999 Employee Stock Purchase Plan	6,628,776
2000 Non-Executive Stock Option Plan	1,561,934
1996 Stock Plan	20,480,228
Total	55,895,679

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2006 Stock Incentive Plan

The 2006 Stock Incentive Plan (the “2006 Stock Plan”) was adopted by the stockholders at Foundry’s annual meeting held on June 16, 2006, replacing the 1996 Stock Plan. As of June 16, 2006, 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 employees, consultants and non-employee directors of the Company. The 2006 Stock Plan has a fixed number of shares and will terminate on December 31, 2009 unless re-adopted or extended by the stockholders prior to or on such date; it is not an “evergreen” plan. As of December 31, 2007, under the 2006 Stock Plan, 6,830,323 options were outstanding with a weighted-average exercise price of $17.59 per share. As of December 31, 2007, under the 2006 Stock Plan, 1,639,000 restricted stock awards were also outstanding. The number of shares of the Company’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 under the 2006 Stock Plan 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 time-vesting conditions.

1996 Stock Plan

The 1996 Stock Plan expired on June 16, 2006, the date of our 2006 annual stockholder meeting. As of December 31, 2007, no options were available for future issuance under the 1996 Stock Plan and options to purchase 20,480,228 shares were outstanding with a weighted-average exercise price of $14.64 per share. Stock options granted under the 1996 Stock Plan have an exercise price equal to the fair market value of our common stock on the date of grant. Options under the 1996 Stock Plan 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. Options granted after January 1, 2005 expire 5 years from the date of grant. Effective June 16, 2006, additional equity awards under the 1996 Stock Plan have been discontinued and new equity awards are being granted under the 2006 Stock Plan. Remaining authorized shares under the 1996 Stock Plan that were not subject to outstanding awards as of June 16, 2006 were canceled on June 16, 2006. The 1996 Stock Plan will remain in effect as to outstanding equity awards granted under the plan prior to June 16, 2006.

1999 Directors’ Stock Option Plan

Under the 1999 Directors’ Stock Option Plan (the “Directors’ Plan”), each non-employee director who became a director after the effective date of the plan, but prior to the April 19, 2007 plan modification, was entitled to receive an automatic initial grant of an option to purchase 225,000 shares of common stock upon appointment or election, and annual grants to purchase 60,000 shares of common stock. Options granted under the plan will vest at the rate of 1/4th of the total number of shares subject to the options twelve months after the date of grant and 1/48th of the total number of shares subject to the options each month thereafter. The exercise price of all stock options granted under the Directors’ Plan shall be equal to the fair market value of a share of common stock on the date of grant of the option. Options expire 10 years from the date of grant. For the years ended December 31, 2007 and 2006, our five non-employee directors received annual grants of 260,000 and 240,000, respectively, to purchase shares of common stock at a weighted-average exercise price per share of $16.52 and $10.83, respectively. As of December 31, 2007, there were 875,000 options available for future issuance and 1,987,750 options to purchase common stock outstanding under the Directors’ Plan with a weighted-average exercise price of $32.04 per share. On April 19, 2007 the Board of Directors modified the terms of the Directors’ Stock Option Plan to reduce the number of stock options awarded to a newly appointed or elected Directors from 225,000 shares to 100,000 shares and the number of shares awarded on an annual basis from 60,000 to 40,000 shares. While vesting of options for newly appointed or elected directors was unchanged, vesting of grants awarded on an annual basis was changed to vest ratably over a 24 month period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2000 Non-Executive Stock Option Plan

Under the 2000 Non-Executive Stock Option Plan (the “Non-Executive Plan”), we may issue non-qualified options to purchase common stock to employees and external consultants other than officers and directors. Options granted prior to January 1, 2005 expire 10 years from the date of grant. Options granted after January 1, 2005, expire 5 years from the date of grant. As of December 31, 2007, under the Non-Executive Plan, 331,998 options were available for future issuance and 1,229,936 options to purchase common shares were outstanding with a weighted-average exercise price of $13.24 per share.

The following table (which excludes restricted stock awards) summarizes stock option activity under all stock option plans during the three years ended December 31, 2007:

						Weighted-
				Weighted-		Average		Aggregate
	Options			Average		Remaining		Intrinsic
	Outstanding			Exercise Price		Contractual Term		Value
								(In thousands)
Balance, December 31, 2004		30,038,512		$	14.00
Granted		6,526,700			9.71
Exercised		(2,945,346	)		6.85
Cancelled		(1,832,239	)		14.44
Balance, December 31, 2005		31,787,627			13.75
Granted		6,502,300			14.07
Exercised		(4,798,821	)		7.86
Cancelled		(1,741,194	)		19.29
Balance, December 31, 2006		31,749,912			14.40
Granted		6,508,358			18.10
Exercised		(5,844,350	)		9.63
Cancelled		(1,885,683	)		16.93
Balance, December 31, 2007		30,528,237			16.38		4.44	$	123,895
Vested and expected to vest at December 31, 2007		28,355,622			16.44		4.45	$	118,662
Exercisable at December 31, 2007		20,962,759			16.64		4.46	$	103,191

Approximately 0.3 million shares and 6.2 million stock options were granted under the 1999 Directors’ Stock Option Plan and the 2006 Stock Plan, respectively, during the year ended December 31, 2007.

For the years ended December 31, 2007 and 2006, the total fair value of the shares vested was $37.1 million and $45.2 million, respectively. As of December 31, 2007 and 2006, there were 9,565,478 and 9,017,034, respectively, unvested options for all plans.

As of December 31, 2007, an aggregate of 14,968,966 shares were available for future option and award grants to our employees.

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 2007 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 December 31, 2007.

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the years ended December 31, 2007, 2006 and 2005, 5.8 million, 4.8 million and 2.9 million, respectively, in stock options were exercised. The total intrinsic value of stock options exercised during the years ended December 31, 2007, 2006 and 2005 was $52.6 million, $35.2 million and $14.2 million, respectively.

As of December 31, 2007, there was $45.8 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 2.58 years.

Restricted Stock Awards

Foundry’s Board of Directors approved the issuance of 647,500 and 643,750 shares of restricted stock with a weighted-average grant date fair value of $17.54 and $14.57 per share, respectively, during the years ended December 31, 2007 and 2006.

We issue shares on the date that the restricted stock awards vest. For the majority of restricted stock awards the number of shares issued on the date the restricted stock awards vest is net of the statutory withholding requirements that we pay on behalf of our employees. As a result, the actual number of shares issued will be less than the number of restricted stock awards granted. This will continue in the future and the amount of shares withheld will vary depending on the amount of awards that vest and the value of our stock. During 2007, we withheld 112,726 shares to satisfy $1.7 million of employees’ tax obligations. In January 2008, we withheld 70,813 shares to satisfy $1.0 million of employees’ tax obligations. We have paid these amounts in cash to the appropriate taxing authorities. The number of restricted stock awards vested in the table below includes shares that we withheld on behalf of employees to satisfy the statutory tax withholding requirements.

A summary of the Company’s restricted stock award activity and related information for the year ended December 31, 2007 is set forth in the following table:

	Restricted Stock			Weighted Average
	Outstanding			Grant Date Fair Value
Balance, December 31, 2006		627,750		$	14.58
Granted		647,500		$	17.54
Vested		(309,875	)	$	14.59
Forfeited		(12,000	)	$	14.21
Balance, December 31, 2007		953,375		$	16.59

As of December 31, 2007, there was $8.2 million of total unrecognized compensation cost related to restricted stock award granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.7 years.

Restricted Stock Units

Foundry’s Board of Directors approved the issuance of 1,665,000 shares of restricted stock units (“RSUs”) with a weighted-average grant date fair value of $18.51 per share during the years ended December 31, 2007.

We will issue shares on the date that the restricted stock units vest. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest will be net of the statutory withholding requirements that we pay on behalf of our employees. As a result, the actual number of shares issued will be less than the number of restricted stock units granted. The amount of shares withheld will vary depending on the amount of awards that vest and the value of our stock.

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following schedule summarizes information about the Company’s RSUs as of December 31, 2007:

				Remaining
				Contractual		Aggregate
	Shares			Life (Years)		Intrinsic Value
						(In thousands)
Balance, December 31, 2006		—
Awarded		1,665,000
Released		—
Forfeited/expired		(26,000	)
Balance, December 31, 2007		1,639,000			1.68	$	28,715
Vested and expected to vest at December 31, 2007		1,304,358			1.60	$	22,852
Exercisable at December 31, 2007		—			—	$	—

None of the awarded RSUs were vested as of December 31, 2007. 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 December 31, 2007, there was $21.6 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 2.7 years.

1999 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 2006 and 2005, Foundry issued an aggregate of 1,086,076 shares and 978,138 shares, respectively, under the ESPP at average per share prices of $8.64, and $8.46, respectively. The Company issued no shares under the ESPP during the year ended December 31, 2007 due to the suspension of its employee payroll withholdings for the purchase of its common stock under the ESPP plan from August 2006 through July 31, 2007 as a result of the Company’s delayed filing of its periodic reports with the SEC.

A total of 6,628,776 shares of common stock were reserved for issuance under the ESPP as of December 31, 2007. The number of shares reserved for issuance under the ESPP will be increased on the first day of each fiscal year through 2009 by the lesser of (i) 1,500,000 shares, (ii) 2% of our outstanding common stock on the last day of the immediately preceding fiscal year or (iii) the number of shares determined by the Board of Directors.

As a result of the Company’s delayed filing of its periodic reports with the SEC, the Company suspended its employee payroll withholdings for the purchase of its common stock under the ESPP and returned all employee contributions. When the ESPP resumed, employees enrolled in the plan were allowed to make a one-time increase to their contributions for the remainder of the offering period ending July 31, 2008. This increase resulted in a modification to the plan under SFAS 123R and additional expense of $0.3 million was recognized for the year ended December 31, 2007. An additional $0.2 million is expected to be recognized over the remainder of the offering period ended July 31, 2008. On June 5, 2007, the Board of Directors amended the ESPP to limit the ability of a participant in the ESPP to increase or decrease the rate of his or her payroll deductions during any offering period (as defined in the ESPP). This change is effective beginning August 2, 2007. Further, on January 25, 2007, Foundry’s Board of Directors approved a bonus payment in the total amount of $4.5 million to compensate those employees participating in the Company’s ESPP at the time it was suspended. The amount of the bonus paid was set by the Board of Directors to compensate participants for the opportunity lost due to the suspension of the ESPP. The amount of the bonus equals the value of the shares estimated to have been purchasable by each participant in the ESPP-as if acquired by the participant under the terms of the ESPP-and sold in a same day sale transaction

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

immediately following the originally scheduled ESPP purchase on January 31, 2007. Under SFAS 123R, Foundry’s suspension of ESPP employee payroll withholdings effectively cancels the related option held by ESPP participants. As a result, the Company recorded additional stock-based compensation expense in the fourth fiscal quarter of 2006 in the amount of $0.3 million.

The compensation cost that has been charged against income for these plans was $46.0 million, $50.8 million and $4.6 million for the years ending December 31, 2007, 2006 and 2005, respectively. The total income tax benefit recognized in the income statement was $15.2 million, $14.4 million and $1.8 million for the years ending December 31, 2007, 2006 and 2005, respectively. Compensation cost capitalized as part of inventory for the years ended December 31, 2007, 2006 and 2005 was $0.2 million, $0.1 million and approximately $3,000, respectively.

Stock-based compensation relates to the following categories by period:

	Year Ended December 31,
	2007		2006		2005
	(In thousands)
Cost of revenue — Product	$	1,457	$	1,858	$	179
Cost of revenue — Service		2,029		2,175		201
Research and development		16,518		17,542		1,733
Sales and marketing		17,916		20,680		1,808
General and administrative		8,101		8,519		684
Total	$	46,021	$	50,774	$	4,605

Extension of Stock Option Exercise Periods for Former Employees

The Company could not issue any securities under its registration statements on Form S-8 during the period in which it was not current in its SEC reporting obligations to file periodic reports under the Securities Exchange Act of 1934. As a result, during parts of 2006 and 2007, options vested and held by certain former employees of the Company could not be exercised until the completion of the Company’s stock option investigation and the Company’s public filings obligations had been met (the “trading black-out period”). Options covering approximately 262,313 shares of common stock were scheduled to expire and could not be exercised as a result of the trading black-out period restriction. The Company extended the expiration date of these stock options to July 13, 2007, the end of a 30-day period subsequent to the Company’s filing of its required regulatory reports. As a result of the modification, the fair value of such stock options were reclassified to current liabilities subsequent to the modification and were subject to mark-to-market provisions until the earlier of final settlement or July 13, 2007. During the year ended December 31, 2007. the Company measured the fair value of these stock options using the Black-Scholes option valuation model and recorded approximately $0.8 million to stock-based compensation expense as a result of the modification and approximately $0.3 million to interest and other income, net as a result of the mark-to-market provision. During the year ended December 31, 2007, 164,439 options were exercised and the liability of approximately $1.2 million associated with unexercised options with extended exercise periods was reclassified from current liabilities to equity.

Amendment of Certain Stock Options

In the year ended December 31, 2007, the Company amended certain options granted under the 1996 Stock Plan and the 2000 Non-Executive Stock Option Plan that had original exercise prices per share that were less than the fair market value per share of the common stock underlying the option on the option’s grant date, as determined by the Company for financial accounting purposes. Employees subject to taxation in the United States and Canada had the opportunity to increase their strike price on affected options to the appropriate fair market value per share on the date of grant so as to avoid unfavorable tax consequences under United States Internal Revenue Code

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Section 409A and applicable Canadian tax law. In exchange for increasing the exercise price of these options, the Company committed to make a cash payment to employees participating in the offer so as to make employees whole for the incremental strike price as compared to their original option exercise price. Pursuant to Internal Revenue Service and Securities Exchange Commission rules, the amendment of United States non-officer employee option agreements were executed through a tender offer. Canadian employee option agreements were amended directly as allowed by Canadian law. On August 2, 2007, the date that the tender offer closed, the Company amended options to purchase 3.7 million shares of its common stock. The Board of Directors also approved the amendment of options to purchase 0.6 million shares of its common stock for certain officers who were not allowed to participate in the tender offer. Based on the above arrangements, the Company committed to make aggregate cash payments of $6.3 million and cancelled and regranted 1,104,858 options to purchase common stock. The cash payments will be returned to the Company if and when the underlying options to which they relate are exercised by Foundry’s employees. During the year ended December 31, 2007, the Company recorded approximately $4.9 million in stock-based compensation expense and expects to record over the remaining vesting period approximately $4.1 million in stock-based compensation expense, in connection with these amended option grants.

Accelerated Vesting of Stock Options

On November 3, 2005, the Board of Directors approved the immediate vesting of approximately 2.2 million shares of unvested stock options previously awarded to employees and officers that have an exercise price of $20.00 or greater under our equity compensation plans. The closing market price per share of our common stock on November 3, 2005 was $12.44 and the exercise prices of the approximately 2.2 million in unvested options on that date ranged from $21.50 to $27.33. The Board of Directors made the decision to immediately vest these options based in part on the issuance of SFAS 123R. Absent the acceleration of these options, upon adoption of SFAS 123R, we would have been required to recognize approximately $25.0 million in pre-tax compensation expense from these options over their remaining vesting terms as of December 31, 2005. By accelerating these unvested stock options, the related compensation expense is included in the 2005 pro forma results in Note 2, “Stock-based Compensation.” We also believe that because the options that were accelerated had exercise prices in excess of the current market value of our common stock, the options were not fully achieving their original objective of incentive compensation and employee retention. Certain of the stock options which were vested by the Board of Directors in November of 2005 were subsequently determined to require remeasurement. The unamortized deferred stock-based compensation at the time of accelerated vesting was $0.1 million. Under the guidelines of APB 25 the Company accelerated the amortization of the deferred stock-based compensation for the options with accelerated vesting and has recorded stock-based compensation expense of $0.1 million in the year ended December 31, 2005.

Retained Earnings

The following table summarizes the activity in our retained earnings account (in thousands):

Balance at December 31, 2006	$	231,205
Cumulative effect of adoption of FIN 48		777
Cumulative effect of adoption of EITF 06-2		(683	)
Repurchase and retirement of common stock		(82,929	)
Net income		81,143
Balance December 31, 2007	$	229,513

6.  401(K) PLAN

The Company provides a tax-qualified employee savings and retirement plan that entitles eligible employees to make tax-deferred contributions. Under the 401(k) Plan, U.S.-based employees may elect to reduce their current annual compensation up to the statutorily prescribed limit, which was $15,500 in calendar year 2007. Employees

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

age 50 or over may elect to contribute an additional $5,000. The 401(k) Plan provides for discretionary contributions as determined by the Board of Directors. The Company has a matching contribution program whereby it matches dollar for dollar contributions made by each employee. The matching amount in calendar year 2007 was up to $3,500 per year for each employee, an increase from $1,250 in the previous year. The matching contributions to the 401(k) Plan totaled $2.0 million and $0.7 million in 2007 and 2006, respectively.

7.   SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables set forth selected consolidated statement of income data for each of the eight quarters ended December 31, 2007. Operating results for any quarter are not necessarily indicative of results for any future period (in millions, except share and per share amounts).

Year Ended December 31, 2007	Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Net revenue	$	168.7	$	159.5	$	143.2	$	135.8
Cost of revenue		63.3		59.4		57.1		56.6
Gross margin		105.4		100.1		86.1		79.2
Operating expenses:
Research and development		19.5		18.4		17.9		21.3
Sales and marketing		43.2		38.5		38.5		40.0
General and administrative		11.9		10.2		11.8		10.9
Other charges, net		0.1		0.1		3.0		2.6
Total operating expenses		74.7		67.2		71.2		74.8
Income from operations		30.7		32.9		14.9		4.4
Interest and other income, net		11.2		11.4		10.5		10.4
Income before provision for income taxes		41.9		44.3		25.4		14.8
Provision for income taxes		13.0		16.8		9.8		5.7
Net income	$	28.9	$	27.5	$	15.6	$	9.1
Basic net income per share	$	0.19	$	0.19	$	0.11	$	0.06
Diluted net income per share	$	0.18	$	0.18	$	0.10	$	0.06
Shares used in computing earnings per share (in thousands):
Basic		149,240		148,897		147,285		147,202
Diluted		156,632		156,486		154,034		153,386

Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended December 31, 2006	Fourth Quarter		Third Quarter		Second Quarter			First Quarter
Net revenue	$	132.0	$	118.8	$	108.4		$	114.0
Cost of revenue		53.7		46.9		42.9			44.9
Gross margin		78.3		71.9		65.5			69.1
Operating expenses:
Research and development		16.9		16.8		17.0			20.0
Sales and marketing		32.9		30.4		31.3			34.3
General and administrative		10.0		10.7		12.1			11.1
Other charges, net		2.9		4.2		5.7			—
Total operating expenses		62.7		62.1		66.1			65.4
Income from operations		15.6		9.8		(0.6	)		3.7
Interest and other income, net		9.9		9.1		8.4			6.9
Income before provision for income taxes and cumulative effect of change in accounting principle		25.5		18.9		7.8			10.6
Provision for income taxes		9.8		6.7		3.4			4.6
Income before cumulative effect of change in accounting principle		15.7		12.2		4.4			6.0
Cumulative effect of change in accounting principle, net of taxes		—		—		—			0.4
Net income	$	15.7	$	12.2	$	4.4		$	6.4
Basic net income per share	$	0.11	$	0.08	$	0.03		$	0.04
Diluted net income per share	$	0.10	$	0.08	$	0.03		$	0.04
Shares used in computing earnings per share (in thousands):
Basic		146,764		146,082		145,279			142,477
Diluted		152,364		149,830		150,968			149,333

8.   SUBSEQUENT EVENTS

Investments

As of December 31, 2007, we held $82.5 million of municipal notes investments, classified as short-term investments, with an auction reset feature (“adjustable rate securities”) whose underlying assets were primarily in student loans and which had an AAA credit rating. Subsequently, auctions failed for $29.3 million of our adjustable rate securities, and there is no assurance that auctions on the remaining adjustable rate securities in our investment portfolio will succeed. An auction failure means that the parties wishing to sell their securities could not do so as a result of a lack of buying demand. These developments may result in the classification of some or all of these securities as long-term investments in our consolidated financial statements for the first quarter of 2008. As of February 25, 2008, $65.7 million of our adjustable rate securities are rated AAA, and $17.5 million had an AA credit rating. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments.

We believe we will be able to liquidate our adjustable rate securities without significant loss, and we currently believe these securities are not impaired, primarily due to government guarantees of the underlying securities.

FOUNDRY NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

However, it could take until the final maturity of the underlying notes (up to 33 years) to realize our investments’ recorded value. We currently have the ability and intent to hold our $83.2 million of adjustable rate securities held as of February 25, 2008, until market stability is restored with respect to these securities.

Share Repurchase Program

Subsequent to December 31, 2007, we repurchased an additional 4.4 million shares of our common stock via open market purchases at an average price of $13.56 per share for a total purchase price of $59.9 million. In July 2007, our Board of Directors approved a share repurchase program authorizing the purchase of up to $200 million of our common stock. The shares may be purchased from time to time in the open market or through privately negotiated transactions at management’s discretion, depending upon market conditions and other factors, in accordance with SEC requirements. The authorization to repurchase common stock expires on December 31, 2008. The total purchase price of $59.9 million will be reflected as a decrease to retained earnings during the year ended December 31, 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.

EX-99.2

Exhibit 99.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FOUNDRY NETWORKS, INC.

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

	September 30,			December 31,
	2008			2007
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	524,723		$	331,961
Short-term investments		394,645			575,645
Accounts receivable, net of allowances for doubtful accounts of $2,469 and $2,107 and sales returns of $2,093 and $2,626 at September 30, 2008 and December 31, 2007, respectively		115,611			124,234
Inventories		51,874			42,384
Deferred tax assets		44,706			44,207
Prepaid expenses and other assets		23,428			12,439
Total current assets		1,154,987			1,130,870
Property and equipment, net		6,948			9,658
Investments		87,359			58,062
Deferred tax assets		35,025			35,007
Other assets		5,874			5,234
Total assets	$	1,290,193		$	1,238,831
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,426		$	23,892
Accrued payroll and related expenses		37,863			50,806
Other accrued expenses		12,045			12,382
Deferred revenue		63,748			52,981
Total current liabilities		137,082			140,061
Deferred revenue		29,014			27,786
Income taxes payable		12,296			11,860
Other long-term liabilities		364			475
Total liabilities		178,756			180,182
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $0.0001 par value: Authorized - 5,000 shares at September 30, 2008 and December 31, 2007; None issued and outstanding as of September 30, 2008 and December 31, 2007		—			—
Common stock, $0.0001 par value:
Authorized - 300,000 shares at September 30, 2008 and December 31, 2007:
Issued and outstanding — 149,260 and 148,700 shares at September 30, 2008 and December 31, 2007, respectively		15			15
Additional paid-in capital		920,901			829,910
Accumulated other comprehensive loss		(97	)		(789	)
Retained earnings		190,618			229,513
Total stockholders’ equity		1,111,437			1,058,649
Total liabilities and stockholders’ equity	$	1,290,193		$	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 INCOME
(unaudited)
(in thousands, except per share amounts)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
Net revenue:
Product	$	137,494		$	136,974	$	398,200		$	372,976
Service		28,408			22,523		78,436			65,574
Total net revenue		165,902			159,497		476,636			438,550
Cost of revenue:
Product		51,788			55,032		151,795			157,864
Service		7,333			4,395		23,112			15,305
Total cost of revenue		59,121			59,427		174,907			173,169
Gross margin		106,781			100,070		301,729			265,381
Operating expenses:
Research and development		24,032			18,425		67,685			57,528
Sales and marketing		46,580			38,425		140,106			116,985
General and administrative		11,267			10,271		33,311			32,975
Other charges, net		2,773			60		2,773			5,660
Total operating expenses		84,652			67,181		243,875			213,148
Income from operations		22,129			32,889		57,854			52,233
Other-than-temporary impairment charge on investments		(13,390	)		—		(13,390	)		—
Interest and other income, net		4,685			11,440		20,413			32,337
Income before provision for income taxes		13,424			44,329		64,877			84,570
Provision for income taxes		8,972			16,761		28,193			32,279
Net income	$	4,452		$	27,568	$	36,684		$	52,291
Basic net income per share	$	0.03		$	0.19	$	0.25		$	0.35
Weighted-average shares used in computing basic net income per share		147,301			148,897		146,542			147,768
Diluted net income per share	$	0.03		$	0.18	$	0.24		$	0.34
Weighted-average shares used in computing diluted net income per share		153,103			156,486		151,098			154,776

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)

	Nine Months Ended
	September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	36,684		$	52,291
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,378			8,395
Stock-based compensation expense		38,586			32,801
Provision for doubtful accounts		361			(359	)
Provision for sales returns		(533	)		(592	)
Inventory provisions		6,050			3,138
Benefit for deferred income taxes		(516	)		(3,243	)
Excess tax benefits from stock-based compensation		(4,302	)		(6,342	)
Other-than-temporary impairment charge on investments		13,390			—
Changes in operating assets and liabilities:
Accounts receivable		8,795			(35,562	)
Inventories		(15,476	)		(11,144	)
Prepaid expenses and other assets		(12,528	)		(11,668	)
Accounts payable		(466	)		(3,049	)
Accrued payroll and related expenses		(12,943	)		6,337
Income taxes payable		4,675			17,640
Other accrued expenses		(449	)		(1,457	)
Deferred revenue		11,994			10,098
Net cash provided by operating activities		80,700			57,284
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investments		(25,950	)		(35,025	)
Purchases of held-to-maturity investments		(643,165	)		(560,775	)
Proceeds from sales and maturities of available-for-sale investments		27,800			46,750
Proceeds from sales and maturities of held-to-maturity investments		779,629			526,145
Purchases of property and equipment, net		(2,425	)		(4,180	)
Net cash provided by (used in) investing activities		135,889			(27,085	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock under stock plans, net of repurchases		46,759			38,045
Repurchase and retirement of common stock		(75,580	)		(37,975	)
Excess tax benefits from stock-based compensation		4,302			6,342
Net cash provided by (used in) financing activities		(24,519	)		6,412
Increase in cash and cash equivalents		192,070			36,611
Effect of exchange rate changes on cash		692			(312	)
Cash and cash equivalents, beginning of period		331,961			258,137
Cash and cash equivalents, end of period	$	524,723		$	294,436
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds	$	35,735		$	25,957

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 and nine months ended September 30, 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 and nine months ended September 30, 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 September 30, 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, valuation of investments, 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.

     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 on the Company’s consolidated balance sheet based on an assessment of their liquidity. Auction rate securities have generally been considered short-term investments since they 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. Auctions for these securities began to fail, that is, sell orders began to exceed buy orders, in the first quarter of 2008 and have continued to fail through the third quarter of 2008. As of September 30, 2008, the Company’s ability to exit these instruments in the short-term is not guaranteed. The Company performs an assessment for auction rate securities with failed auctions and as a result, the Company recorded an other-than-temporary loss of $13.4 million on these securities in the third quarter ended September 30, 2008 as discussed below. The Company’s auction rate securities were classified as long-term investments since the estimated remaining life of the underlying student loan collateral is greater than a year. Refer to Note 2 “Cash Equivalents and Investments” for additional discussion regarding the impairment and classification in the balance sheet.

     In light of the acquisition by Brocade (discussed further in Note 12 “Brocade Acquisition”), the Company has revised its intent to hold these investments to recovery, and would be willing to liquidate its auction rate securities prior to the close of the acquisition. While these events have changed the Company’s intent with regard to these securities, there is no assurance that Foundry will be able to successfully liquidate its auction rate security portfolio based upon whether these securities are marketable, or at what price such securities could or will be sold, or that a market for these securities exists, or will exist prior to the close of the acquisition. Based upon the Company’s assessment of these factors, it will continue to classify the auction rate securities as long-term investments.

     During the second quarter of 2008, issuers of auction rate securities, similar to those held by the Company, began to call certain of their auction rate securities at par. During the third quarter of 2008, one of the Company’s auction rate securities, representing approximately 3% of its auction rate portfolio, was redeemed at par. Notwithstanding this redemption, there is no guarantee that the remaining portion of Foundry’s auction rate portfolio will be called at par or otherwise regain liquidity in the short-term.

     Foundry’s auction rate securities are classified as available-for-sale and are carried at fair value. Any temporary unrealized gains and losses are recorded as a component of accumulated other comprehensive income. Unrealized gains and losses that are considered other-than-temporary are recorded in 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.

     During the three months ended September 30, 2008, the Company liquidated certain of its held-to-maturity investments prior to the scheduled maturity date due to significant deterioration of the issuer’s creditworthiness. The Company recognized a gain of approximately $0.3 million relating to the liquidation of the investments with a fair value of approximately $59.4 million. The Company has determined that the sale of these investments does not impact the Company’s ability and intent to hold the remainder of the debt securities to maturity.

     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”), which the FASB issued in September 2006. SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also requires 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 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.

     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 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.

     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.

     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.

     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 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.

     During the three months ended September 30, 2008, the Company did not grant stock options and instead only granted restricted stock units to employees. The fair value of stock option grants and employee stock purchases for the three and nine months ended September 30, 2008, and 2007 were estimated using the following weighted-average assumptions:

	Three Months Ended September 30, 2008					Nine Months Ended September 30, 2008
	Stock Option Plan		Purchase Plan			Stock Option Plan			Purchase Plan
Risk free interest rate		—		2.7	%		2.4	%		3.2	%
Expected term (in years)		—	1.5 years			3.3 years			1.4 years
Dividend yield		—		0	%		0	%		0	%
Volatility of common stock		—		40	%		41	%		40	%
Weighted-average fair value		—	$	5.17		$	4.03		$	4.91

	Three Months Ended September 30, 2007						Nine Months Ended September 30, 2007
	Stock Option Plan			Purchase Plan			Stock Option Plan			Purchase Plan
Risk free interest rate		4.4	%		4.9	%		4.5	%		4.9	%
Expected term (in years)	3.6 years			1.5 years			3.7 years			1.3 years
Dividend yield		0	%		0	%		0	%		0	%
Volatility of common stock		40	%		41	%		40	%		42	%
Weighted-average fair value	$	6.41		$	4.10		$	6.21		$	3.88

     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.

     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 since 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 and nine months ended September 30, 2008.

     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.

     Expected Volatility. Based on guidance provided in SFAS 123R and SAB 107, the volatility assumptions for the three and nine months ended September 30, 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.

     Estimated Forfeitures. Compensation expense 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 nine months ended September 30, 2008, the Company estimated forfeitures of 2% for the Board of Directors and 7% for all other employees based on actual historical option forfeitures. The Company previously used an estimated overall forfeiture rate of 11% in fiscal year 2007. The Company recorded approximately $0.9 million of additional 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 options and restricted 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, and is determined based on the average share price for each period using the treasury stock method. The treasury stock method includes the tax-effected proceeds that would be received assuming the exercise of all in-the-money stock options and assuming that restricted stock is used to repurchase shares in the open market. Certain common stock equivalents were excluded from the calculation of diluted EPS since 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.

     Revenue Recognition

     General. Foundry generally sells its products through its direct sales force, resellers and integration partners. 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 Emerging Issues Task Force (“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 hardware repair and replacement parts, access to technical assistance, and unspecified software updates and upgrades on a when-and-if available basis.

     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 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 the Company’s products do not meet its published specifications or there is an epidemic failure, as defined in the contracts.

     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.

     Income Taxes

     Foundry adopted FASB Financial 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 October 10, 2008, the Company adopted FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The adoption did not have a significant impact on the Company’s consolidated results or operations or financial condition.

     Effective January 1, 2008, the Company adopted 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 certain 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. Upon adoption, the Company did not elect to adopt the fair value option on eligible items under SFAS 159.

2. CASH EQUIVALENTS AND INVESTMENTS

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

	September 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Cash equivalents:
Money market funds	$	86,387	$	—	$	—		$	86,387
U.S. Treasuries and Government-sponsored enterprise securities		345,265		200		(4	)		345,461
Available-for-sale:
Auction rate municipal bonds		67,260		—		—			67,260
Held-to-maturity:
Municipal bonds		16,844		59		(6	)		16,897
U.S. Treasuries and Government-sponsored enterprise securities		397,899		571		(323	)		398,147
	$	913,655	$	830	$	(333	)	$	914,152
Cash equivalents	$	431,652	$	200	$	(4	)	$	431,848
Short-term investments		394,644		598		(329	)		394,913
Long-term investments		87,359		32		—			87,391
	$	913,655	$	830	$	(333	)	$	914,152

	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

     Municipal bonds. Unrealized gains and losses as of September 30, 2008 on Foundry’s investments in municipal bonds were caused by interest rate movements. The contractual terms of the debentures do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. As of September 30, 2008, all of Foundry’s municipal bonds had an investment grade credit rating.

     U.S. Treasuries and Government-sponsored enterprise securities (“GSEs”). Foundry’s U.S. Treasuries and GSE portfolio includes direct debt obligations of the United States Treasury, Federal Home Loan Bank and Federal National Mortgage Association. Unrealized losses as of September 30, 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 September 30, 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 consist of student loan debt obligations whose underlying assets are primarily Federal Family Education Loan Program (“FFELP”) loans guaranteed by the U.S. Department of Education. As a result of auction failures, actual market prices or relevant observable inputs are not readily available to determine the fair value of Foundry’s auction rate securities. As of September 30, 2008, Foundry’s auction rate securities had an original cost basis of $80.7 million. The current market conditions, and the resulting lack of an active market for these securities, required Foundry to use discounted cash-flow valuation models that depend on management’s assumptions to value its auction rate securities. Based on the valuation models, which incorporate assumptions regarding the cash-flows to be received from these instruments and an effective discount rate reflecting premiums for credit and liquidity, Foundry reduced the carrying value and recorded an other-than-temporary impairment loss of $13.4 million during the third quarter of 2008. The estimated other-than-temporary impairment loss recorded during the third quarter of 2008 was based on, among other factors, utilizing the weighted average maturity of the underlying student loan collateral in the valuation models. The weighted average maturity assumption factored into the valuation models at September 30, 2008. This was a change from Foundry’s previous estimate of the time that would be required for the underlying liquidity issues in the auction rate security market to be resolved. Foundry’s current estimate is based on its assumption that the auction rate securities market, as it previously operated, is not going to return. The other-than-temporary impairment charge of $13.4 million represents $7.4 million in recognized loss on these investments during the three months ended September 30, 2008 and $6.0 million of loss reclassified from accumulated other comprehensive loss previously recorded in the six months ended June 30, 2008 to net income.

     As of September 30, 2008, Foundry held auction rate securities with a new cost basis of $67.3 million, which is net of $13.4 million in other-than-temporary impairment losses, as long-term investments based on the estimated remaining life of the underlying student loan collateral. Foundry holds these securities as long-term investments since the estimated remaining life of the underlying student loan collateral is greater than a year, and there is no assurance that Foundry will be able to successfully liquidate its auction rate security portfolio based upon whether these securities are marketable, or at what price such securities could or will be sold, or that a market for these securities exists, or will exist in the next year.

     During the third quarter of 2008, Foundry recorded an other-than-temporary impairment charge of $13.4 million in net income, due to the change in its intent of holding its auction rate securities until a recovery of the auction rate market or redemption. On October 31, 2008, Foundry announced as part of an agreement in principle to amend its merger agreement with Brocade

Communications Systems, Inc. that Foundry stockholders may receive the proceeds of the sale of Foundry’s portfolio of auction rate securities, up to an amount of $50.0 million in the aggregate, or up to approximately $0.33 per share of Foundry common stock, if Foundry is able to successfully liquidate its portfolio of these securities prior to the close of the acquisition. Accordingly, while in absence of the merger, Foundry fully intended to hold the auction rate securities to maturity. Foundry now believes that because these securities may be liquidated prior to the closing of the merger, it no longer has an unconditional intent to hold the auction rate securities until the recovery of the auction rate market or their redemption and it has, accordingly, recorded the other-than-temporary impairment in the third quarter of 2008. The other-than-temporary impairment charge of $13.4 million represents $7.4 million in unrealized loss on these investments during the three months ended September 30, 2008 and $6.0 million represents the transfer of accumulated other comprehensive loss recorded in the six months ended June 30, 2008 from shareholders’ equity to the determination of net income. Based on the unknown results of the shareholder vote related to the amendment to the merger agreement, as well as the ability to market these instruments, and our intent to hold such instruments until the market recovers or they are otherwise redeemed in the event the amendment to the merger agreement is not consummated, we have continued to classify these securities as long-term investments in the balance sheet.

     During the second quarter of 2008, issuers of auction rate securities, similar to those held by Foundry, began to call certain of their auction rate securities at par. During the third quarter of 2008, one of the Foundry’s auction rate securities, representing approximately 3% of its auction rate portfolio, was redeemed at par. On October 7, 2008, the underwriter of the auction rate securities held by Foundry offered an Auction Rate Securities Rights Agreement (the “Rights Agreement”) to Foundry. The Rights Agreement would enable Foundry to sell its portfolio of auction rate securities at its original cost to the underwriter at any time during the period of June 30, 2010, through July 2, 2012. The Rights Agreement also would enable the underwriter to pay Foundry the original cost of the auction rate securities at any time after Foundry accept the underwriter’s offer. The underwriter would also provide “no net cost” loans up to the original cost of the auction rate security until June 30, 2010 at Foundry’s election. “No net cost” is defined in the Rights Agreement as a loan for a portion of the principal amount of the par value of the auction rate security with an interest rate equivalent to the interest rate on the auction rate security Foundry is holding. On October 16, 2008, Foundry’s management was authorized by Foundry’s Board of Directors to review and enter into the rights offering after a comprehensive review of the Rights Agreement. The deadline for Foundry accepting the Rights Agreement is November 14, 2008. Notwithstanding this redemption and proposed rights offering, there is no guarantee that the remaining portion of Foundry’s auction rate portfolio will be called at par or otherwise regain liquidity.

     In accordance with 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 September 30, 2008 (in thousands):

						Loss Greater Than 12
	Loss Less Than 12 months					months				Total
			Gross					Gross				Gross
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
Held-to-maturity:
Municipal Bonds		1,498		(6	)		—		—		1,498		(6	)
U.S. Treasuries and GSEs		201,056		(327	)		—		—		201,056		(327	)
	$	202,554	$	(333	)	$	—	$	—	$	202,554	$	(333	)

     Because the decline in the market value of Foundry’s held-to-maturity investments is attributable to the changes in interest rates and not credit quality, and because Foundry 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 September 30, 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 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 as of September 30, 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
	9/30/2008		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:
Money market funds	$	86,387	$	86,387	$	—	$	—
U.S. Treasuries and GSEs		345,461		345,461		—		—
Available-for-sale:
Auction rate municipal bonds		67,260		—		—		67,260
Held-to-maturity:
Municipal bonds		16,897		—		16,897		—
U.S. Treasuries and GSEs		398,147		229,722		168,425		—
Total	$	914,152	$	661,570	$	185,322	$	67,260

     The table below provides a reconciliation of Foundry’s financial assets measured at fair value on a recurring basis, consisting of available-for-sale auction rate securities, using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2008 (in thousands):

	Fair Value Measurements Using
	Significant Unobservable Inputs (Level 3)
	Three Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2008
Beginning Balance	$	77,127		$	—
Total realized gains or (losses) included in net income		—			—
Change in unrealized losses included in other comprehensive income		6,023			—
Total other-than-temporary impairment charge included in net income		(13,390	)		(13,390	)
Purchases, sales and settlements, net		(2,500	)		(2,500	)
Transfers in Level 3		—			83,150
Ending balance	$	67,260		$	67,260

     Gains and losses (realized and unrealized) included in earnings during the three and nine months ended September 30, 2008 are reported in interest and other income and other-than-temporary impairment charge on investments as follows (in thousands):

	Three Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2008
Total gains included in earnings	$	277		$	289
Change in unrealized gains or (losses) relating to assets still held at the reporting date	$	(13,390	)	$	(13,390	)

     During the three months ended September 30, 2008, the Company liquidated certain of its held-to-maturity investments prior to the scheduled maturity date due to a significant deterioration of the issuer’s creditworthiness. The Company recognized a gain of approximately $0.3 million relating to the liquidation of the investments with a fair value of approximately $59.4 million. The Company has determined that the sale of these investments does not impact the Company’s ability and intent to hold the remainder of the debt securities to maturity.

4. 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):

	September 30, 2008		December 31, 2007
Purchased parts	$	7,873	$	4,279
Work-in-process		21,834		17,195
Finished goods		22,167		20,910
	$	51,874	$	42,384

     Compensation cost capitalized as part of inventory as of September 30, 2008 and December 31, 2007 was $0.3 and $0.2 million, respectively.

5. 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):

	September 30, 2008		December 31, 2007
Product	$	7,036	$	3,095
Support		85,726		77,672
Total	$	92,762	$	80,767
Reported as:
Current	$	63,748	$	52,981
Non Current		29,014		27,786
Total	$	92,762	$	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 nine months ended September 30, 2008 (in thousands):

Deferred support revenue at December 31, 2007	$	77,672
New support arrangements		85,312
Recognition of support revenue		(77,258	)
Ending balance at September 30, 2008	$	85,726

6. 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 if such notice is given 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 September 30, 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 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 its 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 the Company’s 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 nine months ended September 30, 2008 were as follows (in thousands):

Balance, December 31, 2007	$	2,251
Liabilities accrued for warranties issued during the period		850
Warranty claims settled during the period		(1,073	)
Changes in liabilities for pre-existing warranties during the period, including changes in estimates		(477	)
Balance, September 30, 2008	$	1,551

     In the ordinary course of business, Foundry enters into contractual arrangements, including reseller and end-user agreements, that contain customary intellectual property indemnification provisions with respect to the Company’s products 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. The Company has not historically 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. No amounts were reflected in the Company’s condensed consolidated financial statements as of September 30, 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 Foundry’s 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 in view of petitions that Foundry had filed with the U.S. Patent and Trademark Office (“USPTO”) requesting that the USPTO reexamine the validity of five of the six Enterasys patent given 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. To date, the USPTO has issued initial Office Actions (which are published on the USPTO website) on each of the five Enterasys patents submitted for reexamination. In the Office Actions, the USPTO sustained Foundry’s reasons for alleging that the broadest patent claims of the various patents were invalid, but held that some of the narrower claims of four of the patents were valid. Enterasys has filed its initial responses to three of the five Office Actions, and must file its initial responses to the remaining two Office Action during November 2008. The reexamination proceedings are ex parte, meaning that Foundry cannot participate in the reexamination proceedings between Enterasys and the USPTO concerning the Office Actions. 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. Ultimately, the USPTO may issue final rejections of the claims, or reexamination certificates with cancelled, confirmed, amended, or new claims for the five patents being reexamined, which would conclude the reexamination proceedings. 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 counterclaims, on September 27, 2006. Subsequently, Chrimar identified claim 17 of the patent as the exemplary claim being asserted against Foundry. 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. On July 30, 2008, the Court issued a claim construction order. On August 13, 2008, Chrimar filed a motion with the Court for reconsideration of the Court’s claim construction order, but the Court stayed the motion for future consideration after the parties file motions for summary judgment. The parties are now conducting discovery on validity and infringement issues, which must be completed by January 30, 2009. It is expected that summary judgment motions on validity and/or infringement issues will be filed in the Spring of 2009. 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 June 17, 2008, the Court issued a scheduling order for the case and, in particular, scheduled a Markman claim construction hearing for December 3, 2009 and trial for July 12, 2010. The parties are now conducting discovery. 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 was filed on May 16, 2008. The Court has issued a scheduling order for the case, which sets a Markman claim construction hearing on February 12, 2009 and a trial on October 13, 2009. The parties are now conducting discovery. The Company is committed to vigorously defending itself against Fenner’s claims.

     Securities Litigation. The Company 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 the Company’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 the Company’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 Company officers (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 the Company 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. The terms of a settlement have been reached between all of the parties to all of the lawsuits, under which Foundry will not be required to pay any cash. The settlement is subject to completion of documentation and court approval, neither of which can be assured. If the documentation is not finalized 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 “California State 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 October 28, 2008, the parties entered into the Stipulation of Settlement described below. The Stipulation of Settlement is subject to Court approval. Because of the inherent uncertainty of litigation, however, Foundry cannot predict whether the Stipulation of Settlement will be approved by the Court or the outcome of the litigation.

     On March 9, 2007, a purported Foundry stockholder served Foundry’s 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 “Delaware Action”). The complaint again generally asserts similar claims as those in the California State 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. On October 28, 2008, the parties entered into the Stipulation of Settlement described below. The Stipulation of Settlement is subject to Court approval. Because of the inherent uncertainty of litigation, however, Foundry cannot predict whether the Stipulation of Settlement will be approved by the Court 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 (the “California Federal Action”). 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 occurred on May 23, 2008, and the court has not yet ruled on the motion. On October 28, 2008, the parties entered into the Stipulation of Settlement described below. The Stipulation of Settlement is subject to Court approval. Because of the inherent uncertainty of litigation, however, Foundry cannot predict whether the Stipulation of Settlement will be approved by the Court or the outcome of the litigation.

     On October 28, 2008, a Stipulation of Settlement was executed to settle each of the California State Action, the California Federal Action and the Delaware Action. On October 29, 2008, the Stipulation of Settlement was filed with the Court in the California Federal Action. The Stipulation of Settlement is subject to approval by the Court in the California Federal Action. In the event that the Stipulation of Settlement is approved by the Court in the California Federal Action and a judgment is entered in the California Federal Action, counsel for plaintiffs and defendants in the California State Action and Delaware Action will cooperate to effectuate the dismissal with prejudice of the California State Action and the Delaware Action. Under the Stipulation of Settlement, the Company will receive cash payments totaling $1.9 million. The Stipulation of Settlement further provides that Foundry will adopt certain corporate governance measures and Foundry will pay Lead Plaintiffs’ Counsel $1.2 million for their fees and expenses. The Stipulation of Settlement provides for a release of claims against the defendants by Lead Plaintiffs in connection with the matters alleged in the lawsuits and the Company and a release of claims against Lead Plaintiffs, Lead Plaintiffs’ Counsel and the Company by the defendants. The Stipulation of Settlement provides that it is not an admission by the defendants of any wrongdoing, liability, fault or omission by them. The Stipulation of Settlement requires Court approval, and Foundry cannot predict whether the Court will or will not approve the Stipulation of Settlement due to the inherent uncertainty of litigation. Because of the inherent uncertainty of litigation, Foundry also cannot predict 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.

     On July 23, 2008, an action, Doug Edrington v. Bobby R. Johnson, Jr., et al (Case No. 1:08-CV-118013), was filed in the Superior Court of the State of California for the County of Santa Clara. In this action, the plaintiff named as defendants the members of the board of directors of Foundry. The complaint asserts claims on behalf of the Company’s stockholders who are similarly situated with the plaintiff. Among other things, the complaint alleges that the members of the Company’s board of directors have breached their fiduciary duties to the Company’s stockholders in connection with the proposed acquisition of the Company by Brocade Communications Systems, Inc. (the “Merger”) and engaged in self-dealing in connection with approval of the Merger, allegedly resulting in an unfair process and unfair price to the Company’s stockholders. The complaint seeks class certification and certain forms of equitable relief, including enjoining the consummation of the Merger. On October 6, 2008, Plaintiff filed a motion for preliminary injunction of the Merger, requesting that the Court order that additional disclosure be made to shareholders prior to proceeding with the shareholder vote on the Merger scheduled for October 24, 2008. On October 16, 2008, the defendants filed an opposition to Plaintiff’s motion for preliminary injunction, and on October 20, 2008 Plaintiff filed a reply brief in support of the motion for preliminary injunction. A hearing on Plaintiff’s motion for preliminary injunction was held on October 22, 2008. On the same day, the Court entered an order denying Plaintiff’s motion for a preliminary injunction. The Company believes that the allegations of the complaint are without merit, had advanced defense costs on behalf of its directors who intend to vigorously contest the action. However, there can be no assurances that the defendants will be successful in such defense.

     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 September 30, 2008, the Company had 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.

7. 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. That approval expanded the share repurchase program to $300 million. The number of shares to be purchased and the timing of purchases is 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 share repurchase program during the nine months ended September 30, 2008 is summarized as follows (in thousands, except per share amounts):

	Total Number		Average Price
	of Shares		Paid per		Amount of
Nine Months Ended September 30, 2008	Purchased		Share		Repurchases
Cumulative balance at December 31, 2007		4,381	$	18.93	$	82,930
Repurchase of common stock		5,640		13.40		75,580
Cumulative balance at September 30, 2008		10,021	$	15.82	$	158,510

     The purchase price for the repurchased shares in the table above is reflected as a reduction to retained earnings. 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 have been 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 September 30, 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 restricted stock or a 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 of the Company’s common stock 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 made on April 29, 2005.

     A summary of Foundry’s stock option activity for all stock option plans for the nine months ended September 30, 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		1,604,250		$	12.81
Exercised		(3,506,833	)	$	10.26
Forfeited/expired		(785,866	)	$	19.44
Balance, September 30, 2008		27,839,788		$	16.85		3.83	$	117,549
Vested and expected to vest at September 30, 2008		26,668,492		$	16.91		3.83	$	114,374
Exercisable at September 30, 2008		21,218,188		$	17.20		3.76	$	99,786

     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 third 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 September 30, 2008.

     As of September 30, 2008, there was $33.5 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 2.6 years.

     Restricted Stock Awards. A summary of the Company’s restricted stock award activity and related information for the nine months ended September 30, 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		(555	)	$	15.92
Forfeited		—		$	—
Balance, September 30, 2008		398		$	17.53

     As of September 30, 2008, there was $5.3 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 1.8 years.

     Restricted Stock Units. The following schedule summarizes information about the Company’s restricted stock units (“RSUs”) for the nine months ended September 30, 2008:

				Remaining
				Contractual		Aggregate
	Shares			Life (years)		Intrinsic Value
	(in thousands)					(in thousands)
Balance, December 31, 2007		1,639
Awarded		3,907
Released		(499	)
Forfeited/expired		(77	)
Balance, September 30, 2008		4,970			1.81	$	90,499
Vested and expected to vest at September 30, 2008		4,239			1.77	$	77,198
Exercisable at September 30, 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 under the 2006 Stock Plan.

     As of September 30, 2008, approximately $75.2 million of total unrecognized compensation cost related to RSUs is expected to be recognized over a weighted-average period of 2.7 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 nine months ended September 30, 2008 and 2007, the Company issued an aggregate of 2,030,502 and 1,086,076, shares, respectively, under the ESPP at an average per share price of $9.17 and $8.64, respectively. A total of 4,598,274 shares of common stock were reserved for issuance under the ESPP as of September 30, 2008.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Cost of revenue — Product	$	421	$	385	$	1,326	$	1,019
Cost of revenue — Service		891		601		2,613		1,464
Research and development		4,899		4,956		13,617		11,734
Sales and marketing		5,150		5,108		15,122		12,705
General and administrative		2,066		2,236		5,908		5,879
Total	$	13,427	$	13,286	$	38,586	$	32,801

     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 $4.3 million and $6.3 million of excess tax benefits for the nine months ended September 30, 2008 and 2007, respectively, have been classified as a financing cash inflow.

8. NET INCOME PER SHARE

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
	(in thousands, except per share amounts)
Net income	$	4,452	$	27,568	$	36,684	$	52,291
Basic:
Weighted-average shares outstanding		147,301		148,897		146,542		147,768
Basic EPS	$	0.03	$	0.19	$	0.25	$	0.35
Diluted:
Weighted-average shares outstanding		147,301		148,897		146,542		147,768
Add: Weighted-average dilutive potential shares		5,802		7,589		4,556		7,008
Weighted-average shares used in computing diluted EPS		153,103		156,486		151,098		154,776
Diluted EPS	$	0.03	$	0.18	$	0.24	$	0.34

     There were 17.9 million and 11.0 million anti-dilutive common stock equivalents for the nine months ended September 30, 2008 and 2007, respectively.

9. COMPREHENSIVE INCOME

     Comprehensive income consisted of the following (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008		2007
Net income	$	4,452	$	27,568		$	36,684	$	52,291
Other comprehensive income:
Reclass to net income of unrealized loss on available-for-sale securities		6,023		—			—		—
Foreign currency translation adjustments		861		(191	)		692		(312	)
Total comprehensive income	$	11,336	$	27,377		$	37,376	$	51,979

10. 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 September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Americas		73	%		70	%		68	%		69	%
EMEA		17	%		16	%		20	%		16	%
Asia Pacific		6	%		9	%		8	%		9	%
Japan		4	%		5	%		4	%		6	%

     Sales to the United States government accounted for approximately 28% and 22% of the Company’s total net revenue for the three months ended September 30, 2008 and 2007, respectively, and 22% and 17% of the Company’s total net revenue for the nine months ended September 30, 2008 and 2007, respectively.

     Other than the United States government, no individual customer accounted for 10% or more of the Company’s net product revenue for the three and nine months ended September 30, 2008 and 2007. Sales to our ten largest customers accounted for 22% and 28% of net product revenue for the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008 and December 31, 2007, ten customers accounted for approximately 37% and 38%, respectively, of Foundry’s net outstanding trade receivables.

11. INCOME TAXES

     The Company’s interim effective income tax rate is based on its best estimate of its annual effective income tax rate. The effective income tax rates for the three months ended September 30, 2008 and 2007 were 67% and 38%, respectively. The effective income tax rates for the nine months ended September 30, 2008 and 2007 were 43% and 38%, respectively. These rates reflect applicable federal and state tax rates, offset primarily by the tax impact of research and development tax credits, tax-exempt interest income, and the US production activities deduction. The higher effective tax rate for the nine months ended September 30, 2008, compared to the same period in 2007, was primarily due to the unfavorable impact from a $13.4 million charge to income for the other-than-temporary impairment of certain investment securities. In addition, the 2008 tax rate was higher due to the impact from increased stock-based compensation, partially offset by additional 2008 disqualifying dispositions.

     The temporary impairment of investments creates an unrealized capital loss. Only realized capital losses are deductible, and then only to the extent of capital gains. It is anticipated that no capital gains will be realized in the foreseeable future. As such, the company opted to set up a valuation allowance against the full amount of the deferred tax asset recognized for the impairment loss, and accordingly, no tax benefit was recognized on the impairment loss.

     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 September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 2005 and state and local income tax examinations for years before 2004, except to the extent that tax attributes from the earlier closed years are carried forward to years remaining open for audit.

12. BROCADE ACQUISITION

     The Company entered into an Agreement and Plan of Merger, dated as of July 21, 2008 (the “Merger Agreement”), by and among Brocade Communications Systems, Inc., a Delaware corporation (“Brocade”), Falcon Acquisition Sub, Inc. and the Company, pursuant to which Falcon Acquisition Sub, Inc. will merge with and into the Company, and the Company will become a wholly owned subsidiary of Brocade (the “Merger”).

     Pursuant to the terms of the Merger Agreement, each share of common stock of the Company (“Foundry Common Stock”) (other than shares owned by Foundry or Brocade) will be converted into the right to receive $18.50 in cash plus 0.0907 shares of Brocade common stock (“Brocade Common Stock”). Options to purchase Foundry Common Stock and restricted stock units of Foundry will be converted into the rights described in the Merger Agreement. Brocade has announced that it anticipates financing the Merger through a combination of cash on hand (at both companies) and approximately $1.5 billion of committed debt financing from Bank of America and Morgan Stanley Senior Funding, Inc., subject to customary terms and conditions. Consummation of the Merger is subject to customary conditions, including (i) adoption of the Merger Agreement by holders of a majority of the Foundry Common Stock outstanding and (ii) absence of any law or order prohibiting the consummation of the Merger.

     On October 29, 2008, the Company and Brocade reached an agreement in principle to amend the Merger Agreement pursuant to which Foundry’s stockholders would be entitled to receive $16.50 in cash for each share of Foundry common stock. No fractional shares of Brocade common stock would be issued to Foundry stockholders. In addition, the agreement in principle provides that in certain circumstances, Foundry stockholders could receive the proceeds of the sale of Foundry’s portfolio of auction rate securities, up to an amount of $50.0 million in the aggregate, or up to approximately $0.33 per share of Foundry common stock, if Foundry is able to successfully liquidate its portfolio of these securities prior to the close of the acquisition. There can be no assurance, however, that the securities are marketable or at what price such securities could or would be sold, or that a market for these securities exists or will exist prior to the close of the transaction. The Special Meeting of Foundry Stockholders relating to the proposed Merger, originally scheduled for October 24, 2008, was adjourned to October 29, 2008 and further adjourned to November 7, 2008. If a definitive agreement is reached between the Company and Brocade regarding the new agreement in principle, the stockholder meeting will be further delayed and additional information regarding the restructured transaction will be distributed to Foundry’s stockholders for their consideration. In that event, it is anticipated that the Foundry stockholder meeting to consider the restructured transaction would be convened in December 2008, with a closing of the transaction in the second half of December 2008.

EX-99.3

Exhibit 99.3

Unaudited Pro Forma Condensed Combined Financial Statements

Introduction to Unaudited Pro Forma Condensed Combined Financial Statements

     On December 18, 2008, Brocade Communications Systems, Inc. (“Brocade” or the “Company”) completed the acquisition of Foundry Networks, Inc. (“Foundry”), a performance and total solutions provider of networking switching and routing. Under the terms of the merger agreement, as amended on November 7, 2008, at the effective time of the merger, each outstanding share of Foundry common stock (other than shares owned by Foundry, Brocade or their respective subsidiaries) was converted into the right to receive $16.50 in cash, without interest. In addition, Foundry stockholders received, by means of a dividend distributed prior to the consummation of the merger, the proceeds of the sale of Foundry’s portfolio of auction rate securities. Based on net proceeds of $38.8 million from the sale, the pricing of the conditional special dividend payable to Foundry stockholders of record immediately prior to the completion of the merger between Foundry and Brocade was approximately $0.248 per share of Foundry common stock.

     Most Foundry outstanding stock options and restricted stock units were, at the effective time of the merger and subject to applicable withholding requirements, assumed by Brocade or replaced with reasonably equivalent Brocade equity awards based on a conversion ratio derived from the per-share merger consideration as more fully set forth in the amended merger agreement. However, certain Foundry outstanding stock options and restricted stock units were terminated at the effective time of the merger without consideration. In addition, under certain circumstances, certain Foundry outstanding stock options were terminated as of the effective time of the merger and Brocade granted, in lieu thereof, a fully-vested right to be issued Brocade common stock upon settlement thereof based on a conversion ratio derived from the per-share merger consideration as more fully set forth in the amended merger agreement.

     Brocade and Foundry have different fiscal year ends. Accordingly, the following unaudited pro forma condensed combined balance sheet is based upon Brocade’s historical audited consolidated balance sheet as of October 25, 2008 and Foundry’s historical unaudited condensed consolidated balance sheet as of September 30, 2008, giving effect to the merger as if it had been completed on October 25, 2008. The following unaudited pro forma condensed combined statement of income for the fiscal year ended October 25, 2008 combines Brocade’s historical audited consolidated statement of income for the year then ended with Foundry’s historical unaudited consolidated statement of income for the three months ended December 31, 2007 and the nine months ended September 30, 2008, giving effect to the merger as if it had taken place on October 28, 2007.

     The merger is accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” Under the purchase method of accounting, the total purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible and intangible assets of Foundry based on their estimated fair values. Management has made an allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed based on various estimates. A final determination of these estimated fair values were based on the actual net tangible and intangible assets of Foundry that existed as of the date of completion of the merger.

     As of October 25, 2008, Brocade acquired 14.0 million shares of Foundry common stock as reflected in the unaudited pro forma condensed combined financial statements. There were no other significant intercompany balances and transactions between Brocade and Foundry as of the dates and for the periods of these unaudited pro forma condensed combined financial statements.

     These unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the condensed consolidated financial position or results of operations in future periods or the results that actually would have been realized had Brocade and Foundry been a combined company during the specified periods. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this document. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, Brocade’s historical audited consolidated financial statements included in its Form 10-K for the year ended October 25, 2008, Foundry’s historical audited consolidated financial statements included in its Form 10-K for the year ended December 31, 2007 and Foundry’s historical unaudited condensed consolidated financial statements included in its Form 10-Q for the quarter ended September 30, 2008, which are incorporated by reference herein.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET OF BROCADE AND FOUNDRY

	Historical
	Brocade			Foundry
	As of			As of
	October 25,			September 30,			Pro Forma					Pro Forma
	2008			2008			Adjustments (1)					Combined
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	453,884		$	524,723		$	(689,050	)	(a	)	$	289,557
Short-term investments		152,741			394,645			(497,386	)	(a	)		50,000
Accounts receivable, net		158,935			115,611			—					274,546
Inventories		21,362			51,874			24,525		(b	)		94,331
								(3,430	)	(c	)
Deferred tax assets		104,705			44,706			—					149,411
Prepaid expenses and other current assets		49,931			23,428			(587	)	(d	)		45,275
								(27,395	)	(e	)
								(102	)	(f	)
Total current assets		941,558			1,154,987			(1,193,425	)				903,120
Long-term marketable equity securities		177,380			—			(244,959	)	(a	)		3,472
								71,051		(g	)
Long-term investments		36,120			87,359			—					123,479
Restricted cash		1,075,079			—			(1,075,079	)	(a	)		—
Property and equipment, net		313,379			6,948			—					320,327
Goodwill		268,977			—			1,208,101		(h	)		1,668,893
								169,776		(i	)
								7,036		(j	)
								10,684		(c	)
								4,319		(f	)
Intangible assets, net		220,567			—			419,200		(k	)		612,867
								(26,900	)	(l	)
Non-current deferred tax assets		227,795			35,025			(169,776	)	(i	)		93,044
Other assets		37,793			5,874			(4,381	)	(d	)		39,286
Total assets	$	3,298,648		$	1,290,193		$	(824,353	)			$	3,764,488
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	167,660		$	23,426			—				$	191,086
Accrued employee compensation		107,994			37,863			—					145,857
Deferred revenue		103,372			63,748			(29,127	)	(m	)		137,993
Current liabilities associated with facilities lease losses		13,422			—			3,689		(j	)		17,111
Liability associated with class action lawsuit		160,000			—			—					160,000
Current portion of long-term debt		43,606			—			—					43,606
Other accrued liabilities		105,804			12,045			4,218		(f	)		129,321
								7,254		(c	)
Total current liabilities		701,858			137,082			(13,966	)				824,974
Long-term debt, net of current portion		1,011,399			—			—					1,011,399
Convertible subordinated debt		169,660			—			—					169,660
Non-current liabilities associated with facilities lease losses		15,007			—			3,348		(j	)		18,355
Non-current deferred revenue		37,869			29,014			—					66,883
Non-current income tax liability		67,497			12,296			—					79,793
Other non-current liabilities		13,118			364			—					13,482
Total liabilities		2,016,408			178,756			(10,618	)				2,184,546
Stockholders’ equity
Common stock		372			15			(15	)	(n	)		372
Additional paid-in capital		1,392,927			920,901			(920,901	)	(n	)		1,646,478
								253,551		(o	)
Accumulated other comprehensive loss		(85,877	)		(97	)		97		(n	)		(14,826	)
								71,051		(g	)
Retained earnings (accumulated deficit)		(25,182	)		190,618			(190,618	)	(n	)		(52,082	)

2

	Historical
	Brocade		Foundry
	As of		As of
	October 25,		September 30,		Pro Forma					Pro Forma
	2008		2008		Adjustments (1)					Combined
	(in thousands)
						(26,900	)	(l	)
Total stockholders’ equity		1,282,240		1,111,437		(813,735	)				1,579,942
Total liabilities and stockholders’ equity	$	3,298,648	$	1,290,193	$	(824,353	)			$	3,764,488

(1) The letters refer to a description of the adjustments in Note 2, “Pro Forma Adjustments,” of the Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME OF BROCADE AND FOUNDRY

	Historical
	Brocade			Foundry		Foundry
	Twelve Months			Three Months		Nine Months
	Ended			Ended		Ended			Pro Forma					Pro Forma
	October 25, 2008			December 31, 2007		September 30, 2008			Adjustments (1)					Combined
	(in thousands, except per share amounts)
Net revenues	$	1,466,937		$	168,655	$	476,636			—				$	2,112,228
Cost of revenues		606,565			63,249		174,907			(2,418	)	(p	)		887,063
										44,760		(q	)
Gross margin		860,372			105,406		301,729			(42,342	)				1,225,165
Operating expenses:
Research and development		255,571			19,524		67,685			—					342,780
Sales and marketing		274,311			43,235		140,106			—					457,652
General and administrative		58,172			11,960		33,311			(416	)	(r	)		103,027
Legal fees associated with indemnification obligations and other related costs, net		48,673			—		—			—					48,673
Provision for class action lawsuit		160,000			—		—			—					160,000
Amortization of intangible assets		31,484			—		—			38,900		(s	)		70,384
Acquisition and integration costs		682			—		—			—					682
Restructuring costs and facilities lease losses (benefits), net		2,731			—		—			(2,008	)	(t	)		723
Other charges, net		—			54		2,773			—					2,827
Total operating expenses		831,624			74,773		243,875			36,476					1,186,748
Income (loss) from operations		28,748			30,633		57,854			(78,818	)				38,417
Interest and other income, net		26,867			11,199		20,413			—					58,479
Interest expense		(10,068	)		—		—			(90,426	)	(u	)		(100,494	)
Loss on sale of investments, net		(6,874	)		—		—			—					(6,874	)
Loss on impairment of portfolio investments		(8,751	)		—		(13,390	)		—					(22,141	)
Income (loss) before provision for income taxes		29,922			41,832		64,877			(169,244	)				(32,613	)
Income tax provision (benefit)		(137,148	)		12,980		28,193			(34,720	)	(v	)		(130,695	)
Net income	$	167,070		$	28,852	$	36,684		$	(134,524	)			$	98,082
Net income per share — basic	$	0.45		$	0.19	$	0.25							$	0.26
Net income per share — diluted	$	0.43		$	0.19	$	0.24							$	0.25
Shares used in per share calculation - basic		375,303			148,143		146,542								375,303
Shares used in per share calculation - diluted		394,703			155,520		151,098								394,703

(1) The letters refer to a description of the adjustments in Note 2, “Pro Forma Adjustments,” of the Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

     Shares used in computing pro forma combined basic and diluted net income per share are Brocade shares. Dilutive potential common shares have been included only if they have a dilutive effect on earnings per share. The Company cannot estimate the potential dilutive effect of assumed Foundry equity awards and does not include potential dilutive effect of such awards in computing pro forma combined basic and diluted net income per share.

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Basis of Presentation

     On December 18, 2008, Brocade completed the acquisition of Foundry whereby Foundry became a wholly-owned subsidiary of Brocade in a transaction accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” The total purchase price of approximately $2.8 billion includes cash of $2.5 billion, stock options and awards assumed and accelerated with a fair value of $253.6 million, and direct transaction costs of $27.4 million.

     The total purchase price is as follows (in thousands):

Cash	$	2,506,474
Fair value of stock options and awards assumed and accelerated		253,551
Direct transaction costs		27,395
Total purchase price	$	2,787,420

     Under the purchase method of accounting, the total purchase price as shown in the table above is allocated to Foundry’s net tangible and intangible assets based on their estimated fair values as of the date of the completion of the merger. The purchase price has been allocated based on preliminary estimates that are described in the introduction to these unaudited pro forma condensed combined financial statements. The allocation of the purchase price, estimated useful lives and first year amortization associated with certain assets are as follows (in thousands):

			First Year		Estimated
	Amount		Amortization		Useful Life
Net tangible assets	$	964,832	$	—		N/A
Identifiable intangible assets:
Developed products technology		191,300		38,260	5 years
Customer contracts and relationships		194,500		38,900	5 years
In-process research and development		26,900		—		N/A
Order backlog		6,500		6,500	3 months
Goodwill		1,403,388		—		N/A
Total purchase price	$	2,787,420	$	83,660

     A preliminary estimate of $964.8 million has been allocated to net tangible assets acquired and approximately $419.2 million has been allocated to amortizable and non-amortizable intangible assets acquired other than goodwill. The amortization related to the amortizable intangible assets is reflected as pro forma adjustments to the unaudited pro forma condensed combined statement of income.

     Identifiable intangible assets. Acquired developed products technology includes developed and core technology and patents. Developed technology relates to Foundry’s products across all of their product lines that have reached technological feasibility. Core technology and patents represent a combination of Foundry’s processes, patents and trade secrets developed through years of experience in design and development of their products. Brocade expects to amortize the fair value of the acquired developed products technology based on the pattern in which the economic benefits of the intangible asset will be consumed, which is assumed to be by straight-line depreciation.

     Customer contracts and relationships represent existing contracts that relate primarily to underlying customer relationships. Brocade expects to amortize the fair value of these assets based on the pattern in which the economic benefits of the intangible assets will be consumed.

     In-process research and development represents intangible assets to be used in research and development projects that have no alternate future use. Research and development projects that have no alternate future use are charged to expense at the acquisition date. Brocade has recorded a $26.9 million in-process research and development charge for the three months ended January 24, 2009.

     Order backlog represents orders for which a customer purchase order has been received but products have not been shipped. Brocade expects to amortize the fair value of the acquired order backlog based on the pattern in which the economic benefits of the intangible asset will be consumed.

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     Goodwill. Approximately $1,403.4 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” as amended, goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). In the event that the management of the combined company determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made.

2. Pro Forma Adjustments

     Pro forma adjustments are necessary to reflect the purchase price, to reflect amounts related to Foundry’s net tangible and intangible assets at an amount equal to the preliminary estimate of their fair values, to reflect the amortization expense related to the estimated amortizable intangible assets, to reflect changes in depreciation and amortization expense resulting from the estimated fair value adjustments to net tangible assets, and to reflect the income tax effect related to the pro forma adjustments.

     As of October 25, 2008, Brocade acquired 14.0 million shares of Foundry common stock as reflected in the unaudited pro forma condensed combined financial statements. There were no other significant intercompany balances and transactions between Brocade and Foundry as of the dates and for the periods of these unaudited pro forma condensed combined financial statements.

     The pro forma combined income tax benefit does not necessarily reflect the amounts that would have resulted had Brocade and Foundry filed consolidated income tax returns during the periods presented.

     Brocade has not identified any pre-merger contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available which would indicate it is probable that such events have occurred and the amounts can be reasonably estimated, such items will be included in the purchase price allocation.

     The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows:

(a)	To record cash purchase considerations, including $248.4 million paid by the Company to acquire 14.0 million shares of Foundry common stock before the consummation of the acquisition, net of $3.5 million in dividend received;
(b)	To adjust inventory to its fair value;
(c)	To record additional inventory and purchase commitments reserve;
(d)	To eliminate Foundry’s historical intangible assets;
(e)	To reverse prepaid direct costs associated with the merger transaction;
(f)	To record miscellaneous accruals and asset write-offs, including pre-acquisition liabilities, severance costs, etc.
(g)	To reverse unrealized loss related to Foundry shares acquired before the consummation of the acquisition;
(h)	To record goodwill;
(i)	To record deferred tax adjustment related to acquired intangible assets;
(j)	To record a lease loss reserve necessary as of the consummation date;
(k)	To record the fair value of Foundry’s identifiable intangible assets;
(l)	To record the effect of the written-off in-process research and development;
(m)	To adjust deferred revenue to the fair value of the legal performance obligations under Foundry existing contracts;

6

(n)	To eliminate Foundry’s equity;
(o)	To record the fair value of stock options assumed and awards assumed and accelerated;
(p)	To eliminate Foundry’s historical amortization of patent cross-license agreements;
(q)	To amortize acquired Foundry developed products technology and backlog based upon the pattern in which the economic benefits of the intangible asset will be consumed;
(r)	To eliminate Foundry’s historical amortization of purchased intangible assets;
(s)	To amortize other Foundry intangible assets based upon the pattern in which the economic benefits of the intangible assets will be consumed;
(t)	To record benefit from lease loss release;
(u)	To record interest expense including amortization of direct costs for debt incurred by Brocade in connection with the merger (adjustments for debt are calculated assuming a 17% interest rate for $75.0 million and 8.56% effective interest rate for fully drawn facility of $1,100.0 million); and
(v)	To record tax adjustment to unaudited pro forma income statement;

3. Pro Forma Net Income per Share

     The pro forma combined basic and diluted net income per share are based on the number of Brocade shares of common stock used in computing basic and diluted net income per share. Dilutive potential common shares have been included only if they have a dilutive effect on earnings per share. The Company cannot estimate the potential dilutive effect of assumed Foundry equity awards and does not include potential dilutive effect of such awards in computing pro forma combined basic and diluted net income per share.

7