UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2007~~2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-26689

FOUNDRY NETWORKS, INC.

(Exact name of registrant as specified in its charter)

Delaware		77-0431154
(State or other jurisdiction of		(I.R.S. Employer
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
incorporation or organization)		Identification No.)

4980 Great America Parkway
Santa Clara, CA 95054
(Address of principal executive offices, including zip code)

(408) 207-1700
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See ~~definition~~the definitions of “large accelerated filer,” “accelerated filer” and ~~large~~“smaller ~~accelerated~~reporting ~~filer~~company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were ~~150~~147,~~312~~229,~~644~~035 shares of the registrant’s common stock, par value $0.0001 per share, outstanding as of ~~October~~July 31, ~~2007~~2008.

FOUNDRY NETWORKS, INC.

Table of Contents

	Page
PART I — FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Income		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2224
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2931
Item 4. Controls and Procedures		2931
PART II — OTHER INFORMATION		3032
Item 1. Legal Proceedings		3032
Item 1A. Risk Factors		3032
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4144
Item 3. Defaults Upon Senior Securities		4145
Item 4. Submission of Matters to a Vote of Security Holders		4145
Item 5. Other Information		4145
Item 6. Exhibits		4145
SIGNATURE		4246
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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

(in thousands, except per share amounts)

(1) Derived from audited consolidated financial statements as of December 31, 2006.


	June 30,			December 31,
	2008			2007
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	257,940		$	331,961
Short-term investments		590,906			575,645
Accounts receivable, net of allowances for doubtful accounts of $2,196 and $2,107 and sales returns of $1,897 and $2,626 at June 30, 2008 and December 31, 2007, respectively		112,362			124,234
Inventories		49,531			42,384
Deferred tax assets		45,828			44,207
Prepaid expenses and other assets		14,294			12,439

Total current assets		1,070,861			1,130,870
Property and equipment, net		7,616			9,658
Investments		101,273			58,062
Deferred tax assets		39,284			35,007
Other assets		5,697			5,234

Total assets	$	1,224,731		$	1,238,831

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	21,627		$	23,892
Accrued payroll and related expenses		40,753			50,806
Other accrued expenses		12,441			12,382
Deferred revenue		61,922			52,981

Total current liabilities		136,743			140,061
Deferred revenue		28,446			27,786
Income taxes payable		12,833			11,860
Other long-term liabilities		460			475

Total liabilities		178,482			180,182

Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized - 5,000 shares at June 30, 2008 and December 31, 2007; None issued and outstanding as of June 30, 2008 and December 31, 2007		—			—
Common stock, $0.0001 par value:
Authorized - 300,000 shares at June 30, 2008 and December 31, 2007:
Issued and outstanding – 144,870 and 148,700 shares at June 30, 2008 and December 31, 2007, respectively		14			15
Additional paid-in capital		867,049			829,910
Accumulated other comprehensive loss		(6,981	)		(789	)
Retained earnings		186,167			229,513

Total stockholders’ equity		1,046,249			1,058,649

Total liabilities and stockholders’ equity	$	1,224,731		$	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,
	2007		2006		2007		2006
Net revenue:
Product	$	136,974	$	98,968	$	372,976	$	284,320
Service		22,523		19,846		65,574		56,920
Total net revenue		159,497		118,814		438,550		341,240
Cost of revenue:
Product		55,032		43,468		157,864		126,255
Service		4,395		3,406		15,305		8,474
Total cost of revenue		59,427		46,874		173,169		134,729
Gross margin		100,070		71,940		265,381		206,511
Operating expenses:
Research and development		18,425		16,740		57,528		53,771
Sales and marketing		38,425		30,454		116,985		96,069
General and administrative		10,271		10,714		32,975		33,890
Other charges, net		60		4,207		5,660		9,887
Total operating expenses		67,181		62,115		213,148		193,617
Income from operations		32,889		9,825		52,233		12,894
Interest and other income, net		11,440		9,123		32,337		24,506
Income before provision for income taxes and cumulative effect of change in accounting principle		44,329		18,948		84,570		37,400
Provision for income taxes		16,761		6,738		32,279		14,819
Income before cumulative effect of change in accounting principle		27,568		12,210		52,291		22,581
Cumulative effect of change in accounting principle, net of taxes		—		—		—		439
Net income	$	27,568	$	12,210	$	52,291	$	23,020
Basic net income per share	$	0.19	$	0.08	$	0.35	$	0.16
Weighted-average shares used in computing basic net income per share		148,897		146,082		147,768		144,627
Diluted net income per share	$	0.18	$	0.08	$	0.34	$	0.15
Weighted-average shares used in computing diluted net income per share		156,486		149,830		154,776		150,015

(unaudited)
(in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Net revenue:
Product	$	134,843	$	120,784	$	260,705	$	236,002
Service		25,836		22,456		50,029		43,051

Total net revenue		160,679		143,240		310,734		279,053

Cost of revenue:
Product		51,591		51,695		100,006		102,832
Service		7,596		5,444		15,779		10,910

Total cost of revenue		59,187		57,139		115,785		113,742

Gross margin		101,492		86,101		194,949		165,311

Operating expenses:
Research and development		21,925		17,853		43,653		39,103
Sales and marketing		46,391		38,470		93,527		78,560
General and administrative		10,205		11,771		22,044		22,704
Other charges, net		—		3,067		—		5,600

Total operating expenses		78,521		71,161		159,224		145,967

Income from operations		22,971		14,940		35,725		19,344
Interest and other income, net		6,428		10,514		15,728		20,897

Income before provision for income taxes		29,399		25,454		51,453		40,241
Provision for income taxes		11,073		9,822		19,221		15,518

Net income	$	18,326	$	15,632	$	32,232	$	24,723


Basic net income per share	$	0.13	$	0.11	$	0.22	$	0.17

Weighted-average shares used in computing basic net income per share		145,092		147,285		146,163		147,194

Diluted net income per share	$	0.12	$	0.10	$	0.21	$	0.16

Weighted-average shares used in computing diluted net income per share		149,059		154,034		150,219		153,668

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

(unaudited)
(in thousands)


	Six Months Ended June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	32,232		$	24,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,129			5,649
Stock-based compensation expense		25,159			19,515
Provision for doubtful accounts		89			(230	)
Provision for sales returns		(729	)		(888	)
Inventory provisions		4,274			3,035
Benefit for deferred income taxes		(5,898	)		(5,500	)
Excess tax benefits from stock-based compensation		(555	)		(934	)
Changes in operating assets and liabilities:
Accounts receivable		12,513			(12,718	)
Inventories		(11,411	)		(10,665	)
Prepaid expenses and other assets		(3,860	)		(6,290	)
Accounts payable		(2,263	)		1,414
Accrued payroll and related expenses		(10,053	)		108
Income taxes payable		564			6,641
Other accrued expenses		43			287
Deferred revenue		9,600			9,069

Net cash provided by operating activities		54,834			33,216

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale investments		(25,950	)		(21,725	)
Purchases of held-to-maturity investments		(502,479	)		(376,324	)
Proceeds from sales of available-for-sale investments		25,300			37,700
Proceeds from maturities of held-to-maturity investments		438,634			287,720
Purchases of property and equipment, net		(1,625	)		(4,093	)

Net cash used in investing activities		(66,120	)		(76,722	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock under stock plans, net of repurchases		12,459			4,486
Repurchase and retirement of common stock		(75,580	)		—
Excess tax benefits from stock-based compensation		555			934

Net cash provided by (used in) financing activities		(62,566	)		5,420

Decrease in cash and cash equivalents		(73,852	)		(38,086	)
Effect of exchange rate changes on cash		(169	)		(121	)
Cash and cash equivalents, beginning of period		331,961			258,137

Cash and cash equivalents, end of period	$	257,940		$	219,930

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds	$	27,131		$	18,229

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, 2007 and 2006 is unaudited)~~

(information for the three and six months ended June 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 ~~routers,~~ and Internet ~~traffic management products~~routers. Foundry sells its products and services worldwide through its own direct sales ~~efforts~~ force, resellers and integration ~~OEM relationships~~partners. The Company’s customers include ~~United~~Internet ~~States~~Service ~~government agencies,~~Providers ~~universities~~(ISPs), ~~e-commerce~~Metro Service ~~sites~~Providers, government agencies and various enterprises ~~such~~including aseducation, healthcare, entertainment, ~~financial~~technology, ~~manufacturing~~ ~~and~~energy, ~~entertainment~~financial ~~companies~~services, asretail, ~~well~~aerospace, astransportation, ~~Internet~~ and e-commerce ~~Metro service providers~~companies.

Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared by Foundry ~~pursuant~~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, ~~2006~~2007 ~~(“2006 Form 10-K”)~~ 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~~ six months ended ~~September~~June 30, ~~2007~~2008 are not necessarily indicative of the results that may be ~~expected~~ expected for future quarters or for the year ending December 31, ~~2007~~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 ~~sheet~~sheets and condensed consolidated statements of cash flows have been reclassified to conform to the ~~September~~June 30, ~~2007~~ 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.

~~Stock-Based~~ Cash ~~Compensation~~Equivalents and Investments

OnThe ~~January 1,~~Company ~~2006,~~considers ~~Foundry~~all ~~adopted~~investments ~~Statement~~with ofinsignificant ~~Financial~~interest ~~Accounting~~rate ~~Standards~~risk ~~(“SFAS”)~~and ~~No.~~with original ~~123~~maturities ~~(revised~~of ~~2004),~~90 days ~~Share-Based~~or ~~Payment,~~less ~~(“SFAS~~to ~~123R”)~~be ~~which~~cash ~~requires~~equivalents. ~~the~~Cash ~~measurement~~ and ~~recognition~~ ofcash ~~compensation~~equivalents ~~expense~~consist ~~for~~of corporate ~~all stock-based payment awards made to employees~~ and ~~directors~~ ~~including~~government ~~employee~~debt ~~stock options~~securities, ~~restricted~~and ~~stock,~~cash ~~restricted~~deposited ~~stock~~in ~~units~~checking and ~~purchases under~~money ~~the~~market accounts. The Company’s ~~1999~~investments ~~Employee~~are ~~Stock~~maintained ~~Purchase~~and ~~Plan~~managed ~~based~~at onthree ~~estimated~~major ~~fair~~financial ~~values~~institutions. ~~SFAS 123R~~Its ~~supersedes~~investment ~~the previous accounting under Accounting Principles Board (“APB”) Opinion No. 25~~portfolio, ~~Accounting~~ ~~for~~excluding ~~Stock~~auction ~~Issued~~rate ~~to Employees~~securities, ~~(“APB~~is ~~25”),~~classified as ~~allowed~~held-to-maturity ~~under~~and ~~SFAS No. 123, Accounting for~~is ~~Stock-Based~~recorded ~~Compensation~~at ~~(“SFAS~~amortized ~~123”)~~cost, ~~for~~and ~~periods~~includes ~~beginning~~only insecurities ~~2006.~~with Inoriginal ~~March 2005,~~maturities ~~the~~of ~~SEC~~less ~~issued Staff~~than ~~Accounting Bulletin (“SAB”) No. 107 (“SAB 107”) which provides supplemental implementation~~two ~~guidance~~years ~~for~~and ~~SFAS~~with ~~123R.~~secondary ~~The~~or ~~Company~~resale ~~applied~~markets ~~the~~to ~~provisions~~ensure ofportfolio ~~SAB 107 in its adoption of SFAS 123R~~liquidity.

~~Foundry~~Investments ~~adopted~~with ~~SFAS~~original ~~123R~~maturities ~~using~~greater than 90 days that mature less than one year from the ~~modified~~consolidated ~~prospective~~balance ~~transition~~sheet ~~method,~~date ~~which~~are ~~requires~~classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as ~~application~~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 are generally 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 ~~accounting~~underlying ~~standard~~municipal asnote may have an original maturity of ~~January~~as much as 40 1years. Auctions for these securities began failing, ~~2006.~~that ~~Upon~~is, sell ~~adoption~~orders began to exceed buy orders, in the first quarter of ~~SFAS~~2008 ~~123R~~and onhave ~~January~~continued to fail 1,throughout ~~2006,~~the second quarter. The Company’s ability to exit these instruments in the short-term is not guaranteed. The Company ~~adjusted~~performs ~~retained~~an ~~earnings~~assessment byfor ~~approximately~~auction ~~$439,000~~rate securities with failed auctions. ~~This~~Based ~~adjustment~~on ~~reflects~~this assessment, instruments are classified on the balance sheet based on an estimated date when liquidity returns to these securities. During the ~~cumulative~~second ~~effect~~quarter of ~~adoption~~2008, issuers of ~~SFAS~~auction ~~123R~~rate onsecurities, ~~retained~~similar ~~earnings~~to ~~and~~those ~~represents~~held by the Company~~’s estimate~~, began to call certain of their ~~previously~~auction ~~recognized~~rate ~~stock-based~~securities ~~compensation~~at ~~expense~~par. The Company has been notified that ~~will~~one beof ~~reversed~~its ~~when~~auction ~~stock~~rate ~~options~~securities, ~~granted~~representing ~~prior~~approximately to3% ~~December 31~~of its auction rate portfolio, ~~2006~~was ~~are~~called ~~forfeited~~at par, payable on the next reset date during the third quarter of 2008. Notwithstanding this notification, there is no guarantee that any portion of Foundry’s auction rate portfolio will be called at par or otherwise regain liquidity.

~~The~~Foundry’s ~~Company~~auction ~~could~~rate ~~not~~securities ~~issue~~are ~~any~~classified ~~securities~~as ~~under~~available-for-sale ~~its~~and ~~registration~~are ~~statements~~carried onat ~~Form S-8~~fair ~~during~~value. ~~the~~Any ~~period~~unrealized ingains ~~which~~and itlosses ~~was~~are ~~not~~recorded ~~current~~as ina ~~its~~component ~~SEC~~of ~~reporting~~accumulated ~~obligations to file periodic~~other ~~reports~~comprehensive ~~under~~income. ~~the~~All ~~Securities~~other ~~Exchange~~investments, ~~Act~~which ofinclude ~~1934.~~municipal Asbonds, acorporate ~~result~~bonds, ~~options vested~~ and ~~held by certain~~ ~~former~~federal ~~employees~~agency ofsecurities, ~~the~~are ~~Company~~classified ~~could~~as ~~not~~held-to-maturity ~~be exercised until the completion of the Company’s stock option investigation~~ and ~~the~~are ~~Company’s~~stated ~~public~~at ~~filings~~amortized ~~obligations had been met~~cost. The ~~Company~~ ~~extended~~Company ~~the~~does ~~expiration~~not ~~date~~recognize ofchanges ~~these~~in ~~stock options to July 13, 2007 and measured~~ the fair value of ~~these~~ ~~stock options using the Black~~held-~~Scholes~~to-maturity ~~option~~investments ~~valuation model. The Company recorded zero and approximately $0.8 million~~ in ~~stock-based compensation expense during the three and nine months~~income ~~ended~~unless ~~September 30,~~a ~~2007~~decline ~~related~~in tovalue ~~the~~is ~~modification~~considered ~~of these options~~other-than-temporary.

~~Stock-based~~The ~~compensation~~Company ~~includes~~monitors ~~$3.7 million~~its investments for impairment on a quarterly basis and determines whether a decline in ~~the~~fair ~~three~~value is other-than-temporary by considering factors such as current economic and ~~nine~~market ~~months~~conditions, ~~ended~~the ~~September~~credit rating of the security’s issuer, the length of time an 30investment’s fair value has been below its carrying value, ~~2007~~the ~~related~~interval tobetween ~~options~~auction ~~amended~~periods, whether ~~primarily~~or ~~under~~not there have been any failed auctions, and the Company’s ~~tender~~ability ~~offer~~and intent to hold investments to maturity. ~~See~~If ~~“Stockholders~~an investment’s decline in fair value is caused by factors other than ~~Equity~~changes —in ~~Amendment~~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 ~~Certain~~income ~~Stock~~as ~~Options~~incurred.”

~~Stock-based~~Valuation ~~compensation~~of ~~relates to the following categories by period:~~Investments

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Cost of revenue — Product	$	385	$	410	$	1,019	$	1,421
Cost of revenue — Service		601		569		1,464		1,563
Research and development		4,956		3,940		11,734		13,447
Sales and marketing		5,108		4,375		12,705		16,074
General and administrative		2,236		1,994		5,879		6,539
Total	$	13,286	$	11,288	$	32,801	$	39,044

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.

~~Excess~~Fair ~~tax~~Value ~~benefits are realized tax benefits from tax deductions for exercised options in~~Measurement excess of the deferred tax asset attributable to stock compensation costs for such options. As a result of adopting SFAS 123R, approximately $6.3 million and $4.7 million of excess tax benefits for the nine months ended September 30, 2007 and 2006, respectively, have been classified as a financing cash inflow.

~~Valuation~~ Effective January 1, 2008, Foundry adopted certain of ~~Stock~~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-~~Based~~2, ~~Compensation~~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

Foundry has selected the Black-Scholes option-pricing model to value stock-based payments under SFAS 123R. The Black-Scholes option-pricing model includes assumptions regarding expected stock price volatility, option lives, dividend yields, and risk-free interest rates. These assumptions reflect Foundry’s best estimates, but involve uncertainties based on market conditions generally outside of the Company’s control.

~~The~~operations ~~fair~~and ~~value~~financial condition as the result of ~~stock~~adoption. ~~option~~The ~~grants~~Company ~~and~~is ~~employee~~currently evaluating ~~stock~~the ~~purchases~~impact ~~for~~of measuring the ~~three~~remaining nonfinancial assets and ~~nine~~nonfinancial liabilities ~~months~~under ~~ended~~FSP ~~September~~No. ~~30,~~157-2 ~~2007,~~on ~~were~~its ~~estimated~~results ~~using~~of ~~the~~operations ~~following~~and ~~weighted-average~~financial ~~assumptions:~~condition.

	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	%
Estimated annual forfeitures		11	%		11	%		11	%		11	%
Weighted-average fair value	$	6.41		$	4.10		$	6.21		$	3.88

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:

	Three Months Ended September 30, 2006						Nine Months Ended September 30, 2006
	Stock Option Plan			Purchase Plan			Stock Option Plan			Purchase Plan
Risk free interest rate		4.8	%		4.6	%		4.7	%		4.4	%
Expected term (in years)	3.5 years			1.4 years			3.4 years			1.4 years
Dividend yield		0	%		0	%		0	%		0	%
Volatility of common stock		48	%		47	%		47	%		48	%
Estimated annual forfeitures		11	%		11	%		11	%		11	%
Weighted-average fair value	$	4.65		$	3.90		$	5.45		$	3.96

•

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.

~~Expected~~• ~~Term.~~Level ~~The~~2—Valuations ~~expected~~based ~~term~~on ofquoted ~~options~~prices ~~granted~~in ismarkets ~~derived~~that ~~from~~are ~~the~~not ~~average~~considered ~~midpoint between~~to ~~vesting~~be ~~and~~active, ~~the~~broker ~~contractual~~or ~~term~~dealer quotations, asor ~~described~~alternative inpricing ~~SAB~~sources ~~107~~with reasonable levels of price transparency. Foundry’s cash equivalents and investments utilizing Level 2 inputs include government sponsored securities and municipal bonds.

~~Expected~~• ~~Volatility.~~Level ~~Based~~3—Valuations based on ~~guidance~~inputs ~~provided~~that inare ~~SFAS~~unobservable ~~123R~~ and ~~SAB~~significant ~~107,~~to the ~~volatility assumptions~~overall ~~for~~fair ~~the~~value ~~three and nine months ended September 30, 2007 and 2006 were based on a combination of historical and implied volatility~~measurement. ~~The~~Investments ~~expected~~utilizing ~~volatility~~Level of3 ~~stock~~inputs ~~options~~are ~~is based upon equal weightings of~~ the ~~historical volatility of Foundry~~Company’s ~~stock~~auction ~~and~~rate ~~the~~securities ~~implied~~that ~~volatility~~are of not traded ~~options~~in onactive ~~Foundry’s~~markets ~~stock~~or ~~having~~are asubject ~~life~~to oftransfer ~~more~~restrictions. ~~than~~Valuations ~~six~~are ~~months.~~performed ~~Management~~to ~~determined~~adjust ~~that a~~for ~~blend~~illiquidity ofand/or ~~implied~~non-transferability, ~~volatility~~ and ~~historical~~such ~~volatility~~adjustments isare ~~more~~generally ~~reflective~~based ofon available market ~~conditions~~evidence. ~~and a~~In ~~better~~the ~~indicator~~absence of ~~expected~~such ~~volatility~~evidence, ~~than~~management’s ~~using~~best ~~purely~~estimate ~~historical~~is ~~volatility~~used.

~~Expected~~The ~~Dividend~~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. ~~The~~To ~~Company~~the ~~has~~extent ~~never~~that ~~paid~~valuation ~~cash~~is ~~dividends~~based on ~~its~~models ~~capital~~or ~~stock~~inputs ~~and~~that ~~does~~are ~~not~~less ~~expect~~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 ~~pay~~measure ~~cash~~fair ~~dividends~~value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the ~~foreseeable~~fair ~~future~~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.

~~Risk~~Fair value is a market-~~Free~~based ~~Interest~~measure ~~Rate.~~considered ~~The~~from ~~risk~~the perspective of a market participant who holds the asset or owes the liability rather than an entity-~~free~~specific ~~interest~~measure. ~~rate~~Therefore, iseven when ~~based~~market onassumptions are not readily available, the ~~United~~Company’s ~~States~~own ~~Treasury~~assumptions are set to reflect ~~yield~~those ~~curve~~that market participants would use in ~~effect~~pricing the asset or liability at the ~~time~~measurement date. The Company uses prices and inputs that are current as of ~~grant~~the ~~for~~measurement date, including during periods ~~corresponding~~of ~~with~~market dislocation. In periods of market dislocation, the ~~expected~~observability ~~life~~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 ~~option~~Levels of inputs used to determine fair value.

~~Estimated Forfeitures. The Company estimates forfeitures based on an analysis of historical~~Concentrations ~~option forfeitures.~~

~~Cash~~Financial ~~Equivalents~~instruments that potentially subject the Company to a concentration of credit risk consist principally of cash equivalents, short and ~~Investments~~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.

~~The~~Certain ~~Company~~components, ~~considers~~including ~~all~~integrated ~~investments~~circuits ~~with~~and ~~insignificant~~power ~~interest~~supplies, ~~rate~~used ~~risk~~in ~~and~~Foundry’s products ~~with~~are ~~original~~purchased from sole sources. Such components may not be readily available from other ~~maturities~~suppliers ofas ~~90 days~~the ordevelopment ~~less~~period required to befabricate ~~cash~~such ~~equivalents~~components can be lengthy. ~~Cash~~The inability ~~and~~of ~~cash~~a ~~equivalents~~supplier ~~consist~~to ~~of corporate~~fulfill ~~and~~the ~~government~~Company’s ~~debt~~production ~~securities~~requirements, ~~and~~or ~~cash~~the ~~deposited~~time inrequired ~~checking~~for Foundry ~~and~~to ~~money~~identify ~~market~~new ~~accounts~~suppliers if a relationship is terminated, could negatively affect the Company’s future results of operations.

~~Investments with original maturities greater than 90 days that mature less than one year from the consolidated balance sheet date are classified as short~~Stock-~~term~~ ~~investments.~~Based ~~Investments with~~Compensation 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 and have original maturities longer than one year but interest rates that reset from seven days to two years.

~~Foundry’s~~The ~~auction~~Company ~~rate~~accounts ~~securities~~for ~~are classified as available~~stock-~~for-sale~~based ~~and~~compensation ~~are~~in ~~carried~~accordance atwith ~~fair value~~Statement ~~which approximates cost. Unrealized gains and losses, if any, are recorded as a component~~ of Financial ~~accumulated~~Accounting ~~other~~Standards ~~comprehensive income~~ (~~loss~~“SFAS”). ~~There have been no unrealized gains or losses recorded to date~~No. 123 ~~All~~(revised ~~other investments~~2004), ~~which~~Share-Based ~~include municipal bonds~~Payment, ~~corporate~~(“SFAS ~~bonds,~~123R”) ~~and~~which ~~federal~~requires ~~agency~~the ~~securities,~~measurement ~~are~~and ~~classified~~recognition asof ~~held-to-maturity~~compensation ~~and~~expense ~~are~~for ~~stated~~all atstock-based ~~amortized~~payment ~~cost. The~~awards ~~Company~~made ~~does not recognize changes in the fair value of held-~~to~~-maturity~~ ~~investments~~employees inand ~~income unless~~directors aincluding ~~decline~~employee instock ~~value~~options, isrestricted ~~considered other-than-temporary.~~stock,

~~The~~restricted ~~Company’s~~stock ~~short-term~~units and ~~long-term~~employee ~~investments~~purchases ~~are~~under ~~maintained~~the ~~and managed at three major financial institutions. Besides auction rate securities, Foundry~~Company’s ~~investment~~1999 ~~portfolio~~Employee ~~includes~~Stock Purchase ~~only~~Plan ~~marketable~~based ~~securities~~on ~~with~~estimated ~~original~~fair ~~maturities of less than two years and with secondary or resale markets~~values.

~~The~~Valuation 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 otherStock-~~than-temporary,~~Based ~~the Company would reduce the~~Compensation 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.

~~Cash~~SFAS ~~equivalents~~123R ~~and~~requires ~~investments~~companies ~~consist~~to estimate the fair value of stock-based payment awards on the date ~~following~~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 ~~thousands):~~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.

	September 30, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Cash equivalents:
Money market funds	$	121,999	$	—	$	—		$	121,999
Government-sponsored enterprise securities		119,675		18		(3	)		119,690
Available-for-sale:
Auction rate municipal bonds		81,050		—		—			81,050
Held-to-maturity:
Municipal bonds		43,873		43		(5	)		43,911
Government-sponsored enterprise securities		526,279		370		(15	)		526,634
	$	892,876	$	431	$	(23	)	$	893,284
Cash equivalents	$	241,674	$	18	$	(3	)	$	241,689
Short-term investments		458,374		251		(16	)		458,609
Long-term investments		192,828		162		(4	)		192,986
	$	892,876	$	431	$	(23	)	$	893,284

The fair value of stock option grants and employee stock purchases for the three and six months ended June 30, 2008, and 2007 were estimated using the following weighted-average assumptions:

	December 31, 2006
	Three Months Ended June 30, 2008						Six Months Ended June 30, 2008
				Gross			Gross
	Stock Option Plan			Purchase Plan			Stock Option Plan			Purchase Plan
	Amortized			Unrealized			Unrealized			Estimated
Risk free interest rate		2.9	%		3.4	%		2.4	%		4.0	%
	Cost			Gains			Losses			Fair Value
Expected term (in years)	3.6 years			1.7 years			3.3 years			1.6 years
Cash equivalents:
Dividend yield		0	%		0	%		0	%		0	%
Money market funds	$	89,299		$	—		$	—		$	89,299
Volatility of common stock		39	%		43	%		41	%		42	%
Government-sponsored enterprise securities		104,425			32			—			104,457
Weighted-average fair value	$	4.20		$	4.69		$	4.03		$	4.38
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

Municipal bonds. Unrealized gains and losses as of September 30, 2007 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. The issuers of Foundry’s municipal bonds have a credit rating of AAA.


	Three Months Ended June 30, 2007						Six Months Ended June 30, 2007
	Stock Option Plan			Purchase Plan			Stock Option Plan			Purchase Plan
Risk free interest rate		4.7	%		5.0	%		4.7	%		4.9	%
Expected term (in years)	4.0 years			1.5 years			3.8 years			1.3 years
Dividend yield		0	%		0	%		0	%		0	%
Volatility of common stock		41	%		42	%		40	%		43	%
Weighted-average fair value	$	5.89		$	3.83		$	5.44		$	3.67

~~Government~~Risk-~~sponsored~~Free ~~enterprise~~Interest ~~securities (“GSEs”)~~Rate. ~~Unrealized~~The ~~gains~~risk-free ~~and losses as of September 30, 2007 on Foundry’s investments in fixed income housing GSEs (i.e., Federal National Mortgage Association and Federal Home Loan Mortgage Corp.) were caused by~~ interest rate ~~movements. The~~is ~~contractual~~based ~~terms~~on of the ~~investments~~United doStates ~~not~~Treasury yield ~~permit~~curve ~~the~~in ~~issuer~~effect ~~to settle the securities~~ at ~~a price less than~~ the ~~amortized~~time ~~cost~~ of ~~the~~grant ~~investment.~~for ~~The~~periods ~~issuers~~corresponding ofwith ~~Foundry’s~~the ~~GSEs~~expected ~~have~~life ~~a credit rating~~ of ~~AAA~~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 six months ended June 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 six months ended June 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 six months ended June 30, 2008, the Company revised its estimate of forfeitures to 2% for the Board of Directors and 7% for all other employees based on actual historical option forfeitures from its previously estimated overall forfeiture rate of 11% in fiscal year 2007. The Company recorded an additional $0.9 million of stock based compensation during the three months ending March 31, 2008 resulting from the change in estimate.

InComputation ~~accordance with Emerging Issues Task Force (“EITF”) Abstract No. 03-1, The Meaning~~ of ~~Other-Than-Temporary~~ ~~Impairment~~Per ~~and~~Share ~~Its Application to Certain Investments, (“EITF 03-1”), the~~Amounts 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 September 30, 2007 (in thousands):

	Loss Less Than 12 months					Loss Greater Than 12 months					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Municipal bonds	$	5,186	$	(5	)	$	5,000	$	—		$	10,186	$	(5	)
Government-sponsored enterprise securities		39,209		(3	)		48,985		(15	)		88,194		(18	)
	$	44,395	$	(8	)	$	53,985	$	(15	)	$	98,380	$	(23	)

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.

Because the decline in the market value of Foundry’s investments is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of its amortized cost, which will be at maturity, it does not consider these investments to be other-than-temporarily impaired at September 30, 2007.

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, 2007		December 31, 2006
Purchased parts	$	4,386	$	5,758
Work-in-process		19,675		13,193
Finished goods		18,827		15,905
	$	42,888	$	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, purchase 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.

Concentrations

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash equivalents, short and long-term investments, and accounts receivable. Foundry seeks to reduce credit risk on financial instruments by investing in high-quality debt issuances and, by policy, limits the amount of credit exposure with any one issuer or fund. Additionally, the Company grants credit only to customers deemed credit worthy in the judgment of management. As of September 30, 2007 and December 31, 2006, ten customers accounted for approximately 35% and 30%, respectively, of Foundry’s net outstanding trade receivables.

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

Revenue Recognition

General. Foundry generally sells its products through its direct sales force, ~~and~~resellers ~~value-added~~and ~~resellers~~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.

10 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.

~~Table~~ Product. Product revenue is generally recognized upon transfer of ~~Contents~~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.

~~performance~~ Services. ~~has~~Service ~~occurred,~~revenue ~~the~~consists ~~sales~~primarily ~~price~~of isfees ~~fixed~~for orcustomer ~~determinable~~support ~~and~~services. ~~collectibility is~~Foundry’s ~~reasonably~~suite ~~assured. Evidence~~ of ~~an arrangement generally consists of~~ customer ~~purchase~~support ~~orders~~programs ~~and, in~~provides ~~certain~~customers ~~instances,~~hardware ~~sales~~repair ~~contracts or agreements. Shipping terms~~ and ~~related~~replacement ~~documents~~parts, oraccess ~~written~~to ~~evidence~~technical ~~of customer acceptance~~assistance, ~~when~~and ~~applicable,~~unspecified ~~are~~software ~~used~~updates ~~to verify delivery or performance. The Company assesses whether the sales price is fixed or determinable based on payment terms~~ and ~~whether~~upgrades ~~the sales price is subject to refund or adjustment. Foundry assesses collectibility based~~ on ~~the~~a ~~creditworthiness of the customer as determined by its credit checks~~ when-and ~~the customer’s payment history. It is Foundry’s practice to identify an end~~-~~user~~if ~~prior to shipment~~available ~~to a value-added reseller~~basis.

When sales arrangements contain multiple elements (e.g., hardware and service), 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 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. The Company also provides for estimated sales returns at the time product revenue is recognized and records that amount as a reduction to product revenue. Foundry’s sales return provision is based primarily on historical sales returns and its return policies. Foundry’s resellers generally do not have a right of return and its 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.

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 on a when-and-if available basis, hardware repair and replacement parts.

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

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

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

Recent Accounting Pronouncements

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

Effective January 1, 2008, Foundry adopted certain provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which the FASB issued in September 2006. SFAS 157 establishes specific criteria for the fair value measurement of financial and nonfinancial assets and liabilities that are already subject to fair value under current accounting rules. SFAS 157 also requires expanded disclosures related to fair value measurements. In February 2008, the FASB issued Staff Position (“FSP”) 157-2, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value on at least an annual basis. The Company elected to delay the adoption date for the portions of SFAS 157 impacted by FSP 157-2, and, as a result, it adopted a portion of the provisions of SFAS 157. The partial adoption of SFAS 157 was prospective and did not have a significant effect on the Company’s consolidated results of operations and financial condition as the result of adoption. The Company is currently evaluating the impact of measuring the remaining nonfinancial assets and nonfinancial liabilities under FSP No. 157-2 on its results of operations and financial condition.

Effective January 1, 2008, the Company adopted FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115 (“SFAS 159”), which the FASB issued in February 2007. SFAS 159 expands the use of fair value accounting but does not affect existing standards, which require assets or liabilities to be carried at fair value. Under SFAS 159, an entity may elect to use fair value to measure 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.

~~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~~2. ~~Foundry’s foreign~~CASH ~~offices~~EQUIVALENTS ~~conduct~~AND ~~sales, marketing and support activities. Because some of Foundry’s~~INVESTMENTS 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,
	2007			2006			2007			2006
Americas		70	%		63	%		69	%		62	%
EMEA		16	%		17	%		16	%		18	%
Asia Pacific		9	%		10	%		9	%		8	%
Japan		5	%		10	%		6	%		12	%

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

Sales to the United States government accounted for approximately 22% and 20% of the Company’s total net revenue in the three months ended September 30, 2007 and 2006, respectively and 17% of the Company’s total net revenue in the nine months ended September 30, 2007 and 2006.


	June 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
Cash equivalents:
Money market funds	$	152,643	$	—	$	—		$	152,643
U.S. Treasuries and Government-sponsored enterprise securities		69,948		8		(2	)		69,954
Available-for-sale:
Auction rate municipal bonds		83,150		—		(6,023	)		77,127
Held-to-maturity:
Municipal bonds		20,392		133		(4	)		20,521
U.S. Treasuries and Government-sponsored enterprise securities		594,660		528		(347	)		594,841

	$	920,793	$	669	$	(6,376	)	$	915,086

Cash equivalents	$	222,591	$	8	$	(2	)	$	222,597
Short-term investments		590,906		542		(347	)		591,101
Long-term investments		107,296		119		(6,027	)		101,388

	$	920,793	$	669	$	(6,376	)	$	915,086

Other than the United States government, no individual customer accounted for more than 10% of the Company’s net product revenue for the three and nine months ended September 30, 2007 and 2006.


	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

~~Computation~~Municipal bonds. Unrealized gains and losses as of ~~Per~~June 30, ~~Share~~2008 ~~Amounts~~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 June 30, 2008, all of Foundry’s municipal bonds had an investment grade credit rating.

~~Basic~~U.S. ~~earnings~~Treasuries ~~per~~and ~~share~~Government-sponsored enterprise securities (“~~EPS~~GSEs”). ~~has~~Foundry’s ~~been~~U.S. Treasuries ~~calculated~~and ~~using~~GSE ~~the~~portfolio ~~weighted-average~~includes ~~number~~direct ~~of shares~~debt obligations of ~~common~~United ~~stock~~States ~~outstanding during the period~~Treasury, ~~less shares subject to repurchase. Diluted~~Federal ~~EPS~~Home ~~has~~Loan ~~been~~Bank, ~~calculated~~Federal ~~using~~National ~~the~~Mortgage ~~weighted-average~~Association, ~~number~~Federal ofHome ~~shares~~Loan ofMortgage ~~common~~Corporation ~~stock outstanding~~and ~~during~~Federal ~~the~~Farm ~~period~~Credit ~~and~~Bank ~~potentially dilutive weighted-average common stock equivalents~~agencies. ~~Weighted-average~~ ~~common~~Unrealized ~~stock~~losses ~~equivalents~~as ~~include the potentially dilutive effect~~ of ~~in-the-money stock options and restricted stock~~June 30, ~~determined~~2008 ~~based~~were oncaused ~~the~~by ~~average share price for each period~~interest ~~using~~rate ~~the treasury stock method~~movements. ~~Under~~The ~~the~~contractual ~~treasury~~terms ~~stock~~of ~~method,~~ the ~~tax-effected~~investments ~~proceeds~~do ~~that would~~not bepermit ~~received assuming~~ the ~~exercise~~issuer ~~of all in-the-money stock options and restricted stock are assumed~~ to besettle ~~used to repurchase shares in~~ the ~~open market. Certain common stock equivalents were~~ ~~excluded~~securities ~~from~~at ~~the~~a ~~calculation of diluted EPS because the exercise~~ price ofless ~~these common stock equivalents was greater~~ than the ~~average~~amortized ~~market~~cost ~~price~~ of the ~~common~~investment. ~~stock~~As ~~for~~of ~~the respective period and~~June 30, ~~therefore~~2008, ~~their inclusion would have been anti-dilutive. There were 11.0 million and 15.1~~the ~~million~~issuers ~~anti-dilutive~~of ~~common~~Foundry’s ~~stock~~GSEs ~~equivalents~~had ~~for~~a ~~the~~credit ~~nine~~rating ~~months~~of ~~ended September 30, 2007 and 2006, respectively~~AAA.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands, except per share amounts)
Net income	$	27,568	$	12,210	$	52,291	$	23,020
Basic:
Weighted-average shares outstanding		148,897		146,082		147,768		144,627
Basic EPS	$	0.19	$	0.08	$	0.35	$	0.16
Diluted:
Weighted-average shares outstanding		148,897		146,082		147,768		144,627
Add: Weighted-average dilutive potential shares		7,589		3,748		7,008		5,388
Weighted-average shares used in computing diluted EPS		156,486		149,830		154,776		150,015
Diluted EPS	$	0.18	$	0.08	$	0.34	$	0.15

Auction rate municipal bonds (“auction rate securities”). Foundry’s auction rate securities primarily consist of student loan debt obligations whose underlying assets are primarily Federal Family Education Loan Program (“FFELP”) loans guaranteed by the U.S. Department of Education. As a result of auction failures, actual market prices or relevant observable inputs were not readily available to determine the fair value of the Company’s auction rate securities. The current market conditions required the Company to use discounted cash-flow valuation models that depend on management’s assumptions to value its auction rate securities. Based on the valuation model, the Company recorded an unrealized other comprehensive loss of $2.0 million and $6.0 million during the three and six months ended June 30, 2008, respectively. The additional unrealized comprehensive loss recorded during the three months ended June 30, 2008 was based on changes in assumptions used in the valuation models primarily due to the change in the expected time of resolution of instruments containing a lower percentage of FFELP loans within the underlying collateral. As of June 30, 2008, the Company held $74.6 million of auction rate securities as long-term investments based on the estimated period when recovery of fair

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. 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 three months ended September 30, 2007, the Company repurchased 2.1 million shares of its common stock via open market purchases at an average price of $17.84 per share. The total purchase price of $38.0 million was reflected as a decrease to retained earnings in the three months ended September 30, 2007. Common stock repurchases under the program were recorded based upon the settlement date of the applicable trade for accounting purposes. All common shares repurchased under this program have been retired.

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, 2007, 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. 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 Foundry’s employees, consultants and non-employee directors. The 2006 Stock Plan has a fixed number of shares and will terminate on December 31, 2009. The 2006 Stock Plan is not an “evergreen” plan. The number of shares of Foundry’s common stock available for issuance under the 2006 Stock Plan will be reduced by one share for every one share issued pursuant to a stock option or stock appreciation right and by 2.3 shares for every one share issued as a restricted stock or restricted stock unit. Stock options and stock appreciation rights must be granted with an exercise price of not less than 100% of the fair market value ~~on the date of grant. Repricing of stock options and stock appreciation rights~~ is ~~prohibited~~likely ~~without stockholder approval. Awards under the 2006 Stock Plan may be made subject~~ to ~~performance conditions as well as conditions based on time~~occur.

~~Under~~The ~~the~~Company ~~1996~~expects ~~Stock~~to ~~Plan,~~liquidate its auction rate securities without significant loss primarily due to the ~~1999~~large ~~Directors’~~portion ~~Stock~~of ~~Option~~government ~~Plan,~~guaranteed ~~and~~loans within the ~~2000~~underlying ~~Non-Executive~~collateral ~~Stock~~of ~~Option~~the ~~Plan,~~instruments. ~~stock~~The ~~options~~Company ~~generally~~has ~~have~~determined anthat ~~exercise~~these ~~price~~securities ~~equal~~are temporarily impaired primarily due to the ~~fair~~expected ~~market~~time ~~value~~to resolution of ~~Foundry’s~~ ~~common~~instruments ~~stock~~containing ona ~~the~~lower ~~date~~percentage of FFELP ~~grant.~~loans, ~~Options~~changes ~~vest~~in ~~over~~interest arate ~~vesting~~assumptions ~~schedule~~and ~~determined~~liquidity byfactors. The impairment is not the ~~Board~~result of ~~Directors,~~the ~~generally~~Company’s ~~one~~concerns toregarding ~~five~~the ~~years~~credit quality of the issuers. ~~Options~~In ~~granted~~addition, ~~prior~~the Company has the ability and intent to ~~January~~ hold its $77.1 million of auction rate securities, ~~2005~~held ~~expire~~as 10of ~~years~~June 30, ~~from~~2008, ~~the~~until ~~date~~market ofstability ~~grant~~is ~~for~~restored ~~all~~with ~~stock-based~~respect ~~compensation~~to ~~plans~~these securities. ~~Options~~However, ~~granted~~it could ~~after~~take ~~January 1,~~until ~~2005~~the ~~expire~~final 5maturity of the underlying notes (up to 33 years) ~~from~~to realize the investments’ ~~date~~recorded value. During the second quarter of ~~grant~~2008, ~~for~~issuers ~~the~~of ~~2006~~auction ~~Stock~~rate ~~Plan~~securities, similar to those held by the ~~1996~~Company, ~~Stock~~began ~~Plan~~to ~~and~~call ~~the 2000~~certain ~~Non-Executive~~of ~~Stock~~their ~~Option~~auction ~~Plan~~rate securities at par. ~~Options~~The ~~granted~~Company ~~after~~has ~~January 1,~~been ~~2005~~notified ~~expire~~that ~~10 years~~one ~~from~~of its auction rate securities, representing approximately 3% of its auction rate portfolio, was called at par, payable on the next reset date during the third quarter of ~~grant~~2008. ~~for~~Notwithstanding ~~the~~this ~~1999~~notification, ~~Directors~~there is no guarantee that any portion of Foundry’s ~~Stock~~auction ~~Option~~rate ~~Plan~~portfolio will be called at par or otherwise regain liquidity.

AIn ~~summary~~accordance ofwith ~~Foundry’s~~Emerging ~~stock~~Issues ~~option~~Task ~~activity~~Force ~~for~~(“EITF”) ~~all~~Abstract ~~stock~~No. 03-1, ~~option~~The ~~plans~~Meaning ~~for~~of Other-Than-Temporary ~~the~~Impairment ~~nine~~and ~~months ended~~Its ~~September 30,~~Application ~~2007~~to isCertain ~~set~~Investments, ~~forth~~(“EITF in03-1”), the following table ~~(which~~summarizes ~~excludes~~the ~~restricted~~fair ~~stock~~value and gross unrealized losses related to Foundry’s ~~awards~~available-for-sale and ~~restricted~~held-to-maturity ~~stock~~securities, ~~units~~aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2008 (in thousands):

				Weighted-
	Loss Less Than 12 months						Loss Greater Than 12 months				Total
				Average			Remaining
				Gross					Gross				Gross
	Options			Exercise			Contractual		Aggregate
				Unrealized					Unrealized				Unrealized
	Outstanding			Price			Life (years)		Intrinsic Value
	Fair Value			Losses			Fair Value		Losses		Fair Value		Losses
									(in thousands)
Available-for-sale:
Balance, December 31, 2006		31,749,912		$	14.40
Auction rate municipal bonds	$	74,627		$	(6,023	)		—		—	$	74,627	$	(6,023	)
Granted		5,702,858		$	17.99
Held-to-maturity:
Exercised		(4,152,112	)	$	9.56
Municipal Bonds		1,506			(4	)		—		—		1,506		(4	)
Forfeited/expired		(1,806,845	)	$	16.55
U.S. Treasuries and GSEs		293,354			(349	)		—		—		293,354		(349	)
Balance, September 30, 2007		31,493,813		$	15.95			4.68	$	142,683
	$	369,487		$	(6,376	)	$	—	$	—	$	369,487	$	(6,376	)
Vested and expected to vest at September 30, 2007		29,362,519		$	16.01			4.70	$	136,487
Exercisable at September 30, 2007		21,973,745		$	16.22			4.72	$	117,224

~~The~~Because ~~aggregate~~the ~~intrinsic~~decline ~~value~~ in the ~~table~~market ~~above~~value ~~represents~~of ~~the~~Foundry’s ~~total~~investments ~~pre-tax~~is ~~intrinsic~~attributable ~~value (~~to the valuation ~~difference~~of ~~between~~instruments ~~Foundry’s~~containing ~~closing~~a ~~stock~~lower ~~price~~percentage onof FFELP loans within the ~~last~~underlying collateral, ~~trading~~changes ~~day~~in ofinterest ~~the~~rates ~~third~~and ~~quarter of~~liquidity ~~2007~~factors and ~~the~~not ~~exercise~~credit ~~price~~quality, ~~for~~and ~~all~~because ~~in-~~the~~-money~~ Company ~~options)~~has ~~that~~the ~~would~~ability ~~have~~and ~~been~~intent ~~received~~to byhold ~~the~~these investments until a recovery of its amortized ~~option~~cost, ~~holders~~it ~~had~~does ~~all~~not ~~option~~consider ~~holders~~these ~~exercised~~investments ~~their~~to ~~options~~be onother-than-temporarily ~~September~~impaired at June 30, ~~2007~~ 2008.

~~As of September 30, 2007, there was $62~~3.~~5 million~~ ofFAIR ~~total~~VALUE ~~unrecognized compensation cost~~DISCLOSURES ~~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.~~

~~Stock~~Fair ~~Award~~Value ~~Activity. Foundry’s Board of Directors approved the issuance of 647,500 and~~Measurements ~~643,750 shares of restricted stock with a fair value of $17.54 and $14.57 per share, respectively, during the nine months ended September 30, 2007 and 2006.~~

AThe ~~summary~~fair value of the Company’s ~~restricted~~cash ~~stock~~equivalents ~~award activity~~ and ~~related~~investments ~~information~~has ~~for~~been ~~the~~categorized based ~~nine~~upon ~~months~~a ~~ended~~fair ~~September~~value hierarchy in accordance with SFAS No. ~~30,~~157. ~~2007~~Refer isto ~~set~~Note ~~forth~~1. “Summary of Significant Accounting Policies” in the ~~following~~Notes ~~table:~~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.

	Restricted Stock			Weighted Average
	Outstanding			Grant Date Fair Value
	(in thousands)
Balance, December 31, 2006		628		$	14.58
Granted		647		$	17.54
Vested		(310	)	$	14.59
Forfeited		(12	)	$	14.21
Balance, September 30, 2007		953		$	16.59

As of September 30, 2007, there was $12.7 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 2.0 years.

~~Restricted Stock Units.~~ The ~~following~~measurements ~~schedule~~used ~~summarizes~~to ~~information~~determine ~~about~~fair ~~the~~value ~~Company~~of Foundry’s ~~restricted~~ ~~stock~~cash ~~units~~equivalent ~~(“RSUs”)~~and investment portfolio as of ~~September~~June 30, ~~2007~~2008 consisted of the following (in thousands):

				Remaining
				Fair Value Measurements at Reporting Date Using
				Contractual		Aggregate
				Quoted Prices In
	Shares			Life (years)		Intrinsic Value
				Active Markets		Significant		Significant
						(in thousands)
				for Identical		Observable		Unobservable
Balance, December 31, 2006		—
				Assets		Inputs		Inputs
Awarded		1,597,000
	6/30/2008			(Level 1)		(Level 2)		(Level 3)
Released		—
Cash equivalents:
Forfeited/expired		(19,000	)
Money market funds	$	152,643		$	152,643	$	—	$	—
Balance, September 30, 2007		1,578,000			1.92	$	28,040
U.S. Treasuries and GSEs		69,954			39,991		29,963		—
Vested and expected to vest at September 30, 2007		1,255,559			1.84	$	22,311
Available-for-sale:
Exercisable at September 30, 2007		—			—	$	—
Auction rate municipal bonds		77,127			—		—		77,127
Held-to-maturity:
Municipal bonds		20,521			—		20,521		—
U.S. Treasuries and GSEs		594,841			223,925		370,916		—
Total	$	915,086		$	416,559	$	421,400	$	77,127

~~None~~The oftable ~~the~~below ~~awarded~~provides ~~RSUs~~a ~~were~~reconciliation ~~vested as~~ of ~~September 30,~~Foundry’s ~~2007.~~financial ~~These~~assets ~~RSUs~~measured ~~have~~at ~~been~~fair ~~deducted~~value ~~from~~on ~~the~~a ~~shares~~recurring ~~available~~basis, ~~for~~consisting ~~grant~~of ~~under~~available-for-sale ~~the~~auction ~~Company’s~~rate ~~stock~~securities, ~~option~~using ~~plans. The weighted-average~~significant ~~grant~~unobservable ~~date~~inputs ~~fair~~(Level ~~value~~3) offor ~~restricted~~the ~~stock~~three ~~units~~and ~~granted~~six ~~during the nine~~ months ended ~~September~~June 30, ~~2007~~ ~~was~~2008 ~~$18.49.~~(in ~~As of September 30, 2007, approximately $28.7 million of total unrecognized~~thousands): ~~compensation cost related to RSUs is expected to be recognized over a weighted-average period of 2.9 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, 2006, the Company issued an aggregate of 1,086,076, shares under the ESPP at an average per share price of $8.64. The Company issued no shares under the ESPP during the nine months ended September 30, 2007. A total of 6,628,776 shares of common stock were reserved for issuance under the ESPP as of September 30, 2007.


	Fair Value Measurements Using
	Significant Unobservable Inputs (Level 3)
	Three Months Ended			Six Months Ended
	June 30, 2008			June 30, 2008
Beginning Balance	$	79,179		$	—
Total realized gains or (losses) included in net income		—			—
Total unrealized losses included in other comprehensive income		(2,052	)		(6,023	)
Purchases, sales and settlements, net		—			—
Transfers in Level 3		—			83,150

Ending balance	$	77,127		$	77,127

AsGains aand ~~result~~losses ~~of the Company’s failure to timely file its periodic reports with the SEC, the Company suspended its employee payroll withholdings for the purchase of its common stock under the ESPP~~ (realized and ~~returned all employee contributions~~unrealized) ~~from~~included ~~August 2006 through July 31, 2007. When the ESPP resumed, employees enrolled~~ in ~~the~~earnings ~~plan~~during ~~were allowed to make a one-time increase to their contributions for~~ the ~~remainder~~three ~~of the offering period ending July 31, 2008. This increase resulted in a modification to the plan under SFAS 123R~~ and ~~additional expense of $0.1 million was~~six ~~recognized~~months ~~for the quarter~~ ended ~~September~~June 30, ~~2007. An additional $0.3 million is expected to be recognized over the remainder of the offering period ended July 31,~~ 2008. Onare ~~June 5,~~reported ~~2007, the Board of Directors amended the ESPP to limit the ability of a participant~~ in ~~the~~interest ~~ESPP~~and toother ~~increase or~~income ~~decrease the rate of his or her payroll deductions during any offering period (~~as ~~defined~~follows (in ~~the ESPP~~thousands)~~. 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 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.

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. The Company measured the fair value of these stock options using the Black-Scholes option valuation model and recorded approximately $0.8 million during the three months ended June 30, 2007 to stock-based compensation expense as a result of the modification and approximately $0.4 million to interest and other income, net as a result of the mark-to-market


	Three Months Ended		Six Months Ended
	June 30, 2008		June 30, 2008
Total gains included in earnings	$	—	$	12

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

4. INVENTORIES


	June 30, 2008		December 31, 2007
Purchased parts	$	7,107	$	4,279
Work-in-process		20,480		17,195
Finished goods		21,944		20,910

	$	49,531	$	42,384

Compensation cost capitalized as part of inventory as of June 30, 2008 and December 31, 2007 was $0.2 million for both of the respective periods.

~~provision~~5. ~~During~~DEFERRED ~~the three months ended June 30, 2007, 100,872 options were exercised and~~REVENUE approximately $0.7 million was reclassified from current liabilities to equity. During the three months ended September 30, 2007, 63,567 options were exercised. As of September 30, 2007, the remaining liability of approximately $0.6 million associated with unexercised options with extended exercise periods was reclassified from current liabilities to equity.

~~Amendment~~Amounts ofbilled ~~Certain~~in ~~Stock~~excess Options. In the nine months ended September 30, 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~~revenue ~~common~~recognized ~~stock~~are ~~underlying~~included ~~the option on the option’s grant date,~~ as ~~determined~~deferred byrevenue ~~the Company for financial accounting purposes. Employees subject to taxation~~ in the ~~United States and~~ ~~Canada~~accompanying ~~had~~consolidated ~~the~~balance 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 Section 409A and applicable Canadian tax lawsheets. InProduct ~~exchange~~deferred ~~for increasing~~revenue ~~the~~includes ~~exercise~~shipments ~~price of these options, the Company committed~~ to ~~make a cash payment to~~direct 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 nonend-~~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~~users, ~~2007,~~resellers ~~the~~and ~~date~~integration ~~that the tender offer closed, the Company amended options to purchase 3~~partners.~~7 million~~ ~~shares~~Below ofis ~~its~~a ~~common~~breakdown ~~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. These 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 three months and nine months ended September 30,~~deferred ~~2007,~~revenue ~~the Company recorded approximately $3.7 million~~ (in ~~stock-based compensation expense and~~thousands): ~~expects to record over the remaining vesting period approximately $5.5 million in stock-based compensation expense, in connection with these amended option grants.~~


	June 30, 2008		December 31, 2007
Product	$	5,351	$	3,095
Support		85,017		77,672

Total	$	90,368	$	80,767

Reported as:
Current	$	61,922	$	52,981
Non Current		28,446		27,786

Total	$	90,368	$	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 six months ended June 30, 2008 (in thousands):


Deferred support revenue at December 31, 2007	$	77,672
New support arrangements		56,576
Recognition of support revenue		(49,231	)

Ending balance at June 30, 2008	$	85,017

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 June 30, 2008, Foundry had approximately $65.2 million of open purchase orders with its component suppliers and third-party manufacturers that may not be cancelable.

Guarantees and Product Warranties

~~FASB~~The ~~Interpretation~~Company ~~No. 45,~~has ~~Guarantor’s~~indemnification ~~Accounting~~obligations ~~and~~contained ~~Disclosure~~in ~~Requirements~~commercial ~~for Guarantees~~agreements, including ~~Including~~customary ~~Indirect~~intellectual ~~Guarantees~~property ofindemnifications ~~Indebtedness~~for ofthe ~~Others,~~Company’s ~~(“FIN~~products ~~45”),~~contained ~~requires~~in ~~that~~agreements with ~~upon~~its ~~issuance~~resellers ~~of a~~and ~~guarantee,~~end-users. ~~the~~The ~~guarantor~~Company ~~must~~has ~~disclose~~not ~~and~~historically ~~record~~recorded a liability ~~for~~related ~~the fair value of the~~to ~~obligation~~these itindemnification ~~assumes~~provisions, ~~under that guarantee. FIN 45 is applicable to Foundry’s product warranty liability~~ and its indemnification ~~obligations~~arrangements ~~contained~~have innot ~~commercial~~had ~~agreements,~~any ~~including customary~~significant ~~intellectual~~impact ~~property~~on ~~indemnifications for~~ the Company’s ~~products~~financial ~~contained~~position, inresults ~~agreements~~of ~~with~~operations, ~~its resellers~~or ~~and~~cash ~~end-users~~flows.

The Company provides customers with a standard one or five year hardware warranty, depending on the type of product purchased, and a 90-day software warranty. Customers can upgrade and/or extend the warranty ~~for up to five years~~ 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, 2007 were as follows (in thousands):

Balance, December 31, 2006	$	1,546
Liabilities accrued for warranties issued during the period		2,006
Warranty claims settled during the period		(1,035	)
Changes in liabilities for pre-existing warranties during the period, including changes in estimates		(368	)
Balance, September 30, 2007	$	2,149

In the ordinary course of business, Foundry enters into contractual arrangements under which it may agree to indemnify the counter-party from losses relating to a breach of representations and warranties, a failure to perform certain covenants, or claims and losses arising from certain external events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. No amounts were reflected in the Company’s condensed consolidated financial statements as of September 30, 2007 or December 31, 2006 related to these indemnifications.

~~Deferred~~Changes ~~Support~~in ~~Revenue~~product warranty liability for the six months ended June 30, 2008 were as follows (in thousands):

Foundry offers its customers renewable support arrangements that generally range from one to 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, 2007 (in thousands):


Balance, December 31, 2007	$	2,251
Liabilities accrued for warranties issued during the period		588
Warranty claims settled during the period		(740	)
Changes in liabilities for pre-existing warranties during the period, including changes in estimates		(412	)

Balance, June 30, 2008	$	1,687

Deferred support revenue at December 31, 2006	$	65,564
New support arrangements		74,365
Recognition of support revenue		(64,266	)
Ending balance at September 30, 2007	$	75,663

In the ordinary course of business, Foundry enters into contractual arrangements under which it may agree to indemnify the counter-party from losses relating to a breach of representations and warranties, a failure to perform certain covenants, or claims and losses arising from certain external events as outlined within the particular contract, which may include, for example, losses arising from litigation or claims relating to past performance. Such indemnification clauses may not be subject to maximum loss clauses. No amounts were reflected in the Company’s condensed consolidated financial statements as of June 30, 2008 or December 31, 2007 related to these indemnifications.

~~Retained Earnings~~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 ~~following~~discovery ~~table~~process ~~summarizes~~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 ~~activity~~parties, Foundry filed a motion to stay the case, which was assented to by Enterasys, because of petitions that Foundry had filed with the U.S. Patent and Trademark Office (the “USPTO”) requesting that the USPTO reexamine the validity of five of the six Enterasys patents in view of certain prior art. On August 28, 2007, the ~~Company~~court granted Foundry’s ~~retained~~motion ~~earnings~~to ~~account~~stay (the case. All activity in the case is now on hold while the USPTO ~~thousands~~reexamination process proceeds. On March 24, 2008, the USPTO issued an Office Action with respect to the first of the five Enterasys patents being re-examined, namely, U.S. Patent # 6,539,022, in which all of the claims challenged by Foundry were rejected over the prior art cited by Foundry. Enterasys filed a response to the Office Action on May 27, 2008, which the USPTO is now considering. On June 24, 2008, the USPTO issued an Office Action with respect to a second of the five patents being reexamined, namely U.S. Patent 6,147,995. The USPTO rejected some, but not all, of the patent claims that were challenged by Foundry. Enterasys has until August 24, 2008 to respond to this Office Action. The reexamination proceedings are ex parte, meaning that Foundry cannot participate in the re-examination 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. 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.

Balance at December 31, 2006	$	231,205
Cumulative effect of adoption of FIN 48		778
Cumulative effect of adoption of EITF 06-2		(683	)
Retirement of common stock		(37,975	)
Net income		52,291
Balance at September 30, 2007	$	245,616

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, 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. The court held a hearing concerning the parties’ objections to the Special Master’s report on July 21, 2008, and is expected to issue an order construing the claims in the next few months. It is expected that, after the issuance of a claim construction order, the court will set a further schedule for the case. The Company is vigorously defending itself against Chrimar’s claims.

~~Income~~On ~~Taxes~~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,

Foundry adopted Financial FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, (“FIN 48”), on January 1, 2007. FIN 48 is an interpretation of SFAS No. 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 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

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. The Company is currently evaluating the impacts and disclosures of this standard, but does not expect EITF 07-3 to have a material impact on its consolidated results of operations or financial condition.

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 the Company in the first quarter of fiscal 2008. The Company currently is determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.

Inscheduled ~~the~~a ~~first~~Markman ~~quarter~~claim ofconstruction ~~2007,~~hearing ~~Foundry~~for ~~adopted EITF Issue No.~~December ~~06-2~~3, ~~Accounting~~2009, ~~for Sabbatical Leave~~ and ~~Other~~a ~~Similar~~trial ~~Benefits~~for ~~Pursuant to FASB Statement No.~~July 4312, ~~(“EITF 06-2”). EITF 06-2~~ ~~requires companies to accrue the cost of such compensated absences over the service period~~2010. ~~Foundry adopted~~The ~~EITF~~Company ~~06-2~~is ~~through~~committed ato ~~cumulative-effect~~vigorously ~~adjustment,~~defending ~~resulting~~itself inagainst ~~an additional liability of $~~Network-1~~.1 million,~~’s ~~additional deferred tax assets of $439,000, and a reduction to retained earnings of $683,000 in the first quarter of 2007~~claims.

InOn ~~September~~February ~~2006~~26, ~~the~~2008, ~~FASB~~Fenner ~~issued~~Investments, ~~SFAS No~~Ltd. ~~157~~ (“Fenner”) filed a lawsuit against Foundry, 3Com ~~Fair~~Corporation, ~~Value~~Extreme ~~Measurements~~Networks, ~~(“SFAS~~Inc., ~~157”)~~Netgear, ~~which~~Inc., Zyxel Communications, Inc., D-Link ~~defines~~Systems, ~~fair~~Inc., ~~value~~and SMC Networks, ~~establishes~~Inc. ain ~~framework~~the United States District Court for ~~measuring~~the ~~fair~~Eastern ~~value~~District of Texas, Tyler Division, alleging that certain of Foundry’s products infringe Fenner’s U.S. Patent No. 7,145,906 and ~~expands~~seeking ~~disclosures~~injunctive ~~about~~relief, as well as unspecified damages. On February 28, 2008, ~~fair~~Fenner ~~value~~filed ~~measurements~~an amended complaint that added three additional defendants, namely, Tellabs, Inc., Tellabs ~~SFAS~~North ~~157~~America, isInc., ~~effective~~and ~~for~~Enterasys ~~fiscal~~Networks, ~~years~~Inc. ~~beginning~~Subsequently, ~~after~~on ~~November~~May 155, ~~2007~~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 ~~interim~~the ~~periods~~other ~~within~~defendants. ~~those~~Foundry’s ~~fiscal~~answer ~~years~~to the second amended complaint was filed on May 16, 2008. The ~~Company~~Court ishas ~~currently~~not ~~assessing~~yet ~~the~~issued ~~potential~~a scheduling ~~effect~~order. ifThe ~~any~~Company ofis ~~implementing~~committed ~~this~~to ~~standard~~vigorously defending itself against Fenner’s claims.

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

In 2004, the Company accepted a settlement proposal presented to all issuer defendants. Under the terms of this settlement, the plaintiffs would have dismissed and released all claims against the Foundry Defendants in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases and for the assignment or surrender of control of certain claims 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. If an amended or modified settlement is not reached and thereafter approved by the District Court, the Company intends to defend the lawsuit vigorously. Because of the inherent uncertainty of litigation, however, Foundry cannot predict its outcome.

In August and September 2006, purported Foundry stockholders filed two putative derivative actions against certain of Foundry’s current and former officers, directors and employees in the Superior Court of the State of California County of Santa Clara. Both actions were consolidated into In re Foundry Networks, Inc. Derivative Litigation, Superior Court of the State of California, Santa Clara County, Lead Case. No. 1-06-CV 071651 (the “Consolidated Action”). On February 5, 2007, plaintiffs served a Consolidated Amended Shareholder Derivative Complaint (the “CAC”). The CAC names 19 defendants and Foundry as a nominal defendant. In general, the CAC alleges that certain stock option grants made by Foundry were improperly backdated and that such alleged backdating resulted in alleged violations of generally accepted accounting principles, the dissemination of false financial statements

2and potential tax ramifications. ~~COMPREHENSIVE~~The ~~INCOME~~CAC ~~(LOSS)~~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.

~~Comprehensive~~On ~~income~~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. (~~loss~~Case No. l-07-CV 080813) is. ~~defined~~The Patel action generally asserted similar claims as those in the Consolidated ~~change~~Action as well as a cause of action for violation of Section 1507 of the California Corporations Code which is not asserted in ~~equity~~the Consolidated Action. On April 4, 2007 the plaintiff filed a Request for Voluntary Dismissal of anthe ~~enterprise~~action. ~~excluding~~On June 19, 2007, plaintiff re-filed the ~~changes~~action ~~resulting~~Patel ~~from~~v. ~~stockholder~~Akin, ~~transactions~~et al. ~~Non~~(Civil Action No. 3036-~~net~~VCL), ~~income~~in ~~components~~the Court of ~~comprehensive~~Chancery ~~income~~of the State of orDelaware, ~~loss~~New ~~for~~Castle County. The complaint again generally asserts similar claims as those in the Consolidated ~~three~~Action and ~~nine~~seeks ~~months~~judgment ~~ended~~against ~~September 30~~the individual defendants for damages purportedly sustained by the Company as a result of the alleged misconduct, ~~2007~~as well as unspecified equitable relief to remedy the individual defendants’ alleged breaches of fiduciary duties. The complaint further seeks an award of attorney’s fees and ~~2006~~costs, ~~were~~accountants’ ~~insignificant~~and experts’ fees, cost and ~~consisted~~expenses, ~~entirely~~and such other relief as the Court might deem proper. The parties have engaged in settlement discussions, which are ongoing. Because of ~~foreign~~the ~~currency~~inherent ~~translation~~uncertainty ~~adjustments~~of litigation, however, Foundry cannot predict whether a settlement will be reached or the outcome of the litigation.

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

~~Purchase~~On ~~Commitments~~October 3, ~~with~~2007, ~~Suppliers~~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 ~~Third~~JPMorgan Chase & Co. Defendants, and Foundry Networks, Inc., Nominal Defendant (Case No. 2:07-~~Party~~CV-01566-JCC). On ~~Manufacturers~~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.

~~Foundry~~On ~~uses~~July 23, ~~contract~~2008, ~~manufacturers~~an toaction, ~~assemble~~Doug ~~certain~~Edrington ~~parts~~v. ~~for~~Bobby ~~its~~R. ~~chassis~~Johnson, ~~and~~Jr., ~~its stackable~~et ~~products~~al. ~~The~~(Case ~~Company~~No. 1:08-CV-118013), ~~also~~was ~~utilizes~~filed ~~third-party~~in ~~OEMs~~the toSuperior ~~manufacture~~Court ~~certain Foundry-branded~~of ~~products~~the State of California for the County of Santa Clara. In ~~order~~this toaction, ~~reduce~~the ~~lead-times~~plaintiff ~~and~~named ~~ensure~~as andefendants ~~adequate~~the ~~supply~~members of ~~inventories,~~ the board of directors of Foundry. The complaint asserts claims on behalf of the Company’s ~~agreements~~stockholders ~~with~~who ~~some~~are ofsimilarly situated ~~these~~with ~~manufacturers~~the ~~allow~~plaintiff. ~~them~~Among toother ~~procure~~things, ~~long lead-time~~the ~~component~~complaint ~~inventory~~alleges onthat the members of the Company’s ~~behalf~~board ~~based~~of ondirectors ahave ~~rolling~~breached ~~production~~their ~~forecast provided~~fiduciary byduties ~~Foundry.~~to ~~The~~the Company’s isstockholders ~~contractually~~in connection ~~obligated~~with tothe ~~purchase~~proposed ~~long~~acquisition ~~lead-time~~of ~~component inventory~~the ~~procured~~Company by ~~certain~~Brocade ~~manufacturers~~Communications inSystems, ~~accordance~~Inc. (“Brocade”) ~~with~~and ~~its~~engaged ~~forecasts~~in ~~although~~self-dealing itin ~~can generally~~connection ~~give~~with ~~notice~~approval of ~~order~~the ~~cancellation~~Merger, atallegedly resulting ~~least~~in ~~90 days~~an ~~prior~~unfair process and unfair price to the ~~delivery~~Company’s ~~date~~stockholders. InThe complaint seeks ~~addition,~~class ~~the~~certification ~~Company~~and ~~issues~~certain ~~purchase~~forms ~~orders~~of toequitable ~~its~~relief, ~~component~~including ~~suppliers~~enjoining ~~and~~the ~~third-party~~consummation of ~~manufacturers~~the ~~that~~proposed ~~may~~merger. ~~not~~The beCompany ~~cancelable.~~believes Asthat ofthe ~~September 30,~~allegations ~~2007,~~of ~~Foundry~~the ~~had~~complaint ~~approximately~~are ~~$68.0~~without merit ~~million~~and ofintends ~~open~~to ~~purchase~~vigorously ~~orders~~contest ~~with~~the ~~its~~action. ~~component~~However, ~~suppliers~~there ~~and~~can ~~third-party~~be ~~manufacturers~~no assurances that ~~may~~the ~~not~~defendants will be ~~cancelable~~successful in such defense.

Litigation

Intellectual Property Proceedings. On June 21, 2005, Enterasys Networks, Inc. (“Enterasys”) filed a lawsuit against the Company (and Extreme Networks, Inc. (“Extreme”)) 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 an answer denying the allegations. On November 3, 2005, the Court severed Enterasys’ claims 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, 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. The petitions were all granted by the USPTO. Enterasys assented to the motion for a stay. 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. It is expected that the USPTO will begin issuing Office Actions concerning the merits of the petitions (i.e., assessing the validity of the patents over the prior art cited by Foundry) over the next six months to a year. At some point in the future, the stay of the case may be lifted by the Court, depending mainly on the results of the reexamination process. At that time, the Court will issue a new scheduling order for the case. We are vigorously defending ourselves 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 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. It is expected that Professor Lemley will hold a Markman claim construction hearing in January 2008, after which he will make recommendations to the Court for construing the claims. The Company is committed to 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 three of its officers (the “Foundry Defendants”), including the Company’s Chief Executive Officer and former Chief Financial Officer, and investment

~~banking~~ United ~~firms~~States ~~that~~Attorney’s ~~served~~Office asSubpoena ~~underwriters~~ for ~~Foundry’s~~Production ~~initial~~of ~~public~~Documents. ~~offering~~On inJune 26, ~~September~~2006, ~~1999.~~Foundry ~~The~~received ~~amended~~a ~~complaint~~subpoena ~~alleged~~from ~~violations~~the ofUnited ~~Sections 11~~States ~~and~~Attorney’s 15Office offor the ~~Securities~~production ~~Act~~ of ~~1933~~ ~~and~~documents ~~Section~~relating ~~10(b)~~to ofits ~~the~~historical ~~Securities~~stock ~~Exchange~~option ~~Act~~granting ofpractices. ~~1934,~~The onCompany ~~the~~has ~~grounds that the registration~~produced ~~statement~~certain ~~for~~documents ~~the initial public offering (“IPO”) failed~~ to ~~disclose that (i)~~ the ~~underwriters agreed~~United toStates ~~allow~~Attorney’s ~~certain~~Office ~~customers to purchase shares~~ in ~~the~~October ~~IPO~~of in2006, ~~exchange~~but ~~for~~has ~~excess~~not ~~commissions~~received tocorrespondence befrom ~~paid to~~ the ~~underwriters,~~United ~~and~~States ~~(ii) the~~Attorney’s ~~underwriters~~Office ~~arranged~~since ~~for certain customers to purchase additional shares in~~ the ~~aftermarket~~Company’s atproduction ~~predetermined prices~~of documents. The ~~amended~~Company ~~complaint~~has ~~also alleges~~cooperated ~~that~~with ~~false~~the orUnited ~~misleading~~States ~~analyst~~Attorney’s ~~reports~~Office ~~were issued~~ and ~~seeks~~will ~~unspecified~~continue ~~damages. Similar~~to ~~allegations~~do ~~were~~so ~~made~~if inrequested ~~lawsuits~~by ~~challenging~~the ~~over~~United ~~300~~States ~~other~~Attorney’s ~~initial public offerings conducted in 1999 and 2000~~Office. ~~The cases were consolidated for pretrial purposes.~~

OnGeneral. ~~February 19,~~From ~~2003~~time to time, the ~~District~~Company ~~Court~~is ~~ruled~~subject onto ~~all~~other ~~defendants’~~legal ~~motions~~proceedings toand ~~dismiss.~~claims Inin ~~ruling~~the onordinary ~~motions~~course of business, including claims of alleged infringement of trademarks, copyrights, patents and/or other intellectual property rights. From time to ~~dismiss~~time, ~~the~~third ~~District~~parties assert ~~Court~~patent ~~must~~infringement ~~treat~~claims against the ~~allegations~~Company in the ~~complaint~~form asof ifletters, lawsuits and other ~~they~~forms ~~were~~of ~~true~~communication. ~~solely~~In ~~for~~addition, ~~purposes~~from oftime ~~deciding~~to time, the ~~motions.~~Company ~~The~~receives ~~motion~~notification ~~was~~from customers ~~denied~~claiming asthat they are entitled to ~~claims under~~indemnification or other obligations from the ~~Securities~~Company related ~~Act~~to ofinfringement ~~1933~~claims inmade ~~the~~against ~~case~~them ~~involving~~by ~~Foundry~~third parties. ~~The~~In ~~same~~accordance ~~ruling~~with ~~was~~SFAS ~~made~~No. 5, Accounting infor ~~all~~Contingencies, ~~but~~(“SFAS 5”), the Company records a liability when it is both probable ~~ten~~that a liability has been incurred and the amount of the ~~other~~loss ~~cases~~can be reasonably estimated. The Company ~~District~~reviews ~~Court~~the ~~dismissed~~need ~~the~~for ~~claims~~any ~~under~~such ~~Section~~liability ~~10(b)~~on ofa ~~the~~quarterly basis and records any necessary ~~Securities~~adjustments ~~Exchange~~to ~~Act~~reflect the effect of ~~1934~~ongoing ~~against~~negotiations, ~~Foundry~~settlements, ~~and~~rulings, ~~one~~advice of ~~the~~legal counsel, ~~individual~~and ~~defendants~~other information and ~~dismissed~~events pertaining to a particular case in the period they become ~~all~~known. ofAt June 30, 2008, the ~~Section~~Company ~~20(a)~~had ~~“control~~not ~~person”~~recorded ~~claims~~any such liabilities in accordance with SFAS 5. The ~~District~~Company ~~Court~~believes ~~denied~~it ~~the~~has ~~motion~~valid defenses with respect to ~~dismiss~~ the ~~Section~~legal ~~10(b)~~matters ~~claims~~pending against ~~Foundry’s~~it. In ~~remaining~~the ~~individual~~event ~~defendants~~of ona ~~the~~determination ~~basis~~adverse ~~that~~to ~~those defendants~~Foundry, ~~allegedly~~the ~~sold~~Company ~~Foundry~~could ~~stock~~incur ~~following~~substantial ~~the~~monetary liability ~~IPO.~~and ~~The~~be ~~stock~~required ~~sale~~to ~~allegations~~change ~~were~~its ~~found sufficient~~business ~~for~~practices. ~~pleading~~Any ~~purposes.~~unfavorable Adetermination ~~similar~~could have ~~ruling~~a ~~was~~material ~~made~~adverse ~~with~~effect ~~respect~~on toFoundry’s 62financial ~~individual defendants~~position, inresults ~~the~~of ~~other~~operations, ~~cases~~or cash flows.

~~In 2004, the Company had accepted a settlement proposal presented to all issuer defendants~~7. ~~Under~~ ~~the~~STOCKHOLDERS ~~terms of this settlement, the plaintiffs would have dismissed and released all claims~~EQUITY 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. On April 24, 2006, the District Court conducted a fairness hearing on the settlement and heard arguments from both the plaintiffs and issuers in favor of the settlement as well as from both the underwriter defendants and three individual objectors against the settlement. While the District Court was considering the final approval, 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). 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. Accordingly, the parties withdrew the prior settlement, and plaintiffs have filed amended complaints in an effort to comply with the Second Circuit decision. There is no assurance that the settlement will be amended or renegotiated to comply with the Second Circuit’s ruling, and then approved. If the settlement is not amended or renegotiated and then approved, the Company intends to defend the lawsuit vigorously. Because of the inherent uncertainty of litigation, however, the Company cannot predict its outcome.

InShare ~~August~~Repurchase ~~and~~Program. ~~September~~In July ~~2006~~2007, ~~purported~~the ~~Foundry shareholders filed two putative derivative actions against certain of Foundry~~Company’s ~~current~~Board ~~and~~of ~~former~~Directors ~~officers,~~approved ~~directors~~a ~~and employees in the~~share ~~Superior~~repurchase ~~Court~~program ofauthorizing the ~~State~~Company ofto ~~California~~purchase ~~County~~up ofto ~~Santa Clara. The actions were captioned Watkins v. Johnson, et al. (Case No.~~$200 ~~1-06-CV~~million ~~068878)~~of ~~and~~its ~~Rosenbaum~~common vstock. ~~Johnson~~In April 2008, etthe ~~al.~~Company’s ~~(Case~~Board ~~No. 1-06~~of ~~CV 071651).~~Directors Onapproved ~~December 27,~~an ~~2006,~~increase ~~pursuant~~ to athe ~~Court~~size ~~Order,~~of ~~both~~the ~~actions~~share repurchase ~~were~~program ~~consolidated~~of ~~into~~an Inadditional ~~re Foundry Networks, Inc~~$100 million. ~~Derivative~~That ~~Litigation,~~approval ~~Superior~~expanded ~~Court of~~ the ~~State~~share ~~of California, Santa~~repurchase ~~Clara~~program ~~County,~~to ~~Lead Case. No.~~$300 ~~1-06-CV 071651 (the “Consolidated Action”)~~million. OnThe ~~February 5,~~number ~~2007, Plaintiffs~~of ~~served~~shares ato ~~Consolidated~~be ~~Amended~~purchased ~~Shareholder~~and ~~Derivative~~the ~~Complaint~~timing ~~(the~~of ~~“CAC”).~~purchases ~~The~~was ~~CAC~~based ~~names~~on 19several ~~defendants and Foundry as a nominal defendant. In general~~factors, including the ~~CAC~~price ~~alleges~~of ~~that~~Foundry’s ~~certain~~ stock, ~~option~~general ~~grants~~business ~~made by Foundry were improperly backdated~~ and ~~that~~market ~~such alleged backdating resulted in alleged violations of generally accepted accounting principles~~conditions, ~~the dissemination of~~ ~~false financial statements~~ and ~~potential~~other ~~tax~~investment ~~ramifications~~opportunities. The ~~CAC~~share ~~asserts~~repurchase 11program ~~causes~~is ofscheduled ~~action against~~to ~~certain~~expire ~~and/or~~on ~~all of the defendants, including, among others, breach of fiduciary duty,~~December ~~accounting~~31, ~~unjust enrichment and violations of California Corporations Code Sections 25402 and 25403~~2008. ~~On February 13~~However, ~~2007,~~in ~~the~~light ~~Company~~of ~~filed a motion to stay~~ the ~~CAC~~proposed ~~pending~~acquisition ~~resolution~~ of ~~a substantially~~the ~~similar~~Company ~~derivative~~by ~~action~~Brocade, ~~pending in~~ the ~~United~~Company ~~States District Court for the~~does ~~Northern~~not ~~District~~currently ofanticipate ~~California,~~buying ~~San~~back ~~Jose~~any ~~Division.~~additional Onshares ~~March 20,~~under ~~2007,~~ the ~~Court~~share ~~granted~~repurchase ~~the motion to stay~~program. ~~The action continues to be stayed.~~

OnThe ~~March 9,~~stock ~~2007,~~repurchase aactivity ~~purported~~under ~~Foundry shareholder served~~ the ~~Company’s~~share ~~registered~~repurchase ~~agent~~program ~~for service~~during ~~of process with a putative derivative action against certain of~~ the ~~Company’s~~six ~~current~~months ~~and~~ended ~~former officers, directors and employees. The complaint named Foundry as a nominal defendant. The action was filed on February~~June 2830, ~~2007,~~2008 ~~in the Superior Court of the State of California, Santa Clara County, and~~ is ~~captioned~~summarized ~~Patel v. Akin, et al. (Case No. 1-07-CV 080813). The Patel action generally asserted similar claims~~ as ~~those~~follows (in ~~the Consolidated Action. In addition~~thousands, itexcept ~~asserted~~per ~~a cause~~share ~~of action for violation of Section 1507 of the California Corporations Code. On April 27,~~amounts): 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-


	Total Number		Average Price
	of Shares		Paid per		Amount of
Six Months Ended June 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 June 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 June 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

~~VCL)~~common ~~and~~stock ~~names~~available ~~Foundry~~for asissuance aunder ~~nominal~~the ~~defendant.~~2006 ~~The~~Stock ~~complaint~~Plan ~~again~~will ~~generally~~be ~~asserts~~reduced ~~similar claims~~by asone ~~those~~share infor every ~~the~~one ~~Consolidated~~share ~~Action~~issued ~~relating~~pursuant to ~~allegations~~a ~~that certain~~ stock option ~~grants made~~or bystock ~~Foundry~~appreciation ~~were~~right ~~improperly~~and ~~backdated~~by 2.3 ~~The~~shares ~~complaint~~for every ~~asserts~~one ~~seven~~share ~~causes~~issued ofas ~~action~~restricted ~~against certain~~stock ~~and/~~or ~~all~~a ofrestricted ~~the~~stock ~~defendants,~~unit. ~~including,~~Stock ~~among~~options ~~others,~~and ~~breach~~stock appreciation ofrights ~~fiduciary~~must ~~duty, accounting,~~be ~~unjust~~granted ~~enrichment,~~with ~~rescission~~an ~~and~~exercise ~~corporate~~price ~~waste.~~of ~~Pursuant~~not toless athan ~~stipulation~~100% ~~and order~~ of the ~~Court,~~fair ~~Foundry~~market value ~~and~~of the ~~individual defendants~~Company’s ~~responses~~common tostock ~~the complaint are due~~ on ~~or before~~the ~~December 3,~~date ~~2007~~of grant. ~~The~~Repricing ~~parties~~of ~~are~~stock inoptions ~~the~~and ~~very~~stock appreciation ~~early~~rights ~~stages~~is ofprohibited ~~settlement~~without ~~negotiations~~stockholder approval. ~~Because~~ ofAwards under the ~~inherent~~2006 ~~uncertainty~~Stock ofPlan may ~~litigation,~~be ~~however,~~made wesubject ~~cannot~~to ~~predict~~performance ~~whether~~conditions aas ~~settlement will~~well beas ~~reached~~conditions orbased ~~the~~on ~~outcome of the litigation~~time.

InUnder ~~September~~the ~~and~~1996 ~~October 2006~~Stock Plan, ~~purported~~the ~~Foundry~~1999 ~~shareholders filed four putative derivative actions against certain of Foundry~~Directors’s ~~current~~Stock ~~and~~Option ~~former officers~~Plan, ~~directors~~ and ~~employees in~~ the ~~United~~ ~~States~~2000 ~~District Court for the Northern District of California. The complaints named Foundry as a nominal defendant. The four actions were captioned Desai v. Johnson, et al. (Case No. C~~Non-~~06-05598 PVT), McDonald v. Johnson, et al. (Case No. C06 06099 HRL), Jackson v. Akin, et al. (C06~~Executive ~~06509~~Stock ~~JCS)~~Option ~~and Edrington v. Johnson~~Plan, ~~Jr.,~~stock etoptions ~~al.~~generally ~~(C06~~have ~~6752~~an ~~RMW).~~exercise Onprice ~~December 8,~~equal ~~2006~~to the ~~actions were~~fair ~~consolidated~~market ~~into~~value ~~In re~~ of Foundry’s ~~Networks,~~common ~~Inc.~~stock ~~Derivative~~on ~~Litigation,~~the ~~U.S.D.C.~~date ~~No. Dist.~~of ~~Cal~~grant. ~~(San~~ ~~Jose~~Options ~~Division)~~vest ~~Case~~over ~~No. 5:06-CV-05598-RMW).~~a Avesting ~~hearing~~schedule ondetermined ~~certain~~by ~~plaintiffs’ motion to appoint lead plaintiff and lead counsel was held on February 2, 2007, and, on February 12, 2007,~~ the ~~Court~~ ~~appointed~~Board ~~lead~~of ~~plaintiff and lead counsel. On February 15~~Directors, ~~2007,~~generally ~~Edrington~~one v.to ~~Johnson,~~five Jryears., etOptions ~~al. was~~granted ~~voluntarily~~prior ~~dismissed. Pursuant~~ to ~~a stipulation among the parties~~January 1, on2005 ~~March 26,~~expire ~~2007,~~10 ~~Plaintiffs~~years ~~filed~~from ~~and served a Consolidated Derivative Complaint (~~the ~~“CDC”).~~date ~~The~~of ~~CDC~~grant ~~generally alleges~~for ~~that~~all ~~certain~~ stock-based ~~option~~compensation ~~grants~~plans. ~~made~~Options bygranted ~~Foundry~~after ~~were improperly backdated and that such~~January ~~alleged backdating resulted in alleged violations of generally accepted accounting principles~~1, ~~dissemination~~ of2005 ~~false~~expire ~~financial~~5 years ~~statements~~from ~~and~~the ~~potential~~date ~~tax ramifications. The CDC pleads a combination~~ of ~~causes~~grant offor ~~action,~~the ~~including,~~2006 ~~among~~Stock ~~others~~Plan, ~~breach~~the of1996 ~~fiduciary~~Stock ~~duty,~~Plan ~~unjust enrichment~~ and ~~violations of Sections 10(b), 14(a) and 20(a) of~~ the ~~Securities and Exchange Act of~~ ~~1934.~~2000 OnNon-Executive ~~May 10,~~Stock ~~2007,~~Option ~~Foundry filed a motion to dismiss the CDC~~Plan. ~~Pursuant~~Options togranted aafter ~~stipulation among the parties~~January 1, ~~the~~2005 ~~individual~~expire ~~defendants~~10 years ~~named in~~ from the ~~CDC~~date ~~are~~of ~~not~~grant ~~required~~for ~~to answer or otherwise respond to~~ the ~~CDC~~1999 ~~unless the court denies Foundry~~Directors’s ~~motion~~Stock toOption ~~dismiss~~Plan. On ~~June~~April 2521, ~~2007~~2008, ~~Plaintiffs~~ ~~filed~~the ~~an opposition to Foundry~~Company’s ~~motion to dismiss, and, on August 2, 2007, Foundry~~Board ~~filed~~of aDirectors ~~reply~~resolved to ~~Plaintiffs’~~discontinue ~~opposition.~~further ~~Pursuant~~equity toaward agrants ~~stipulation~~from ~~among~~ the ~~parties~~2000 ~~and~~Non-Executive ~~an order~~Stock ofOption ~~the Court, the hearing on Foundry’s motion to dismiss currently is scheduled for November 30, 2007~~Plan. The ~~parties~~last ~~are~~grant infrom the ~~very~~2000 ~~early~~Non-Executive ~~stages~~Stock ofOption ~~settlement~~Plan ~~negotiations.~~was ~~Because~~made ofon ~~the inherent uncertainty of litigation~~April 29, ~~however, we cannot predict whether a settlement will be reached~~ ~~or the outcome of the litigation~~2005.

~~SEC~~A ~~Information~~summary ~~Inquiry.~~of ~~The SEC has initiated an informal inquiry into~~ Foundry’s ~~historical~~ stock option ~~granting~~activity ~~practices.~~for Atall ~~the~~stock ~~SEC’s~~option ~~request,~~plans for the ~~Company~~six ~~voluntarily~~months ended ~~produced~~June 30, ~~certain documents~~2008 tois ~~the~~set ~~SEC~~forth in ~~this~~the ~~matter.~~following ~~The~~table ~~Company~~(which isexcludes ~~cooperating~~restricted ~~with~~stock ~~the~~awards ~~SEC~~ and ~~expects to~~ ~~continue~~restricted tostock ~~do so.~~units):

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.


				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		(457,774	)	$	8.02
Forfeited/expired		(579,448	)	$	19.92

Balance, June 30, 2008		31,095,265		$	16.25		4.04	$	30,861

Vested and expected to vest at June 30, 2008		29,803,257		$	16.28		4.03	$	30,645

Exercisable at June 30, 2008		23,440,864		$	16.46		3.95	$	29,764

~~General.~~The ~~From~~aggregate ~~time~~intrinsic tovalue ~~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~~table inabove ~~the~~represents ~~form of letters, lawsuits and other forms of communication. In addition, from time to time,~~ the ~~Company~~total ~~receives~~pre-tax ~~notification~~intrinsic ~~from~~value ~~customers claiming that they are entitled to indemnification or other obligations from~~ (the ~~Company related~~difference tobetween ~~infringement claims made against them by third parties. Regardless of the merits of the Company~~Foundry’s ~~position,~~closing ~~litigation~~stock isprice ~~always~~on ~~an expensive and uncertain proposition. In accordance with SFAS No. 5, Accounting for Contingencies, (“SFAS 5”),~~ the ~~Company~~last ~~records~~trading aday ~~liability when it is both probable that a liability has been incurred and the amount~~ of the ~~loss~~second ~~can be reasonably~~quarter ~~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~~2008 ~~negotiations, settlements, rulings, advice of legal counsel,~~ and ~~other information and events pertaining to a particular case in~~ the ~~period they~~exercise ~~become~~price ~~known.~~for Atall ~~September 30, 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-money ~~legal matters~~options) ~~pending~~that ~~against~~would ~~it.~~have Inbeen ~~the~~received ~~event~~by ~~of a determination adverse to Foundry,~~ the ~~Company could~~ ~~incur~~option ~~substantial~~holders ~~monetary~~had ~~liability~~all ~~and~~option beholders ~~required~~exercised totheir ~~change~~options ~~its business practices. Any unfavorable determination could have a material adverse effect~~ on ~~Foundry’s financial position~~June 30, ~~results~~ ~~of operations, or cash flows~~2008.

4 As of June 30, 2008, there was $38.3 million ~~INCOME~~of ~~TAXES~~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 2.8 years.

~~The~~Restricted ~~Company’s~~Stock ~~interim~~Awards. ~~effective~~A ~~income~~summary ~~tax~~of ~~rate~~the isCompany’s ~~based~~restricted onstock ~~its~~award ~~best~~activity ~~estimate of its annual~~and ~~effective~~related ~~income~~information ~~tax rate. The effective income tax rates~~ for the ~~three~~six months ended ~~September~~June 30, ~~2007~~ ~~and~~2008 ~~2006~~is ~~were~~set ~~38%~~forth ~~and~~in ~~36%,~~the ~~respectively.~~following ~~The effective income tax~~table:


	Restricted Stock			Weighted Average
	Outstanding			Grant Date Fair Value
	(in thousands)
Balance, December 31, 2007		953		$	16.59
Granted		—		$	—
Vested		(315	)	$	14.68
Forfeited		—		$	—

Balance, June 30, 2008		638		$	17.54

As of June 30, 2008, there was $6.1 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 1.9 years.

~~rates~~ Restricted ~~for~~Stock ~~the nine months ended September 30, 2007 and 2006 were 38% and 40%, respectively~~Units. ~~These~~ ~~rates reflect applicable federal and state tax rates, offset by federal and state research and development tax credits, export sales incentives, and tax-exempt interest income.~~ The ~~higher effective~~following ~~tax~~schedule ~~rate~~summarizes ~~for~~information ~~the~~about ~~three months ended September 30, 2007 compared to~~ the ~~prior year was~~Company’s ~~primarily~~restricted ~~due~~stock tounits ~~decreased~~(“RSUs”) ~~reserves related to the expired statute of limitations. The lower effective tax rate~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2007 compared to the prior year was~~2008: ~~primarily due to the decreased impact of stock-based compensation and the extension of the federal research and development credit, partially offset by reduced export incentive benefits.~~

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 greater volatility and, consequently, the Company’s ability to estimate reasonably its future quarterly and annual effective tax rates will be adversely affected.


				Remaining
				Contractual		Aggregate
	Shares			Life (years)		Intrinsic Value
	(in thousands)					(in thousands)
Balance, December 31, 2007		1,639
Awarded		9
Released		—
Forfeited/expired		(46	)

Balance, June 30, 2008		1,602			1.19	$	18,935

Vested and expected to vest at June 30, 2008		1,379			1.14	$	16,300

Exercisable at June 30, 2008		—			—	$	—

~~Management~~None ~~believes~~of the ~~Company~~awarded ~~will~~RSUs ~~likely~~were ~~generate~~vested ~~sufficient~~as ~~taxable income in the future to realize the tax benefits arising from its existing net deferred tax assets~~ of ~~$73.7~~June ~~million as of September~~ 30, ~~2007,~~2008. ~~although~~These ~~there~~RSUs ~~can~~have bebeen nodeducted ~~assurance that it will be able to do so. In~~from ~~accordance with SFAS 123R,~~ the ~~Company~~shares ~~recorded~~available afor ~~net~~grant ~~deferred~~under ~~tax asset for~~ the ~~book~~Company’s ~~compensation expense related to non-qualified~~ stock ~~options,~~option ~~which~~plans ~~was approximately $30.5 million~~ at ~~September 30,~~a ~~2007.~~rate ~~A portion or all~~ of ~~Foundry’s deferred tax assets relating to stock-based compensation may not ultimately be realized~~2.3 Toshares ~~the extent the deferred tax benefit is more than the actual tax~~for ~~benefit~~every ~~realized,~~one ~~the~~share ~~difference~~issued ~~may~~under ~~impact~~ the ~~income~~2006 ~~tax expense if the Company does not have a sufficient hypothetical additional paid-in capital (“APIC”) pool under SFAS 123R to decrease additional paid-in capital~~plan.

~~Foundry~~As ~~adopted the provisions~~ of ~~FIN 48 on January~~June 130, ~~2007. As a result of adoption~~2008, ~~the Company~~approximately ~~has recorded an increase to retained earnings of~~ $018.8 million as of ~~January 1,~~total ~~2007.~~unrecognized Incompensation cost ~~addition,~~related ~~the~~to ~~Company~~RSUs ~~recorded~~is aexpected ~~decrease~~ to ~~deferred~~be ~~tax~~recognized ~~assets~~over ~~of $2.9 million,~~ a ~~decrease to additional paid~~weighted-inaverage ~~capital~~period of $42.2 ~~million and an increase to taxes payable of $0~~years.~~5 million. As~~ ~~part of the FIN 48 adoption, the Company reclassified $9.4 million from current taxes payable to non-current taxes payable.~~

AsEmployee 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 ~~adoption~~lesser ~~date,~~of ~~Foundry~~the ~~had~~fair ~~gross~~market ~~tax~~value ~~affected~~of ~~unrecognized~~the ~~tax~~shares ~~benefits~~at (i) the beginning of ~~$14~~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.1 During the six months ended June 30, ~~million~~2008, the Company issued an aggregate of ~~which~~1,162,809 shares under the ESPP at an average per share price of $68.095. The Company issued no shares under the ESPP during the six months ended June ~~million~~30, 2007. ifA ~~recognized~~total of 5,465,967 ~~would~~shares ~~affect~~of common stock were reserved for issuance under the ~~Company’s~~ESPP ~~effective~~as ~~tax~~of June 30, ~~rate~~2008.

~~Foundry~~Stock-based ~~conducts~~compensation ~~business~~relates ~~globally~~to ~~and, as a result,~~ the ~~Company~~following ~~files~~categories ~~income~~by ~~tax~~period ~~returns~~ (in ~~the~~ ~~United States federal jurisdiction and various state and foreign jurisdictions. In the normal~~thousands): 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.

In general, Foundry is no longer subject to United States federal income tax examinations for years before 2002 and state and local income tax examinations for years before 2000. Foundry is no longer subject to United States federal or state income tax examinations for years before 2004, except to the extent that tax attributes in these years were carried forward to years remaining open for audit.


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of revenue — Product	$	430	$	319	$	905	$	634
Cost of revenue — Service		752		414		1,722		863
Research and development		3,837		3,440		8,717		6,778
Sales and marketing		4,494		3,902		9,972		7,597
General and administrative		1,645		1,818		3,843		3,643

Total	$	11,158	$	9,893	$	25,159	$	19,515

AsExcess oftax ~~the~~benefits ~~adoption~~are ~~date,~~realized ~~Foundry~~tax ~~had~~benefits ~~accrued~~from ~~interest~~tax ~~expense~~deductions ~~related~~for toexercised ~~the~~options ~~unrecognized tax~~in ~~benefits~~excess of ~~$1.8 million.~~the ~~The~~deferred ~~Company~~tax ~~recognizes~~asset ~~interest~~attributable ~~accrued~~to ~~and~~stock ~~penalties,~~compensation ifcosts ~~incurred, related~~for tosuch ~~unrecognized~~options. Approximately ~~tax~~$0.6 million ~~benefits~~and as$0.9 million ~~a component~~ of ~~income~~excess tax ~~expense.~~benefits ~~This~~for ~~policy~~the ~~did~~six ~~not~~months ended June ~~change~~30, as2008 aand ~~result~~2007, ofrespectively, ~~the~~have ~~adoption~~been ofclassified ~~FIN~~as 48a financing cash inflow.

During the first three quarters of 2007, there was a reduction in unrecognized tax benefits of $1.8 million recorded under FIN 48 resulting from the lapse of the applicable statute of limitations.

~~Item 2~~8. ~~Management’s~~NET ~~Discussion~~INCOME ~~and~~PER ~~Analysis of Financial Condition and Results of Operations~~SHARE

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

Overview


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
	(in thousands, except per share amounts)
Net income	$	18,326	$	15,632	$	32,232	$	24,723

Basic:
Weighted-average shares outstanding		145,092		147,285		146,163		147,194

Basic EPS	$	0.13	$	0.11	$	0.22	$	0.17

Diluted:
Weighted-average shares outstanding		145,092		147,285		146,163		147,194
Add: Weighted-average dilutive potential shares		3,967		6,749		4,056		6,474

Weighted-average shares used in computing diluted EPS		149,059		154,034		150,219		153,668

Diluted EPS	$	0.12	$	0.10	$	0.21	$	0.16

~~Founded~~There inwere 1996, we design, develop, manufacture, market and sell a comprehensive, end-to-end suite of high performance data networking solutions, including Ethernet Layer 2-7 switches, Metro routers, and Internet traffic management products19.9 million ~~We sell our products~~ and ~~services worldwide through our own direct sales efforts, resellers and OEM relationships~~13.3 million ~~Our customers include United States government agencies, universities, e~~anti-~~commerce~~dilutive ~~sites,~~common ~~and~~stock ~~enterprises~~equivalents ~~such~~for asthe ~~healthcare,~~six ~~financial,~~months ~~manufacturing~~ended ~~and entertainment companies~~June 30, as2008 ~~well as Internet~~ and ~~Metro~~2007, ~~service providers~~respectively.

~~Stock~~9. ~~Option~~COMPREHENSIVE ~~Investigation and Tender Offer~~INCOME

InComprehensive ~~the~~income ~~second~~consisted ~~quarter~~ of ~~fiscal 2007, we completed~~ the ~~restatement~~following of(in ~~our historical financial~~thousands): statements as a result of our independent stock option investigation and review of historical stock compensation practices and regained compliance with the listing standards of the Nasdaq Stock Market.

In the nine months ended September 30, 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 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. These 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 three months and nine months ended September 30, 2007, the Company recorded approximately $3.7 million in stock-based compensation expense and expects to record over the remaining vesting period approximately $5.5 million in stock-based compensation expense, in connection with these amended option grants.


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net income	$	18,326		$	15,632		$	32,232		$	24,723
Other comprehensive income:
Net unrealized loss on available-for-sale securities		(2,052	)		—			(6,023	)		—
Foreign currency translation adjustments		74			(118	)		(169	)		(121	)

Total comprehensive income	$	16,348		$	15,514		$	26,040		$	24,602

~~Our employees exercised certain stock option grants in 2006 for which we have revised the measurement dates following our stock option investigation~~10. ~~When~~SEGMENT ~~the~~AND ~~revised~~GEOGRAPHIC ~~measurement dates~~INFORMATION resulted in grant date fair market values in excess of the grant exercise prices, the Internal Revenue Service and the State of California have determined that the grantee has incurred a tax obligation under Section 409A of the Internal Revenue Code and respective state statutes. On February 9, 2007, the Board of Directors authorized us to assume these Section 409A and applicable state tax obligations on behalf of our employees and we have elected to participate in Internal Revenue Service and State of California sponsored programs designed to facilitate company payments of these taxes for our non-executive employees. In addition, our Board of Directors has approved the reimbursement of Section 409A taxes our executives have incurred on their 2006 stock option exercises. The taxes we have assumed for both our executive and non-executive employees plus an amount to compensate these employees for the gross-up or income effect of our payments has been recorded as bonus compensation in the amount of $3.1 million in the first quarter of 2007.

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.


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Americas		68	%		69	%		66	%		68	%
EMEA		21	%		17	%		21	%		16	%
Asia Pacific		8	%		8	%		9	%		9	%
Japan		3	%		6	%		4	%		7	%

~~Share~~Sales ~~Repurchase~~to ~~Program~~the United States government accounted for approximately 16% and 11% of the Company’s total net revenue for the three months ended June 30, 2008 and 2007, respectively, and 17% and 15% of the Company’s total net revenue for the six months ended June 30, 2008 and 2007, respectively.

InOther ~~July 2007,~~than ~~our~~the ~~Board~~United ofStates ~~Directors~~government, ~~approved~~no aindividual ~~share~~customer ~~repurchase~~accounted ~~program~~for ~~authorizing~~10% usor ~~to purchase~~more ~~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~~Company’s ~~discretion,~~net ~~depending upon~~product ~~market~~revenue ~~conditions~~for ~~and other factors, in accordance with SEC requirements. The authorization to repurchase our common stock expires on December 31, 2008. During~~ the three and six months ended ~~September~~ June 30, ~~2007,~~2008 weand ~~repurchased 2~~2007.~~1 million~~ ~~shares~~As of ~~our common stock via open market purchases at an~~ ~~average price of $17.84 per share. The total purchase price of $38.0~~June ~~million~~30, ~~was~~2008 ~~reflected~~and ~~as a decrease to retained earnings in the three months ended September~~December 3031, 2007., ~~Common~~ten ~~stock repurchases~~customers ~~under~~accounted ~~the~~for ~~program~~approximately ~~were~~24% ~~recorded~~and ~~based~~38%, respectively, ~~upon the settlement date~~ of ~~the~~Foundry’s ~~applicable~~net outstanding trade ~~for~~ ~~accounting purposes~~receivables. ~~All common shares repurchased under this program have been retired.~~

~~Critical~~11. ~~Accounting~~INCOME ~~Policies and Use of Estimates~~TAXES

~~Management~~The Company’s ~~discussion~~interim ~~and~~effective ~~analysis~~income oftax ~~financial~~rate ~~condition~~is ~~and results of operations are~~ based on ~~our~~its ~~condensed~~best ~~consolidated~~estimate ~~financial~~of ~~statements,~~its ~~which have been prepared in accordance~~annual ~~with~~effective ~~United~~income ~~States~~tax ~~generally accepted accounting principles~~rate. The ~~preparation~~effective ofincome ~~these~~tax ~~financial statements~~rates ~~requires~~for ~~us to make estimates and judgments that affect~~ the ~~reported~~three ~~amounts~~months ofended ~~assets~~June 30, 2008 and ~~liabilities~~2007 ~~and~~were ~~the~~38% ~~disclosure of contingent assets~~ and ~~liabilities at the date of the condensed consolidated financial statements~~39%, ~~and~~respectively. ~~the~~The ~~reported~~effective ~~amounts~~income oftax ~~revenue~~rates ~~and~~for ~~expenses during~~ the ~~period~~six ~~reported.~~months ~~By their nature~~ended June 30, ~~these~~2008 ~~estimates~~ and ~~judgments~~2007 ~~are~~were ~~subject~~37% toand ~~an inherent~~39%, ~~degree of uncertainty~~respectively. ~~Management~~These ~~bases~~rates ~~its~~reflect ~~estimates~~applicable ~~and~~federal ~~judgments on historical~~and ~~experience,~~state ~~market~~tax ~~trends~~rates, ~~and~~offset ~~other~~primarily ~~factors~~by ~~that are believed to be reasonable under~~ the ~~circumstances.~~ ~~These~~tax ~~estimates~~impact ~~form the basis for judgments about the carrying value~~ of ~~assets~~federal and ~~liabilities~~ ~~that~~state ~~are~~research ~~not~~and ~~readily~~development tax ~~apparent~~credits, ~~from~~tax-exempt ~~other~~interest ~~sources. Actual results may differ from what we anticipate~~income, and ~~different assumptions or estimates about~~ the ~~future~~US ~~could~~production ~~change~~activities ~~our reported results~~deduction. ~~Management~~The ~~believes~~lower effective ~~critical~~tax ~~accounting~~rate ~~policies as disclosed in our Annual Report on Form 10-K~~ for the ~~year~~six months ended ~~December~~June 3130, ~~2006~~2008, ~~reflect~~compared to the ~~more~~same ~~significant~~period ~~judgments and estimates used~~ in ~~preparation of our financial statements. Management has discussed the development~~2007, ~~selection,~~was ~~and~~primarily ~~disclosure~~due ofto ~~these~~an ~~estimates~~increase ~~with~~in the ~~Audit~~US ~~Committee~~production ofactivities ~~Foundry’s~~deduction ~~Board of Directors. Management believes there have been no material changes to our critical accounting policies~~ and ~~estimates~~ ~~during~~a ~~the~~reduction ~~nine months ended September 30, 2007 compared with those discussed~~ in ~~our~~the ~~Annual~~impact ~~Report~~of ~~on Form 10~~stock-Kbased ~~for the year ended December 31~~compensation, ~~2006~~offset ~~with~~by the ~~exception~~expiration of ~~our accounting~~the ~~policy~~federal ~~for~~research ~~income~~and development ~~taxes as described below~~credit.

~~Income~~When ~~Taxes~~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.

WeManagement ~~adopted~~believes ~~Financial~~the ~~Accounting~~Company ~~Standards~~will ~~Board~~likely ~~(“FASB”)~~generate ~~Interpretation~~sufficient ~~No. 48,~~taxable ~~Accounting~~income ~~for Uncertainty~~ in ~~Income~~the ~~Taxes~~future to —realize anthe ~~interpretation~~tax ofbenefits ~~FASB~~arising ~~Statement~~from ~~No. 109,~~its ~~(“FIN~~existing ~~48”)~~net ondeferred ~~January 1,~~tax ~~2007.~~assets ~~FIN~~as ~~48 is an interpretation~~ of ~~FASB Statement 109~~June 30, ~~Accounting for Income Taxes~~2008, ~~and it~~ ~~seeks~~although tothere ~~reduce~~can ~~the~~be ~~diversity~~no inassurance ~~practice~~that ~~associated~~it ~~with~~will ~~certain~~be ~~aspects~~able ofto ~~measurement~~do ~~and recognition in accounting for income taxes~~so. ~~FIN~~A 48portion ~~prescribes~~or aall ~~recognition~~of ~~threshold and~~Foundry’s ~~measurement~~deferred ~~attribute for the financial statement recognition and measurement of a~~ tax ~~position that~~assets anrelating ~~entity takes or expects~~ to ~~take in a tax return. Additionally, FIN 48 provides guidance on de~~stock-~~recognition,~~based ~~classification,~~compensation ~~interest~~may ~~and~~not ~~penalties,~~ultimately ~~accounting~~be inrealized. ~~interim~~To ~~periods, disclosures,~~the ~~and~~extent ~~transition.~~the ~~Under~~deferred ~~FIN 48, an entity may only recognize or continue to recognize~~ tax ~~positions that~~benefit ~~meet~~is ~~a “~~more ~~likely~~ than ~~not”~~the ~~threshold.~~actual Intax ~~accordance~~benefit ~~with~~realized, ~~our~~the ~~accounting~~difference ~~policy, we~~may ~~recognize~~impact ~~accrued~~the ~~interest~~income ~~and~~tax ~~penalties~~expense ~~related~~if tothe ~~unrecognized~~Company ~~tax~~does ~~benefits~~not ashave a ~~component~~sufficient ofhypothetical ~~tax~~additional ~~expense.~~paid ~~This~~in ~~policy~~capital ~~did~~(“APIC”) ~~not~~pool ~~change~~under asSFAS a123R ~~result~~to ofabsorb ~~our~~that ~~adoption of FIN 48~~difference.

WeAt ~~recognize~~December 31, ~~deferred~~2007, ~~tax~~Foundry ~~assets~~had ~~based~~a onliability ~~differences~~for ~~between~~gross ~~the~~unrecognized ~~financial statement carrying amounts and the~~ tax ~~bases~~benefits of ~~assets and liabilities~~$16. ~~We record a valuation allowance to reduce our~~6 ~~deferred~~million, ~~tax~~of ~~assets~~which ~~to the amount that is more likely than not to be realized~~$6.9 million, ~~Significant management~~if ~~judgment~~recognized, iswould ~~required~~affect inthe ~~determining~~Company’s ~~whether~~effective ~~valuation allowances should be recorded against our deferred~~ tax ~~assets~~rate. During ~~Management assesses~~ the ~~likelihood~~six ~~that~~months ~~our~~ended ~~deferred tax assets will be realized against projected future taxable income or our ability to generate taxable income from specific sources~~June 30, ~~and to the extent that realization is not believed to be more likely than not~~2008, athere ~~valuation~~was ~~allowance~~no ismaterial ~~established.~~change Inin the ~~event~~amount ~~we determine that we are unable to realize some or all~~ of ~~our deferred tax assets in~~ the ~~future, an adjustment to our deferred tax assets~~ ~~would~~liability befor ~~necessary,~~gross ~~resulting~~unrecognized ~~in a charge to income in the period such determination is made. Likewise, if we later determine that it is more likely than not that our deferred~~ tax ~~assets would be realized, the previously provided valuation allowance would be reversed~~benefits. ~~Our net deferred tax~~ ~~assets as of September 30, 2007 and December 31, 2006 were $73.7 million and $74.6 million, respectively.~~

InAt ~~accordance with Statement of Financial Accounting Standards (“SFAS”) No.~~December ~~123 (revised 2004)~~31, ~~Share-Based Payment~~2007, ~~(“SFAS~~Foundry ~~123R”),~~had ~~we recorded~~ a ~~deferred~~liability ~~tax~~for ~~benefit~~accrued oninterest ~~certain stock-based~~and ~~awards~~penalties ~~associated~~related ~~with~~to the ~~our~~unrecognized ~~stock-based~~tax ~~compensation~~benefits ~~plans,~~of ~~including~~$1.8 million. ~~nonqualified~~During ~~stock options,~~the ~~but~~six ~~under~~months ~~current~~ended ~~accounting~~June 30, ~~standards~~2008, wethere ~~cannot~~was no ~~record~~material achange ~~deferred~~in ~~tax~~the ~~benefit~~total onamount ~~costs associated~~of ~~with~~the ~~incentive~~liability ~~stock~~for ~~options~~accrued interest and ~~employee~~penalties ~~stock purchase plan shares (qualified stock~~related ~~options).~~to ~~For~~the ~~qualified~~unrecognized ~~stock~~tax ~~options,~~benefits.

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

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

12. SUBSEQUENT EVENTS

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”).

we Pursuant ~~record~~to ~~tax~~the ~~benefit~~terms ~~only~~of in the ~~period~~Merger ~~when~~Agreement, ~~disqualifying~~each ~~dispositions~~share of common stock of the ~~underlying~~Company ~~stock~~(“Foundry ~~occur.~~Common ~~Accordingly,~~Stock”) as(other wethan ~~cannot~~shares ~~record~~owned ~~the~~by ~~tax~~Foundry ~~benefit~~or ~~for~~Brocade) ~~stock-based~~will ~~compensation~~be ~~expense~~converted into the ~~associated~~right ~~with~~to ~~qualified~~receive ~~stock~~$18.50 ~~options~~in ~~until~~cash ~~the~~plus ~~occurrence~~0.0907 shares of ~~future~~Brocade ~~disqualifying~~common ~~dispositions~~stock (“Brocade Common ofStock”). ~~the~~Options ~~underlying~~to ~~stock,~~purchase ~~our~~Foundry ~~future~~Common ~~quarterly~~Stock and ~~annual~~restricted ~~effective~~stock ~~tax~~units ~~rates~~of Foundry will be ~~subject to~~ ~~greater~~converted ~~volatility~~into ~~and,~~the ~~consequently,~~rights ~~our~~described ~~ability~~in tothe ~~estimate~~Merger ~~reasonably~~Agreement. ~~our~~Brocade ~~future~~has ~~quarterly~~announced ~~and~~that it ~~annual~~anticipates ~~effective~~financing ~~tax~~the ~~rates~~Merger isthrough ~~adversely~~a ~~affected.~~combination Inof ~~accordance~~cash ~~with~~on ~~SFAS~~hand ~~123R,~~(at weboth ~~recorded~~companies) ~~a net~~and ~~deferred~~approximately ~~tax~~$1.5 billion ~~asset~~of ~~for~~committed ~~the~~debt ~~book~~financing ~~compensation~~from ~~expense~~Bank ~~related~~of toAmerica ~~non-qualified~~and ~~stock~~Morgan ~~options, which~~Stanley ~~was~~Senior ~~approximately~~Funding, ~~$30~~Inc.~~5 million~~, atsubject ~~September 30,~~to ~~2007.~~customary Toterms ~~the~~and ~~extent~~conditions. ~~the~~Consummation ~~deferred~~of ~~tax~~the ~~benefit~~Merger is ~~more~~subject ~~than~~to ~~the~~customary ~~actual~~conditions, ~~tax~~including ~~benefit~~(i) adoption ~~realized,~~of the ~~difference~~Merger ~~may~~Agreement ~~impact~~by holders of a majority of the ~~income~~Foundry ~~tax~~Common ~~expense~~Stock ifoutstanding, ~~we do~~(ii) absence ~~not~~of ~~have~~any alaw ~~sufficient~~or ~~hypothetical~~order ~~additional~~prohibiting ~~paid~~the consummation inof ~~capital~~the Merger, and (~~“APIC”~~iii) expiration ~~pool~~or ~~under~~termination ~~SFAS~~of ~~123R~~the toHart-Scott-Rodino waiting ~~decrease~~period ~~additional~~and ~~paid-in~~certain ~~capital~~other regulatory approvals.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, including our expectations that our interest income will decline over the next several quarters, that our remaining cash, cash equivalents, short term investments and cash generated from operations will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our operations through at least the next 12 months, regarding our intention to vigorously defend ourselves in certain litigation, regarding our expectation that our operating expenses will increase modestly during the third quarter and fiscal year ended 2008, and regarding the impact of the recent auction market failures on our liquidity. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed in Part II, Item 1A. “Risk Factors.” Our recent announcement of the agreement for Brocade to acquire Foundry may intensify certain of these risks. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this document as well as in other documents we file from time to time with the SEC. All public reports filed by us with the SEC are available free of charge on our website at www.foundrynetworks.com or from the SEC at www.sec.gov as soon as practicable after we electronically file such reports with the SEC.

Recent Developments

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, (ii) absence of any law or order prohibiting the consummation of the Merger, and (iii) expiration or termination of the Hart-Scott-Rodino waiting period and certain other regulatory approvals.

Overview

Founded in 1996, we design, develop, manufacture, market and sell a comprehensive, end-to-end suite of high performance data networking solutions, including Ethernet Layer 2-7 switches and Metro and Internet routers. We sell our products and services worldwide through our own direct sales force, resellers and integration partners. Our 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.

Critical Accounting Policies and Use of Estimates

Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from what we anticipate, and different assumptions or estimates about the future could change our reported results. Management believes the critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007 reflect the more significant judgments and estimates used in the preparation of our financial statements. Management believes there have been no material changes to our critical accounting policies and estimates during the six months ended June 30, 2008 compared with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 with the exception of our accounting policy for valuation of investments and fair value measurement as described in Note 1, “Summary of Significant Accounting Policies” and estimates for valuation of our auction rate securities as described in Note 2, “Cash Equivalents and Investments” to Condensed Consolidated Financial Statements.

Results of Operations

Net Revenue

We offer products in two configuration platforms, a fixed configuration stackable and a flexible configuration chassis. A stackable has a fixed configuration that cannot be altered. A chassis uses a modular platform that can be populated and reconfigured with various management and line card modules as frequently as desired by the customer. For example, customers can use our chassis products at the edge of their network or reconfigure the chassis for use in the backbone or core of their network. Our selling prices ~~and gross margins~~ on chassis-based products are generally higher than our stackable products because of the flexible configuration offered by chassis-based products.

Net revenue information is as follows (dollars in thousands):

	Three Months Ended September 30,
	Three Months Ended June 30,
	2007					2006
	2008					2007
			% of Net					% of Net
	$		Revenue			$		Revenue			$ Change		% Change
Net revenue:
Product	$	~~136~~134,~~974~~843		8684	%	$	98120,~~968~~784		8384	%	$	3814,~~006~~059		3812	%
Service		2225,~~523~~836		1416	%		1922,~~846~~456		1716	%		23,~~677~~380		1315	%
Total net revenue	$	~~159~~160,~~497~~679		100	%	$	~~118~~143,~~814~~240		100	%	$	4017,~~683~~439		3412	%
Net product revenue:
Chassis	$	97,~~252~~087		7172	%	$	6685,~~309~~757		6771	%	$	3011,~~943~~330		4713	%
Stackable		3937,~~722~~756		2928	%		3235,~~659~~027		3329	%		72,~~063~~729		228	%
Total net product revenue	$	~~136~~134,~~974~~843		100	%	$	98120,~~968~~784		100	%	$	3814,~~006~~059		3812	%

	Nine Months Ended September 30,
	Six Months Ended June 30,
	2007					2006
	2008					2007
			% of Net					% of Net
	$		Revenue			$		Revenue			$ Change		% Change
Net revenue:
Product	$	~~372~~260,~~976~~705		8584	%	$	~~284~~236,~~320~~002		8385	%	$	8824,~~656~~703		3110	%
Service		6550,~~574~~029		1516	%		5643,~~920~~051		1715	%		86,~~654~~978		1516	%
Total net revenue	$	~~438~~310,~~550~~734		100	%	$	~~341~~279,~~240~~053		100	%	$	9731,~~310~~681		2911	%
Net product revenue:
Chassis	$	~~265~~191,~~965~~484		7173	%	$	~~188~~168,~~776~~714		6671	%	$	7822,~~149~~770		4213	%
Stackable		~~107~~69,~~011~~221		2927	%		9567,~~544~~288		3429	%		101,~~507~~933		113	%
Total net product revenue	$	~~372~~260,~~976~~705		100	%	$	~~284~~236,~~320~~002		100	%	$	8824,~~656~~703		3110	%

We manage our business based on four geographic regions: the Americas (primarily the United States); Europe, the Middle East, and Africa (“EMEA”); Japan; and Asia Pacific. Because some of our customers, such as the United States government and ~~multinational companies, span various~~ ~~geographic locations, we determine 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,
	2007			2006			2007			2006
Americas		70	%		63	%		69	%		62	%
EMEA		16	%		17	%		16	%		18	%
Asia Pacific		9	%		10	%		9	%		8	%
Japan		5	%		10	%		6	%		12	%

~~Net~~multinational ~~product revenue increased 38% and 31% in the three and nine months ended September 30~~companies, ~~2007,~~ ~~respectively,~~span ~~compared~~various togeographic ~~the same periods in 2006 primarily due to increased sales of our LAN switching and WAN router product families~~locations, ~~and~~we ~~expansion~~determine ofrevenue ~~our~~by ~~sales organization from 349~~geographic ~~sales~~region ~~personnel~~based inon the ~~third~~billing ~~quarter~~location of ~~2006 to 397 in~~ the ~~third quarter of 2007~~customer. Net product revenue from our chassis-based products improved due to greater volume shipments of our RX, SuperX, and XMR/MLX platforms for the enterprise and service provider markets. Revenue for the RX, SuperX and XMR/MLX platforms, along with the associated accessories, increased by ~~$35.8 million~~region ~~and~~as ~~$98.7 million in the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006. The increases were offset by~~ a ~~$3.7 million and $19.0 million decrease in revenue~~percentage for our older “JetCore” based BigIron and FastIron platforms for the three and nine months ended September 30, 2007, respectively, compared to the same period in 2006. Sales to the United States government accounted for approximately 22% of ~~total~~ net ~~revenue~~product for the third quarter of 2007, up from 20% in the third quarter of 2006 and grew approximately 44% in absolute dollars. Sales to the United States government for the nine months ended September 30, 2007 and 2006 accounted for approximately 17% of total net revenue, ~~but~~was ~~grew~~as ~~approximately 26% in absolute dollars. The~~follows: ~~increase in our overall product sales is mainly attributed to the greater volume of shipments for the three and nine months ended September 30, 2007, compared to the same periods in 2006.~~

Other than the United States government, no individual customer accounted for more than 10% of our net product revenue for the three and nine months ended September 30, 2007 and 2006.


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Americas		68	%		69	%		66	%		68	%
EMEA		21	%		17	%		21	%		16	%
Asia Pacific		8	%		8	%		9	%		9	%
Japan		3	%		6	%		4	%		7	%

~~Service~~Net product revenue ~~consists~~increased 12% and 10% in the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. This was primarily due to increased sales of our ~~revenue~~LAN ~~from~~switching ~~customer~~and ~~support~~MAN ~~contracts.~~router ~~Although~~products, wewhich experienced increased acceptance by both ~~sell~~enterprise and service ~~contracts~~provider ~~with~~customers. ~~terms~~In ~~ranging~~addition, the increase in sales was facilitated by the expansion of our sales organization from ~~one~~395 tosales ~~five~~personnel ~~years~~at June 30, ~~most~~2007 ~~service~~to ~~contracts~~484 ~~are~~at June ~~purchased~~30, ~~with~~2008. aNet ~~one~~product ~~year~~revenue ~~term.~~from ~~The~~our ~~13%~~chassis-based ~~and~~products ~~15%~~improved ~~increases~~primarily indue ~~service~~to ~~revenue~~greater volume inshipments of our XMR/MLX platforms for the service provider markets. We experienced a mix shift from stackable to chassis during three and ~~nine~~ six months ended ~~September~~June 30, ~~2007~~2008, ~~respectively,~~ compared to the same periods in ~~2006~~2007, ~~were~~primarily ~~due~~as ~~to service~~a ~~contract~~result ~~initiations~~of onan ~~new~~increase ~~product~~in ~~sales~~deployments ~~and~~within ~~renewals~~large ~~from~~customers who ~~our~~typically ~~growing~~buy ~~installed~~a ~~base~~greater percentage of ~~networking~~ ~~equipment~~chassis-based products. ~~Our~~Revenue ~~customer~~for ~~base~~the ~~grew~~RX, bySuperX ~~approximately~~and XMR/MLX 1chassis-based products,~~200~~ ~~new~~along ~~accounts~~with ~~from~~the ~~September~~associated accessories, increased 23% or $15.5 million to $81.8 million during the three months ended June 30, 2008 from $66.3 million during the ~~2006~~same period in 2007, and increased 24% or $30.6 million to ~~September~~$157.3 million during the six months ended June 30, 2008 from $126.7 million during the same period in 2007.

During the three and six months ended June 30, 2008, over the same periods in 2007, we experienced a modest decline in both our Americas and Japan net product sales, as a percentage of net product revenue. This shift in product sales from Americas and Japan to EMEA was primarily the result of the growth in our EMEA sales organization and greater geographical diversification within the EMEA region. Net product sales in the three and six months ended June 30, 2008 for the Asia Pacific region remained consistent, as a percentage of net product revenue, as compared to the same periods in 2007.

Other than the United States government, no individual customer accounted for 10% or more of our net product revenue for the three and six months ended June 30, 2008 and 2007. Sales to the United States government accounted for approximately 16% and 11% of total net product revenue during the three months ended June 30, 2008 and 2007, respectively, and increased approximately 61% in absolute dollars. Sales to the United States government accounted for approximately 17% and 15% of total net product revenue during the six months ended June 30, 2008 and 2007, respectively, and increased approximately 30% in absolute dollars. Sales to the United States government expanded during the three and six months ended June 30, 2008, compared to the same periods in 2007, primarily due to our investment in our Federal sales team and a larger percentage of Federal revenue coming from program spending.

Service revenue consists primarily of revenue from customer support contracts. Although we sell service contracts with either one or five year terms, most service contracts are purchased with a one year term. The 15% and 16% increase in service revenue in the three and six months ended June 30, 2008 as compared to the same periods in 2007, was due to service contract initiations on new product sales and renewals from our growing installed base of networking equipment. We added 1,354 new customers from June 30, 2007 to June 30, 2008.

Gross Margin

The following table presents gross margin and the related gross margin percentages (dollars in thousands):

	Three Months Ended September 30,										Nine Months Ended September 30,
	Three Months Ended June 30,										Six Months Ended June 30,
	2007					2006					2007					2006
	2008					2007					2008					2007
			Gross					Gross					Gross					Gross
	$		Margin %			$		Margin %			$		Margin %			$		Margin %
Gross margin:
Product	$	8183,~~942~~252		6062	%	$	5569,~~500~~089		5657	%	$	~~215~~160,~~112~~699		5862	%	$	~~158~~133,~~065~~170		56	%
Service		18,~~128~~240		8071	%		1617,~~440~~012		8376	%		5034,~~269~~250		7768	%		4832,~~446~~141		8575	%
Total gross margin	$	~~100~~101,~~070~~492		63	%	$	7186,~~940~~101		6160	%	$	~~265~~194,~~381~~949		6163	%	$	~~206~~165,~~511~~311		6159	%

~~Our cost of product revenue consists primarily of material, labor, freight, warranty costs,~~26 provisions for excess and obsolete inventory, and manufacturing overhead, which includes stock-based compensation. The increase in product gross margins as a percentage of net product revenue in the three and nine months ended September 30, 2007, compared to the same periods in 2006, was primarily due to the shift in sales from our lower margin stackables products to our higher margin chassis products, improved pricing and lower manufacturing costs achieved in our new product families as shipments achieved greater volume.

Our gross margins may be adversely affected by increased price competition, component shortages, increases in material or labor costs, excess and obsolete inventory charges, changes in channels of distribution, or customer, product and geographic mix. See also “Risk Factors — Our gross margins and average selling prices of our products have decreased in the past and may continue to decrease as a result of competitive pressures and other factors.”

Our cost of product revenue consists primarily of material, labor, freight, warranty costs, provisions for excess and obsolete inventory, and manufacturing overhead, which includes stock-based compensation. The increase in product gross margins for the three and six months ended June 30, 2008, as compared to the same periods in 2007, was primarily due to an improved pricing environment and product cost reductions. Improved pricing has been driven by favorable pricing related to our MLX product family and to a lesser extent improvements in other product families. In addition, we have been able to negotiate cost reductions with our contract manufacturers as our products have matured and the volumes have increased. Our product gross margin benefited by $0.2 million or 0.2% and $0.6 million or 0.5% from the sale of fully reserved inventory during the three months ended June 30, 2008 and 2007, respectively, and benefited by $0.6 million or 0.2% and $1.2 million or 0.5% during the six months ended June 30, 2008 and 2007, respectively.

Our cost of service revenue consists primarily of costs of providing services under customer support contracts including maintaining adequate spares inventory levels at service depots. In addition, these costs include materials, labor, and overhead which includes stock-based compensation. The decreases in service gross margin percentage in the three and six months ended June 30, 2008 over the same periods in 2007 was primarily due to the change in our allocation of technical support services costs and the expansion of our customer support infrastructure to support a larger and more diverse customer base. In prior periods, we allocated technical support costs between cost of service revenue and sales and marketing expense based on a percentage of direct labor hours related to repair work for customers under service contracts. During the first quarter of 2008, we recognized that the workload of our technical support services team had shifted, and they were devoting most of their time providing technical support. For this reason, we began to allocate all of the technical support group costs to cost of service revenue, and, as a result, we recorded an additional expense of $1.8 million and $3.5 million during the three and six months ended June 30, 2008, respectively, as compared to the same periods in 2007, which resulted in a decrease in our service-based gross margins. In addition, it has become necessary to make further investments in our support infrastructure, logistics capabilities and inventory to support our larger installed base of enterprise and service provider customers. Service gross margins typically experience variability due to the timing of technical support service initiations and renewals and additional investments in our customer support infrastructure.

Our gross margins may be adversely affected by increased price competition, component shortages, increases in material or labor costs, excess and obsolete inventory charges, changes in channels of distribution, or customer, product and geographic mix. See also “Risk Factors — Our gross margins and average selling prices of our products have decreased in the past and could decrease as a result of competitive pressures and other factors.”

Operating Expenses

The following table presents operating expenses (dollars in thousands):

	Three Months Ended September 30,													Nine Months Ended September 30,
	Three Months Ended June 30,													Six Months Ended June 30,
	2007					2006								2007					2006
	2008					2007								2008					2007
			% of Net					% of Net			%					% of Net					% of Net			%
	$		Revenue			$		Revenue			Change			$		Revenue			$		Revenue			Change
Research and development	$	1821,~~425~~925		1214	%	$	1617,~~740~~853		1412	%		1023	%	$	5743,~~528~~653		1314	%	$	5339,~~771~~103		1614	%		712	%
Sales and marketing		3846,~~425~~391		2429	%		3038,~~454~~470		2627	%		2621	%		~~116~~93,~~985~~527		2730	%		9678,~~069~~560		28	%		2219	%
General and administrative		10,~~271~~205		6	%		1011,~~714~~771		98	%		(413	%)		3222,~~975~~044		87	%		3322,~~890~~704		108	%		(3	%)
Other charges, net		60—		—			43,~~207~~067		42	%		(99100	%)		~~5,660~~—		1—	%		95,~~887~~600		32	%		(43100	%)

Research and development expenses consist primarily of salaries and related personnel expenses for engineers, ~~stock-based~~prototype ~~compensation~~materials, ~~expense~~consulting and testing costs, ~~prototype~~facility ~~materials~~costs, depreciation of equipment used in research and development activities, and ~~the~~beginning ~~cost~~in offiscal ~~facilities~~2008 management information service costs allocated from general and administrative expenses. Research and development expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 increased $14.71 million and $34.86 million, respectively, compared to the same periods in ~~2006~~2007. ~~Payroll~~The ~~expense~~increase ~~increased $1.9 million and $5.7 million~~ in ~~the~~research ~~three~~ and ~~nine months ended September 30, 2007, respectively, which was partially~~ ~~offset~~development byexpenses ~~a decrease in prototype material spending of $0.2 million and $2.2 million~~ for the three ~~and~~ ~~nine~~ months ended ~~September~~June 30, ~~2007~~2008, ~~respectively,~~ compared to the ~~same periods of 2006. In the~~ three months ended ~~September~~ June 30, 2007, ~~the payroll expense increase~~ was primarily due to ~~increased~~ ~~salary~~an ~~costs~~increase ~~due~~in tosalaries ~~increased~~of ~~headcount~~$2.1 million, ~~and~~payroll ~~salary~~related expenses ~~adjustments~~of ~~and~~$0.5 million, anbonus ~~increase in stock-based compensation~~ expense of $1.0.4 million., Inand ~~the~~stock ~~nine~~based ~~months~~compensation ~~ended~~of ~~September 30~~$0.4 million, ~~2007,~~which ~~the payroll~~largely ~~expense~~resulted ~~increase~~from ~~was~~growth ~~due~~in toour ~~increased~~research ~~salary~~and ~~costs~~development headcount, ~~partially~~salary increases ~~offset~~and byexpenses aassociated ~~decrease~~with in additional stock-based ~~compensation~~awards ~~expense~~granted ofin $12007.~~7 million.~~ ~~Included~~Our inresearch and ~~the~~development headcount increased ~~salary~~to ~~costs~~294 ~~for~~at ~~the nine months ended September~~June 30, ~~2007~~2008 ~~were~~from ~~special~~232 ~~one-time~~at ~~bonuses recorded in the quarter ended March~~June 3130, 2007 ~~of $3~~.~~4 million,~~ ofIn ~~which $1.6 million related~~ addition to the ~~suspension~~increase ofin our ~~ESPP~~salaries and ~~$1.8 million~~ related topersonnel ~~our~~expenses, ~~assumption~~facilities ofexpense ~~employee~~increased ~~409A taxes associated with 2006 exercises of~~by ~~stock~~$0.4 million ~~option~~for ~~grants~~management ~~with~~information ~~revised~~services ~~measurement~~costs ~~dates.~~allocated ~~Our~~from ~~research~~general and ~~development headcount~~administrative ~~increased~~expenses, ~~from~~offset ~~212~~ in ~~the~~part ~~third~~by ~~quarter~~a offavorable ~~2006~~decrease ~~to 239~~ in ~~the~~depreciation ~~third~~expense ~~quarter~~ of ~~2007~~$0.5 million ~~The~~related ~~decreases~~to inaging ~~prototype~~test ~~material~~equipment ~~were~~that ~~due~~has tobeen ~~the~~fully ~~introduction of the RX, XMR/MLX in late 2005 and early 2006~~depreciated.

Sales and marketing expenses consist primarily of salaries, stock-based compensation expense, commissions and related expenses for personnel engaged in marketing, sales and customer service functions, as well as trade shows, advertising, promotional expenses and the cost of facilities. Sales and marketing expenses for the three and nine months ended September 30, 2007 increased $8.0 million and $20.9 million, respectively, compared to the same periods of 2006. Sales and marketing department payroll, fringe benefits and commission expenses increased by $8.0 million and $18.6 million for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006. Commission expense increased $4.1 million and $10.4 million for the three and nine months ended September 30, 2007, respectively, due to the increase in sales revenue as compared to the same periods in 2006. The ~~payroll and fringe benefits expenses increased as a result of the~~ increase in ~~our~~research ~~sales~~ and ~~marketing~~development headcount from 407 employees in the third quarter of 2006 to 467 in the third quarter of 2007. Included in the payroll and fringe benefits increase for the nine months ended September 30, 2007 were special one-time bonuses recorded in the quarter ended March 31, 2007 of $3.2 million, of which $2.4 million related to the suspension of our ESPP and $0.8 million related to our assumption of employee 409A taxes associated with 2006 exercises of stock option grants with revised measurement dates. The increases in payroll costs were partially offset by a decrease in stock-based compensation expense of $3.4 million for the nine months ended September 30, 2007, as compared to the same period of 2006. Travel related expenses ~~increased by $1.1 million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008, as compared to the ~~same~~six ~~period in 2006. In addition, the carrying costs associated with the level of evaluation and demonstration inventory at customer sites increased by $0.8 million for the nine~~ months ended ~~September 30, 2007, as~~ ~~compared to the same period of 2006.~~

~~General and administrative expenses consist primarily of salaries and related expenses for~~27 executive, finance and administrative personnel, stock-based compensation expense, facilities, bad debt, legal fees, accounting fees, and other general corporate expenses. General and administrative expenses for the three and nine months ended September 30, 2007 decreased $0.4 million and $0.9 million, respectively, compared to the same periods of 2006, primarily due to decreases in legal costs and bad debt expenses, partially offset by increases in accounting and consulting service fees and payroll expenses. Legal costs decreased by $2.1 million and $4.3 million for the three and nine months ended September 30, 2007, respectively, compared to the same periods of 2006, primarily due to lower patent litigation expenses in 2007. Bad debt expenses decreased by $0.9 million and $1.3 million for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006, primarily due to lower account receivables write offs in 2007. Consulting services fees increased $0.9 million and $1.1 million for the three and nine months ended September 30, 2007, respectively, as compared to the same periods in 2006, primarily due to increased costs relating to our upgrade of our ERP system. In

~~the three months ended September~~June 30, 2007, ~~payroll~~was ~~expenses~~primarily ~~increased~~due ~~$0.7 million~~an asincrease ~~compared to~~in ~~the~~salaries ~~same period~~ of ~~2006~~$4.0 million, ~~Headcount~~payroll ~~increased~~related expenses ~~from 74 at the end~~ of ~~September~~$1.0 30million, ~~2006~~stock tobased 82compensation ~~at the end~~ of ~~September~~$1.9 30million, ~~2007.~~and Inhigher ~~the~~facilities and ~~nine~~management ~~months~~information ~~ended~~services ~~September 30,~~allocation ~~2007,~~expense ~~payroll~~of ~~expenses increased~~ $21.0 million ~~due to increased salary costs~~, ~~partially~~ offset in part by a favorable decrease in ~~stock-based compensation~~depreciation expense ~~for the nine months ended September 30, 2007~~ of $0.7 million. ~~Included~~and inbonus ~~the increased~~expense. ~~salary~~During ~~costs for~~ the ~~nine~~first ~~months~~quarter ~~ended~~of ~~September 30~~2007, ~~2007~~we ~~were~~recorded a special one-time ~~bonuses~~ ~~recorded~~bonus ~~in the quarter ended March 31, 2007~~ of $03.74 million, of which $01.36 million related to the suspension of our 1999 Employee Stock Purchase Plan (“ESPP”) and $01.48 million related to our assumption of employee 409A taxes associated with 2006 exercises of stock option grants with revised measurement dates. ~~Accounting~~We ~~fees~~believe that ~~increased~~investments ~~$1.8 million~~in ~~for~~research ~~the~~and ~~nine~~development, ~~months~~including ~~ended~~the ~~September 30~~retention, ~~2007~~recruiting asand ~~compared~~hiring toof engineers ~~the~~and ~~same~~spending ~~period in~~on ~~2006~~prototype ~~due~~development tocosts ~~increased~~are ~~costs~~critical ~~relating~~to our ability to remain competitive in the ~~extension~~marketplace, ofand we expect our ~~fiscal~~spending ~~year~~on ~~2006~~research ~~audit~~and development will grow modestly in absolute dollars during the third quarter of 2008.

~~Other~~Sales ~~charges~~and marketing expenses consist primarily of salaries and related personnel expenses, stock-based ~~net~~compensation expense, ~~consist~~commissions and related expenses for personnel engaged in marketing, sales and customer service functions, as well as expenses associated with trade shows and seminars, advertising, recruiting, travel, cost of facilities, expenses for maintaining customer evaluation inventory at customer sites and beginning in fiscal 2008 management information service costs allocated from general and administrative expenses. Sales and marketing expenses for the three and six months ended June 30, 2008 increased $7.9 million and $15.0 million, respectively, compared to the same periods in 2007. The increase in sales and marketing expenses for the three months ended June 30, 2008, compared to the three months ended June 30, 2007, was primarily due to an increase in salaries of ~~litigation~~$4.5 million, ~~settlement~~payroll ~~charges~~related expenses of $1.0 million, stock based compensation of $0.6 million and ~~charges~~commission ~~relating~~expenses of $2.0 million, which resulted from salary increases, growth in our sales and marketing headcount, additional stock-based awards granted in 2007 and increase in revenue for the three months ended June 30, 2008, compared to the ~~professional~~same ~~fees~~period in prior year. Our sales and ~~other~~marketing headcount increased to 566 at June 30, 2008 from 459 at June 30, 2007. In addition to the increase in salaries and related personnel expenses, travel related expenses increased by $0.7 million due to the expansion of our sales force, and facilities expense increased by $1.0 million for management information services costs allocated from general and administrative expense, offset by a reduction of $0.4 million for the carrying costs associated with the ~~investigation~~levels of ~~stock~~evaluation ~~option~~and ~~grants~~demonstration inventory held at customer sites and a decrease of $1.8 million from allocating costs from technical support to ~~our~~cost of service ~~employees~~revenue as discussed under “Gross Margin” above.

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

The increase in sales and marketing expenses for the six months ended June 30, 2008, compared to the six months ended June 30, 2007, was primarily due an increase in salaries of $8.3 million, payroll related expenses of $2.7 million, stock based compensation of $2.4 million, and commission expenses of $4.6 million. In addition, our recruiting and travel related expenses increased $1.0 million and $1.3 million, respectively, to support the increase in our sales organization, and facilities allocation expense increased by $1.8 million primarily for the allocation of management information services costs. The increases in expense were offset by a decrease in advertising expense of $0.5 million, a reduction for the carrying costs associated with the levels of evaluation and demonstration inventory held at customer sites of $1.0 million, a decrease of technical support costs of $3.5 million due to allocating costs from technical support to cost of service revenue as discussed under “Gross Margin” above, and due to a reduction in bonus expense. We recorded a special one-time bonus in the first quarter of 2007, of which $2.4 million related to the suspension of our ESPP and $0.8 million related to our assumption and reimbursement of employee 409A taxes associated with exercises of certain stock options in 2006 with revised measurement dates. We expect that sales and marketing expenses will continue to grow in absolute dollars, but at a slower rate than in the first quarter of 2008.

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, facilities, bad debt, legal, and other general corporate expenses. General and administrative expenses for the three and six months ended June 30, 2008 decreased by $1.6 million and $0.7 million, respectively, compared to the same periods in 2007. The decrease in general and administrative expenses for the three months ended June 30, 2008, compared to the three months ended June 30, 2007, was primarily due to a reduction in accounting fees of $0.9 million, legal expenses of $0.9 million, and allocation of costs from management information services group to other departments beginning the first quarter of 2008, which resulted in a reduction of general and administrative expenses of $1.8 million, offset by an increase in salaries of $0.5 million and bonuses of $0.4 million. The increase in salaries resulted from growth in our general and administrative headcount and salary increases. Our general and administrative headcount increased to 96 at June 30, 2008 from 80 at June 30, 2007.

The decrease in general and administrative expenses for the six months ended June 30, 2008, compared to the six months ended June 30, 2007, was primarily due to a reduction in accounting fees of $0.7 million, legal service fees of $1.3 million, allocation of costs from management information services group to other departments, which resulted in a reduction of general and administrative expenses of $3.1 million, and a decrease in bonus expense. We recorded a special one-time bonus in the first quarter of 2007, of which $0.3 million related to the suspension of our ESPP and $0.4 million related to our assumption of employee 409A taxes associated with 2006 exercises of stock option grants with revised measurement dates. The decreases in general and administrative expenses were offset by an increase in salaries and payroll related expenses of $1.1 million and $0.6 million, respectively, additional costs associated with consulting services to support our ERP system and other information systems projects of $0.7 million and increased state franchise and property taxes of $0.7 million. We expect general and administrative

expenses to grow in absolute dollars for the third quarter of 2008 due to the increase in legal costs related to the proposed acquisition by Brocade.

Other charges, net decreased by $3.1 million and $5.6 million during the three and six months ending June 30, 2008, as compared to the same periods in 2007. Other charges in 2007, primarily related to expenses for professional fees and other costs associated with the investigation of stock option grants to our employees.

Interest and Other Income, Net

We earn interest income on funds maintained in interest-bearing money market and investment accounts. We recorded interest and other income of $116.4 million and $911.10 million for the three months ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007, respectively. We recorded interest and other income of $3215.3 7 million and $2421.53 million for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007, respectively. ~~These~~The decrease ~~increases~~in ~~were~~interest ~~primarily~~and ~~due~~other toincome ~~increased~~in ~~average~~the ~~investment~~three ~~balances~~ and ~~higher~~ ~~interest~~six ~~rates.~~months ~~Our~~ended ~~total~~June 30, ~~cash~~2008, ~~and~~compared ~~investments~~to the ~~increased~~same ~~$105.5 million,~~period orin ~~13%~~2007, ~~from September 30,~~was ~~2006~~primarily due to ~~September 30,~~lower ~~2007~~interest rates. In the ~~nine~~three ~~months~~and six months ended ~~September~~June 30, 2007, we recorded an expense of $0.4 million in interest and other income, net relating ~~related~~ to the extension of the exercise date for stock options held by certain former employees who were not permitted to exercise their stock options until ~~the~~certain ~~completion~~conditions ofwere ~~our~~met. ~~restatement~~Our oftotal cash ~~our financial statements~~ and ~~our public~~investments ~~reporting~~increased ~~obligations to the U~~$29.S.3 million, ~~Securities~~or ~~and~~3%, ~~Exchange~~from ~~Commission had been met. As of September~~June 30, 2007, ~~there~~to ~~are~~June 30, ~~no remaining costs associated with the extension of these exercise dates~~2008. We believe our interest income will gradually decline ~~over~~during the ~~next~~remainder ~~several~~of ~~quarters~~2008 as ~~a result~~our portfolio of investments ~~the~~rolls ~~recent~~out ~~Federal~~of ~~Reserve~~higher ~~interest~~yielding ~~rate~~instruments ~~reductions~~ and asinto wenew ~~continue~~instruments toyielding ~~execute~~a ~~on our~~market ~~share~~rate ~~repurchase~~of ~~program~~interest.

Provision for Income Taxes

Our interim effective income tax rate is based on our best estimate of our annual effective income tax rate. The effective income tax rates for the three months ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~ 2007 were 38% and 3639%, respectively. The effective income tax rates for the ~~nine~~six months ended ~~September~~ June 30, 2008 ~~2007~~ and ~~2006~~2007 were 3837% and 4039%, respectively. These rates reflect applicable federal and state tax rates, offset primarily by the tax impact of federal and state research and development tax credits, ~~export sales incentives, and~~ tax-exempt interest income, and the US production activities deduction. The ~~higher~~ lower effective tax rate for the ~~three~~six months ended ~~September~~June 30, ~~2007~~2008 compared to the ~~prior~~same ~~year~~period ~~was~~in 2007, was primarily due to ~~decreased~~an ~~reserves~~increase ~~related to~~in the ~~expired~~US ~~statute~~production ofactivities ~~limitations.~~deduction ~~The~~and ~~lower~~a ~~effective~~reduction ~~tax~~in ~~rate for~~ the ~~nine months ended~~ ~~September 30, 2007 compared to the prior year was primarily due to the decreased~~ impact of stock-based compensation, ~~and~~offset by the ~~extension~~expiration of the federal research and development credit~~, partially offset by reduced export incentive benefits~~.

When an employee exercises a stock option issued under a nonqualified plan, or has a disqualifying disposition related to a qualified plan, we receive 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 we 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, our future quarterly and annual effective tax rates will be subject to greater volatility and, consequently, our ability to estimate reasonably our future quarterly and annual effective tax rates will be adversely affected.

Subsequent to the adoption of FIN 48 as of January 1, 2007, there was a reduction in unrecognized tax benefits of $1.8 million recorded under FIN 48 resulting from the lapse of the applicable statute of limitations.

Liquidity and Capital Resources

~~Cash~~As ~~and~~of ~~investments~~June 30, ~~increased~~2008, we held $5977.21 million ~~from~~of ~~December 31,~~municipal ~~2006~~note toinvestments ~~September 30~~at fair value, ~~2007~~which ~~primarily~~is ~~due~~net ~~to cash generated from operations~~ of $576.30 million in temporary unrealized losses. ~~Cash~~Each ~~provided~~of bythese ~~operating~~notes operates with an auction ~~activities~~reset ~~was~~feature (“auction rate securities”) and have underlying assets that are primarily ~~attributable~~student loans. toAs ~~net~~a ~~income~~result of ~~$52.3 million~~the illiquidity in the auction rate market, ~~plus~~actual ~~adjustments~~market ~~for~~prices ~~non-cash~~or relevant ~~charges,~~observable ~~including~~inputs ~~$32~~were not readily available to determine the fair value of our auction rate securities.~~7 million~~ An auction failure means that the parties wishing to sell their securities could not do so as a result of ~~stock-based~~a ~~compensation~~lack ~~expense,~~of $3buying demand.~~1 million~~ ofThe ~~inventory~~current market conditions required us to use ~~provisions~~discounted ~~and~~cash-flow $8valuation models that depend on significant unobservable inputs to value our auction rate securities.~~4 million~~ ofUnobservable ~~depreciation~~inputs ~~and~~are ~~amortization,~~inputs ~~partially~~that ~~offset~~reflect byour aassumptions ~~net~~about ~~increase~~the assumptions market participants would use in ~~operating~~ ~~assets~~pricing ~~and~~the ~~liabilities~~securities ofbased ~~$28~~on the best information available in the circumstances.7 Our auction rate securities were valued based on Level 3 inputs at June ~~million~~30, ~~and~~2008 anfrom ~~increase~~Level in2 ~~deferred~~inputs ~~tax~~at ~~assets~~December 31, 2007. The fair value of $our auction rate securities based on Level 3.2 inputs represented approximately 8% of our cash, cash equivalents and ~~million~~investment portfolio.

~~Inventories~~The ~~were~~significant unobservable inputs that we used to determine the value of our auction rate securities included a discount rate of interest based on the underlying credit rating, insurance on the instrument, underlying collateral, ability to restructure and expected time to resolution. We validated the model by benchmarking the valuation with securities having similar features. Based on the valuation model, we recorded an unrealized comprehensive loss of approximately $422.90 million and $346.90 million asduring ofthe ~~September 30,~~three ~~2007~~ and ~~December~~six months ended June 3130, ~~2006~~ 2008, respectively. ~~During~~The ~~the~~additional unrealized ~~first~~comprehensive loss recorded during the three ~~quarters~~months ofended ~~2007~~June 30, we2008 ~~increased~~was ~~our~~based ~~inventory~~on changes ~~levels~~in ~~to support~~assumptions aused ~~broader~~in ~~product~~the ~~offering~~valuation ~~and~~models ~~larger~~primarily ~~installed~~due ~~customer~~to ~~base.~~the ~~Inventory~~change ~~turnover~~in ~~was~~the expected ~~approximately~~time ~~6.5~~of resolution and ~~6.6~~valuation as of ~~September 30,~~instruments ~~2007~~containing ~~and~~a ~~December 31,~~lower ~~2006,~~percentage ~~respectively~~of FFELP loans within the underlying collateral.

~~Accounts~~There ~~receivable,~~is ~~net~~no ofassurance ~~allowance~~that ~~for~~auctions ~~doubtful~~on ~~accounts~~the ~~and~~auction ~~provision~~rate ~~for~~securities ~~sales~~in ~~returns,~~our investment portfolio ~~increased~~will ~~$38~~succeed.~~8 million~~ ~~during~~As ~~the~~a ~~three~~result ~~quarters~~ of ~~2007.~~the ~~Our~~auction ~~accounts~~failures, ~~receivable~~our ability to liquidate and ~~days~~fully ~~sales~~recover the ~~outstanding~~carrying ~~(“DSO”)~~value ~~are~~of ~~primarily~~our ~~affected~~remaining byauction ~~shipment~~rate ~~linearity,~~securities ~~collections~~in ~~performance,~~the ~~and~~near term may be limited or not ~~timing~~exist. As of ~~support~~June 30, ~~contract~~2008, ~~renewals~~$74.6 million ~~DSO,~~of ~~calculated~~our auction rate securities were held as long-term investments based on ~~annualized~~an ~~revenue~~estimated ~~for~~date ~~the~~when ~~most recent~~liquidity ~~quarter~~returns ~~ended~~to ~~and~~these ~~net~~securities. ~~accounts~~As ~~receivable~~of asJune 30, 2008, $57.4 million of ~~the~~our ~~balance~~auction ~~sheet~~rate ~~date~~securities had AAA credit rating, ~~was~~and 63$19.7 ~~days~~million ~~and~~had 50AA ~~days~~credit ~~for~~rating. We continue to monitor the ~~three~~market ~~months~~for ~~ended~~auction asrate securities and consider its impact, if any, on the fair value of ~~September 30~~our investments. If the current market conditions further deteriorate, ~~2007~~the issuers are unable to successfully close future auctions and/or ~~December 31,~~if ~~2006~~their credit ratings decline, ~~respectively.~~we may in the future be required to record an other-than-

~~In July 2007, our Board of Directors approved a share repurchase program authorizing us to~~29 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 our stock expires on December 31, 2008. During the three months ended September 30, 2007, we repurchased 2.1 million shares of our common stock via open market purchases at an average price of $17.84 per share. The total purchase price of $38.0 million was reflected as a decrease to retained earnings in the three months ended September 30, 2007.

The amount of capital we will need in the future will depend on many factors, including our capital expenditure and hiring plans to accommodate future growth, research and development plans, the levels of inventory and accounts receivable that we maintain, future demand for our products and related cost and pricing, the level of exercises of stock options and stock purchases under our employee stock purchase plan, and general economic conditions. Although we do not have any current plans or commitments to do so, we do from time to time consider strategic investments to gain access to new technologies or the acquisition of products or businesses complementary to our business. Any acquisition or investment may require additional capital. We have funded our business primarily through our operating activities and we believe that our cash and cash equivalents, short-term investments and cash generated from operations will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our operations through at least the next 12 months.

temporary loss in the income statement on these securities. During the second quarter of 2008, issuers of auction rate securities, similar to those held by us, began to call certain of their auction rate securities at par. We were notified that one of our auction rate securities, representing approximately 3% of our auction rate portfolio, was called at par, payable on the next reset date during the third quarter of 2008. Notwithstanding this notification, there is no guarantee that any of our auction rate portfolio will be called at par or otherwise regain liquidity.

We believe that we will be able to liquidate our auction rate securities without significant loss primarily due to the government guarantees of a large portion of the underlying securities, and we currently believe these securities are temporarily impaired primarily due to the expected time of resolution of instruments containing a lower percentage of FFELP loans within the underlying collateral, changes in interest rate assumptions and liquidity factors. The impairment is not the result of our concerns regarding the credit quality. In addition, we have the ability and intent to hold these investments until recovery of its amortized cost. However, it could take until 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 $77.1 million of auction rate securities held as of June 30, 2008 until market stability is restored with respect to these securities. We believe that, even allowing the possible requirement to hold all such securities for an indefinite period of time, our remaining cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs and to execute our current business plan.

Cash, cash equivalents, and investments decreased by $15.5 million during the six months ended June 30, 2008, from December 31, 2007, primarily due to the $75.6 million repurchase of common stock, offset by cash generated from operations of $54.8 million and the receipt of $12.5 million of cash from issuances of common stock to employees under stock plans. Cash provided by operating activities was primarily attributable to net income of $32.2 million, plus adjustments for non-cash charges, including $25.2 million of stock-based compensation, $5.1 million of depreciation and amortization and $4.3 million of inventory provisions. The increases were offset by an increase in deferred tax assets of $5.9 million and a net decrease in operating assets and liabilities of $4.9 million.

Inventories were $49.5 million and $42.4 million as of June 30, 2008 and December 31, 2007, respectively. Inventories were higher at June 30, 2008 due to a broader product offering to support our sales efforts and a larger installed customer base. Inventory turnover was approximately 5.5 and 7.6 as of June 30, 2008 and December 31, 2007, respectively. The reduction in inventory turnover coincides with the build up of inventory to support our sales efforts, our desire to fill more orders from on-hand inventory, and our larger installed customer base.

Accounts receivable, net of allowances, decreased $11.9 million during the six months ending June 30, 2008 from December 31, 2007. Our accounts receivable and days sales outstanding (“DSO”) are primarily affected by shipment linearity, customer location, collections performance, and timing of support contract renewals. DSO, calculated based on annualized revenue for the most recent quarter ended and net accounts receivable as of the balance sheet date, was 63 days and 65 days as of June 30, 2008 and December 31, 2007, respectively.

In July 2007, our Board of Directors approved a share repurchase program authorizing us to purchase up to $200 million of our common stock. In April of 2008, our Board of Directors approved an expansion to the share repurchase program authorizing us to repurchase an additional $100 million of our common stock. This approval expands the share repurchase authorization to $300 million. 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. However, in light of our proposed acquisition by Brocade, we do not currently anticipate buying back any additional shares under the share repurchase program. During the six months ended June 30, 2008, we repurchased 5.6 million shares of our common stock through open market purchases at an average price of $13.40 per share. The total purchase price of $75.6 million was reflected as a decrease in retained earnings in the six months ended June 30, 2008.

The amount of capital we will need in the future will depend on many factors, including our capital expenditure and hiring plans to accommodate future growth, research and development plans, the levels of inventory and accounts receivable that we maintain, future demand for our products and related cost and pricing, the level of exercises of stock options and stock purchases under our employee stock purchase plan, and general economic conditions. Although we do not have any current plans or commitments to do so, from time to time, we do consider strategic investments to gain access to new technologies or the acquisition of products or businesses complementary to our business. Any acquisition or investment may require additional capital. We have funded our business primarily through our operating activities, and we believe that our cash and cash equivalents, short-term investments and cash generated from operations will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our operations through at least the next 12 months.

Off-Balance Sheet Arrangements and Contractual Obligations

Contractual Commitments

The following table summarizes our contractual obligations as of ~~September~~June 30, ~~2007~~2008 and the ~~effect~~ effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

			Less Than		1-3		3-5		More Than
	Total		1 Year		Years		Years		5 Years
Operating leases of facilities	$	13,537	$	5,430	$	6,495	$	1,612	$	—
Operating leases of facilities and equipment	$	13,684	$	5,942	$	7,306	$	434	$	2
Purchase commitments with contract manufacturers		6765,~~989~~235		6765,~~989~~235		—		—		—
Total contractual cash obligations	$	8178,~~526~~919	$	7371,~~419~~177	$	67,~~495~~306	$	~~1,612~~434	$	—2

For purposes of the above table, contractual obligations for the purchase of goods or services are defined as agreements that are enforceable, legally binding on us, and that may subject us to penalties if we cancel the agreement. Our purchase commitments are based on our short-term manufacturing needs and are fulfilled by our vendors within short time horizons.

The table above excludes liabilities under FASB Interpretation No. 48, “Accounting for Uncertainty in Income taxes” as we are unable to reasonably estimate the ultimate amount or timing of settlement. There were no material changes to the liabilities under FASB Interpretation No. 48. Refer to Note 11. “Income Taxes” in the Notes to Condensed Consolidated Financial Statements for further discussion.

Off-Balance Sheet Arrangements

~~Other~~We ~~than operating leases of facilities and purchase commitments with contract manufacturers, we~~ do not maintain any off-balance sheet transactions, arrangements, or obligations that are reasonably likely to have a ~~material~~ current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material.

Indemnifications

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, 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 condensed consolidated financial statements as of ~~September~~June 30, ~~2007~~2008 or December 31, ~~2006~~2007 related to these indemnifications.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management believes there have been no material changes to our quantitative and qualitative disclosures about market risk during the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, ~~2006.~~2007 except as mentioned below:

As of June 30, 2008, we had investments of approximately $77.1 million in auction rate securities (“ARS”). During the six months ended June 30, 2008, the market conditions for these ARS deteriorated due to the uncertainties in the credit markets. As a result, we were not able to sell our ARS in the auction market during the six months ended June 30, 2008. See “Part I, Item II – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.

Item 4. Controls and Procedures

Limitations on Effectiveness of Controls. ~~Management~~Our ismanagement, ~~responsible~~with ~~for~~the ~~establishing~~participation ~~and maintaining an adequate system~~ of ~~internal~~our ~~controls over financial reporting. The system contains~~chief ~~monitoring~~executive ~~mechanisms,~~officer and ~~actions~~chief ~~deemed~~financial ~~appropriate~~officer, byevaluated ~~management~~the ~~are~~effectiveness ~~taken~~of toour ~~address~~disclosure ~~deficiencies.~~controls ~~The~~and ~~Audit~~procedures ~~Committee,~~pursuant ~~which~~to isRule 13a-15 ~~composed~~under ~~entirely~~the ofSecurities ~~directors~~Exchange ~~who~~Act ~~are~~of ~~not~~1934 ~~our~~as ~~officers~~of the orend ~~employees,~~of ~~provides oversight to~~ the ~~financial~~period ~~reporting~~covered ~~process.~~by ~~Even~~this anQuarterly ~~effective~~Report ~~internal control~~on ~~system,~~Form no10-Q. ~~matter~~In ~~how~~designing ~~well~~and ~~designed,~~evaluating ~~has~~the disclosure ~~inherent~~controls ~~limitations~~and —procedures, ~~including~~management ~~the~~recognizes ~~possibility of~~that ~~human~~any ~~error~~controls and ~~the~~procedures, ~~circumvention~~no matter orhow ~~overriding~~well ofdesigned ~~controls —~~ and ~~therefore~~operated, can provide only ~~provide~~ reasonable assurance ~~that~~of ~~financial~~achieving ~~statements~~the desired ~~are~~control ~~free of material errors~~objectives. ~~Further~~In addition, ~~because~~the design of ~~changes~~ indisclosure ~~conditions,~~controls ~~the~~and ~~effectiveness~~procedures ofmust reflect the ~~system~~fact ofthat ~~internal~~there ~~controls~~are ~~may~~resource ~~vary~~constraints ~~over time~~ and no ~~projections~~that ~~can~~management beis ~~made~~required to ~~future~~apply ~~periods.~~its judgment in evaluating

~~Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of September~~31 30, 2007, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and Form 10-Q.

Changes in Internal Control over Financial Reporting. There were no significant changes to our internal controls during the quarter ended September 30, 2007 that have materially affected our internal controls over financial reporting.

the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of June 30, 2008, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and Form 10-Q, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

See Note 36, “Commitments and Contingencies — Litigation” to Condensed Consolidated Financial Statements which is incorporated herein by reference.

Item 1A. Risk Factors

The risk factors set forth below include any material changes to, and supersede the description of, the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2006~~2007.

Our business and results of operations may be affected by our announced acquisition by Brocade Communication Systems, Inc.

On July 21, 2008, we entered into an agreement to be acquired by Brocade. The pending acquisition could have an adverse effect on our revenue in the near term if customers delay, defer, or cancel purchases pending consummation of the planned acquisition. While we are attempting to mitigate this risk through communications with our customers, current and prospective customers could be reluctant to purchase our equipment, software and/or services due to potential uncertainty about the direction of the combined company’s product offerings and its support and service of existing products. To the extent that the pending acquisition creates uncertainty among customers or Foundry employees such that one large customer, or a significant group of small customers, delays purchase decisions pending consummation of the planned acquisition, or employees depart the Company or become distracted, our results of operations and ability to operate profitably could be negatively affected. Decreased revenue and a failure to be profitable could have a variety of adverse effects, including negative consequences to our relationships with, and ongoing obligations to, customers, suppliers, business partners, and others with whom we have business relationships. In addition, our quarterly operating results could be substantially below the expectations of market analysts, which could cause a decline in our stock price.

We may suffer additional consequences if the acquisition by Brocade were not to be completed.

If the planned acquisition by Brocade were not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

	•		We would not realize the benefits we expect from becoming a part of a combined company with Brocade, including the potentially enhanced financial and competitive position;

	•		Activities relating to the acquisition and related uncertainties may divert our management’s attention from our day-to-day business and cause disruptions among our employees and to our relationships with customers and business partners, thus detracting from our ability to grow revenue and minimize costs and possibly leading to a loss of revenue and market position that we may not be able to regain if the transaction does not occur;

	•		The market price of our common stock could decline following an announcement that the acquisition has been abandoned, to the extent that the current market price reflects a market assumption that the acquisition will be completed;

	•		We could be required to pay Brocade a termination fee and provide reimbursement to Brocade for certain costs incurred;

	•		We would remain liable for our costs related to the transaction, such as legal and accounting fees and a portion of the investment banking fees;

	•		We may not be able to continue our present level of operations and therefore would have to scale back our present level of business and consider additional reductions in force; and

	•		We may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.

Consummation of the proposed acquisition is subject to customary conditions, including (i) adoption of the merger agreement by holders of a majority of the Foundry common stock outstanding, (ii) absence of any law or order prohibiting the consummation of the merger, and (iii) expiration or termination of the Hart-Scott-Rodino waiting period and certain other regulatory approvals.

In connection with the proposed acquisition, we expect to file a proxy statement/prospectus with the Securities and Exchange Commission. The proxy statement/prospectus will be mailed to all holders of our common stock and will contain important information about us, Brocade and the proposed merger, risks relating to the merger and the combined company, and related matters. We urge all of our stockholders to read the proxy statement/prospectus when it becomes available.

Intense competition in the market for networking solutions could prevent us from maintaining or increasing revenue and sustaining profitability.

The market for networking solutions is intensely competitive. In particular, Cisco ~~Systems, Inc. (“Cisco”)~~ maintains a dominant position in this market and several of its products compete directly with our products. Cisco’s substantial resources and market dominance have enabled it to reduce prices on its products within a short period of time following the introduction of these products, which typically causes its competitors to reduce prices and, therefore, the margins and the overall profitability of its competitors. Purchasers of networking solutions may choose Cisco’s products because of its longer operating history, broader product line and strong reputation in the networking market. In addition, Cisco may have developed, or could in the future develop, new technologies that directly compete with our products or render our products obsolete. ~~Although~~We ~~we are currently among the top providers of network infrastructure solutions, we~~ cannot provide assurance that we will be able to compete successfully against Cisco, currently the leading provider in the networking market.

We also compete with other companies, such as 3Com, Alcatel—-Lucent, Enterasys Networks, Extreme Networks, F5 Networks, ~~Inc.,~~ Force 10 Networks, Hewlett-Packard Company, Huawei Technologies, Juniper Networks and Nortel Networks. Some of our current and potential competitors have greater market leverage, longer operating histories, greater financial, technical, sales, marketing and other resources, more name recognition and larger installed customer bases. Additionally, we may face competition from unknown companies and emerging technologies that may offer new LAN, MAN and LAN/WAN solutions. Furthermore, a number of these competitors may merge or form strategic relationships that would enable them to apply greater resources and sales coverage than we can, and to offer, or bring to market earlier, products that are superior to ours in terms of features, quality, pricing or a combination of these and other factors. For example, Alcatel combined with Lucent in 2006.

In order to remain competitive, we must, among other things, invest significant resources in developing new products ~~with superior performance at lower prices than our competitors~~, enhance our current products and maintain customer satisfaction. In addition, we must make certain our sales and marketing capabilities allow us to compete effectively against our competitors. If we fail to do so, our products may not compete favorably with those of our competitors and our revenue and profitability could suffer.

We must continue to introduce new products with superior performance and features in a timely manner in order to sustain and increase our revenue, and if we fail to predict and respond to emerging technological trends and customers’ changing needs, our operating results may suffer.

The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards. Therefore, in order to remain competitive, we must introduce new products in a timely manner that offer substantially greater performance and support a greater number of ~~users~~ports per device, all at lower price points. Even if these objectives are accomplished, new products may not be successful in the marketplace, or may take more time than anticipated to ~~start generating meaningful revenue. The~~ process of developing new technology is complex and uncertain, and if we fail to develop or obtain important intellectual property and accurately predict customers’ changing needs and emerging technological trends, our business could be harmed. We must commit significant resources to develop new products before knowing whether our investments will eventually result in products the market will accept. After a product is developed, we must be able to forecast sales volumes and quickly manufacture a sufficient volume of products and mix of configurations that meet customer requirements, all at low costs.

~~The life cycle of networking products can be as short as 18 to 24 months. The introduction of~~33 ~~new products or product enhancements may shorten the life cycle of our existing products or replace sales of some of our current products, thereby offsetting~~

~~the~~start ~~benefit~~generating ofmeaningful ~~even~~revenue. aThe ~~successful~~process ~~product introduction,~~of ~~and~~developing ~~may~~new ~~cause~~technology ~~customers~~is tocomplex ~~defer purchasing our existing products in anticipation of~~and ~~the~~uncertain, ~~new~~and ~~products.~~if ~~This~~we ~~could~~fail ~~harm~~to ~~our~~develop ~~operating~~or ~~results~~obtain byimportant ~~decreasing~~intellectual ~~sales,~~property ~~increasing~~and ~~our~~accurately ~~inventory~~predict ~~levels~~customers’ ofchanging ~~older~~needs ~~products~~ and ~~exposing~~emerging ustechnological totrends, ~~greater~~our ~~risk~~business ofcould ~~product~~be ~~obsolescence~~harmed. In ~~addition,~~We wemust ~~have~~commit ~~experienced,~~significant ~~and~~resources ~~may~~to indevelop ~~the~~new ~~future~~products ~~experience,~~before ~~delays~~knowing inwhether ~~developing~~our ~~and releasing~~investments ~~new~~will ~~products~~eventually ~~and~~result ~~product enhancements and~~ in ~~achieving~~products ~~volume~~the ~~manufacturing~~market ~~for~~will ~~such~~accept. ~~new~~After ~~products. This~~a ~~has~~product ~~led~~is todeveloped, ~~and~~we ~~may~~must inbe able ~~the future lead~~ to, ~~delayed~~forecast sales, ~~increased~~volumes ~~expenses~~ and ~~lower quarterly~~quickly ~~revenue~~manufacture ~~than~~a ~~anticipated.~~sufficient ~~During~~volume ~~the development~~ of ~~our~~ products, ~~we have also experienced,~~ and ~~may~~mix ~~in the future experience, delays in the development~~ of ~~critical components,~~ ~~which~~configurations inthat ~~turn~~meet ~~has~~customer ~~led to~~requirements, ~~and~~all ~~may~~at inlow ~~the future lead to, delays in product introductions~~costs.

The life cycle of networking products can be as short as 18 to 24 months. The introduction of new products or product enhancements may shorten the life cycle of our existing products or replace sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, and may cause customers to defer purchasing our existing products in anticipation of the new products. This could harm our operating results by decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence. In addition, we have experienced, and may in the future experience, delays in developing and releasing new products and product enhancements and in achieving volume manufacturing for such new products. This has led to, and may in the future lead to, delayed sales, increased expenses and lower quarterly revenue than anticipated. During the development of our products, we have also experienced, and may in the future experience, delays in the development of critical components, which in turn has led to, and may in the future lead to, delays in product introductions.

Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue, gross margins and expenses.

Our revenue and operating results may fluctuate due to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the communications and networking industries. Additionally, there is an unknown risk that problems in the United States credit markets occasioned by problems in the United States housing market may expand such that it impacts the greater United States economy to the degree that it could negatively impact our prospective financial service and retail customers as well as customer demand in other areas. If economic conditions in the United States worsen, we may experience material negative effects on our business, operating results and financial condition. There can be no assurance that we will be able to improve or even maintain our financial results or that economic and market conditions will not deteriorate. There is also the possibility that problems with the United States market will have a negative impact on the global economy or that political turmoil in other parts of the world, including terrorist and military actions, may weaken the global economy which can also negatively impact our business.

Our gross margins and average selling prices of our products have decreased in the past and could decrease as a result of competitive pressures and other factors.

Our industry has experienced erosion of average product selling prices due to a number of factors, particularly competitive and macroeconomic pressures and rapid technological change. The average selling prices of our products have decreased in the past and may continue to decrease in response to competitive pressures, increased sales discounts, new product introductions by our competitors or other factors. Both we and our competitors occasionally lower sales prices in order to gain market share or create more demand. Furthermore, as a result of cautious capital spending in the technology sector, coupled with broader macro-economic factors, both we and our competitors may pursue more aggressive pricing strategies in an effort to maintain sales levels. Such intense pricing competition could cause our gross margins to decline and may adversely affect our business, operating results or financial condition.

Our gross margins may be adversely affected if we are unable to reduce manufacturing costs and effectively manage our inventory levels. Although management continues to closely monitor inventory levels, declines in demand for our products could result in additional provisions for excess and obsolete inventory. Additionally, our gross margins may be negatively affected by fluctuations in manufacturing volumes, component costs, the mix of product configurations sold and the mix of distribution channels through which our products are sold. For example, we generally realize higher gross margins on direct sales to an end user than on sales through resellers or to our OEMs. As a result, any significant shift in revenue through resellers or to our OEMs could harm our gross margins. In addition, if product or related warranty costs associated with our products are greater than we have experienced, our gross margins may also be adversely affected.

Our investments in auction rate securities are subject to risks which may cause losses and affect the liquidity of these investments.

As of June 30, 2008, we held $77.1 million of municipal note investments at fair value, which is net of $6.0 million in temporary unrealized losses, principally classified as long-term investments, with an auction reset feature (“auction rate securities”) whose underlying assets were primarily in student loans. As of June 30, 2008, $74.6 million of our auction rate securities were held as long-term investments based on an estimated date when liquidity returns to these securities. As of June 30, 2008, $57.4 million of our auction rate securities were rated AAA, and $19.7 million had AA credit rating. Auctions for some of these auction rate securities

have recently failed, and there is no assurance that auctions on the remaining auction 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. As a result of auction failures, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited or not exist. These developments may result in the classification of some or all of these securities as long-term investments in our condensed consolidated financial statements.

If the issuers of these auction rate securities 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 may be required to wait until market stability is restored for these instruments or until the final maturity of the underlying notes (up to 33 years) to realize our investments’ recorded value.

We depend on large, recurring purchases from certain significant customers, and a loss, cancellation or delay in purchases by these customers could negatively affect our revenue.

Sales to our ten largest customers accounted for 2822% and 3127% of net product revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007, respectively. The loss of continued orders from any of our more significant customers, such as the United States government or individual agencies within the United States government ~~or Mitsui & Co. Ltd., our reseller in Japan,~~ could cause our revenue and profitability to suffer. Our ability to attract new customers will depend on a variety of factors, including the cost-effectiveness, reliability, scalability, breadth and depth of our products. In addition, a change in the mix of our customers, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margins.

Although our financial performance may depend on large, recurring orders from certain customers and resellers, we do not generally have binding commitments from them. For example:

	•		our reseller agreements generally do not require substantial minimum purchases;

	•		our customers can stop purchasing and our resellers can stop marketing our products at any time; and

	•		our reseller agreements generally are not exclusive and are for one-year terms, with no obligation of the resellers to renew the agreements.

Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, customers and resellers, or the loss of any significant customer or reseller, could harm our business. Although our largest customers may vary from period to period, we anticipate that our operating results for any given period will continue to depend on large orders from a small number of customers. ~~In addition, a change in the mix of our~~ ~~customers, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margins.~~

The United States government is a significant customer and has been one key to our financial success. However, government demand is unpredictable and there is no guarantee of future contract awards.

As part of the changing economic environment, the United States government has become an important customer for the networking industry, and for us in particular, representing approximately 17% and 15% of our total revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007. The process of becoming a qualified government vendor, especially for high-security projects, takes considerable time and effort, and the timing of contract awards and deployment of our products are hard to predict. Typically, six to twelve months may elapse between the initial evaluation of our systems by governmental agencies and the execution of a contract. The revenue stream from these contracts is hard to predict and may be materially uneven between quarters. Government agency contracts are frequently awarded only after formal competitive bidding processes, which are often protracted and may contain provisions that permit cancellation in the event funds are unavailable to the government agency. Even if we are awarded contracts, substantial delays or cancellations of purchases could result from protests initiated by losing bidders. In addition, government agencies are subject to budgetary processes and expenditure constraints that could lead to delays or decreased capital expenditures in certain areas. If we fail to win significant government contract awards, if the government or individual agencies within the government terminate or reduce the scope and value of our existing contracts, or if the government fails to reduce the budget deficit, our financial results may be harmed. Additionally, government orders may be subject to priority requirements that may affect scheduled shipments to our other customers.

3135

~~The~~We ~~matters~~purchase ~~relating~~several tokey ~~our~~components ~~Special~~for ~~Committee investigation into~~ our ~~stock~~products ~~option~~from ~~granting practices~~sole ~~and~~sources; ~~the~~if ~~restatement~~these ofcomponents ~~our~~are ~~financial statements have exposed us to civil litigation~~not ~~claims~~available, ~~regulatory~~our ~~proceedings~~revenue ~~and~~may ~~government~~be ~~proceedings~~adversely ~~which could burden Foundry and have a material adverse effect on us~~affected.

~~The~~We ~~inquiries~~purchase byseveral ~~the~~key ~~Department~~components ofused ~~Justice~~in ~~(“DOJ”) and the Securities and Exchange Commission (“SEC”) into, and the investigation by~~ our ~~Special~~products ~~Committee~~from ~~of,~~suppliers ~~our~~for ~~past~~which ~~stock~~we ~~option granting practices and the restatement of our prior financial statements~~ have ~~exposed and may continue to~~no ~~expose~~readily usavailable toalternative, ~~greater~~or ~~risks~~sole ~~associated with litigation~~sources, ~~regulatory proceedings~~ and ~~government inquiries~~depend ~~and~~on ~~enforcement~~supply ~~actions.~~from Wethese ~~have~~sources ~~cooperated with the DOJ and the SEC and expect~~ to ~~continue~~ tomeet ~~do so~~our needs. The ~~period~~inability of ~~time~~any ~~necessary~~supplier to ~~resolve~~provide ~~these~~us ~~inquiries~~with isan ~~uncertain,~~adequate ~~and~~supply ~~we cannot predict the outcome~~ of ~~these~~key ~~inquiries~~components, or ~~whether we will face additional government~~ ~~inquiries,~~the ~~investigations~~loss orof ~~other~~any ~~actions~~of ~~related to~~ our ~~historical stock option grant practices. As described in Note 3~~suppliers, ~~“Commitments~~may ~~and~~cause ~~Contingencies~~a —delay ~~Litigation,” to Condensed Consolidated Financial Statements, several derivative complaints have been filed~~ in ~~state and federal courts against~~ our ~~current~~ability ~~directors, some of our former directors and some of our current and former executive officers pertaining~~ to ~~allegations~~fulfill ~~relating~~orders ~~to stock option grants. Subject to certain limitations, we are obligated to indemnify our current~~ and ~~former~~may ~~directors,~~have ~~officers and employees~~a inmaterial ~~connection~~adverse ~~with~~effect ~~the~~on ~~investigation of~~ our ~~historical~~business ~~stock option practices, these DOJ~~ and ~~SEC inquiries~~financial ~~and~~condition. ~~any~~We ~~future~~believe ~~government~~lead-times ~~inquiries,~~for ~~investigations or actions. These inquiries could~~various ~~require~~components ushave tolengthened ~~expend~~as ~~significant~~a ~~management time and incur significant legal and other expenses, and could~~ result inof ~~civil~~economic ~~and criminal actions seeking~~uncertainty, ~~among~~which ~~other~~has ~~things,~~made ~~injunctions~~certain ~~against us~~components ~~and~~scarce. ~~the~~As ~~payment~~component ofdemand ~~significant~~increases ~~fines~~ and ~~penalties~~lead-times bybecome uslonger, ~~which~~our ~~could~~suppliers ~~have~~may ~~a material adverse~~increase ~~effect~~component oncosts. ~~our~~If ~~financial~~component ~~condition,~~costs ~~business~~increase, ~~results~~our ofgross ~~operations~~margins ~~and~~may ~~cash~~also ~~flow~~decline.

Our principal limited or sole-sourced components include high-speed dynamic and static random access memories, commonly known as DRAMs and SRAMs, ASICs, printed circuit boards, optical components, packet processors, switching fabrics, microprocessors and power supplies. Proprietary ASICs used in the manufacture of our products are purchased from sole sources and may not be readily available from other suppliers as the development period required to fabricate our ASICs can be lengthy. In addition, our newer product families integrate customizable network processors from sole source suppliers such as Marvell Technology Group Ltd. We acquire these components through purchase orders and have no long-term commitments regarding supply or pricing from these suppliers. From time to time, we have experienced shortages in allocations of components, resulting in delays in filling orders. We may encounter shortages and delays in obtaining components in the future, which could impede our ability to meet customer orders. Our proprietary ASICs, which provide key functionality in our products, are fabricated in foundries operated by, or subcontracted by, Texas Instruments Inc., Fujitsu Ltd., and Broadcom Corp. An alternative supply for these ASICs would require an extensive development period.

We depend on anticipated product orders to determine our material requirements. Lead-times for limited-sourced materials and components can be as long as six months, vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead-times with the risk of inventory obsolescence due to rapidly changing technology and customer requirements. If orders do not match forecasts, or if we do not manage inventory effectively, we may have either excess or insufficient inventory of materials and components, which could negatively affect our operating results and financial condition.

We may be subject to litigation risks and intellectual property infringement claims that are costly to defend and could limit our ability to use certain technologies in the future. Additionally, we may be found to infringe on intellectual property rights of others.

The networking industry is subject to claims and related litigation regarding patent and other intellectual property rights. Some companies claim extensive patent portfolios that may apply to the ~~network~~networking industry. As a result of the existence of a large number of patents and the rate of issuance of new patents in the networking industry, it is practically impossible for a company to determine in advance whether a product or any of its components may infringe upon intellectual property rights that may be claimed by others. From time to time third parties have asserted patent, copyright and trademark rights to technologies and standards that are important to us. Additionally, third parties may in the future assert claims or initiate litigation against us or our manufacturers, suppliers or customers alleging infringement of their intellectual property rights with respect to our existing or future products. We have in the past incurred, and may in the future incur, substantial expenses in defending against such third party claims. In the event of a determination adverse to us, we could incur substantial monetary liability and be required to change our business practices. Either of these could have a material adverse effect on our financial position, results of operations, or cash flows.

A number of companies have developed a licensing program in an attempt to realize revenue from their patent portfolios. Some of these companies have contacted us regarding a license. We carefully review all license requests, but are unwilling to license technology that we believe is not required for our product portfolio. However, any asserted license demand can require considerable effort and expense to review and respond. Moreover, a refusal by us to a license request could result in threats of litigation or actual litigation, which, if or when initiated, could harm our business.

We are a party to lawsuits in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We believe that we have defenses in the lawsuits pending against us as indicated in Note 36, “Commitments and Contingencies — Litigation,” to Condensed Consolidated Financial Statements, and we are vigorously contesting these allegations. Responding to the allegations has been, and probably will continue to be, expensive and time-consuming for us. An unfavorable resolution of the lawsuits could adversely affect our business, results of operations, or financial condition.

If we fail to protect our intellectual property, our business and ability to compete could suffer.

Our success and ability to compete are substantially dependent on our internally developed technology and know-how. Our proprietary technology includes our hardware architectures, our IronWare software, our IronView network management software, and certain mechanical designs. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights in these proprietary technologies. Although we have patent applications pending, there can be no assurance that patents will be issued from pending applications, or that claims allowed on any future patents will be sufficiently broad to protect our technology.

We provide software to customers under license agreements included in the packaged software. These agreements are not negotiated with or signed by the licensee, and thus may not be enforceable in some jurisdictions. Despite our efforts to protect our proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. These precautions may not prevent misappropriation or infringement of our intellectual property. Monitoring unauthorized use of our products is difficult and the steps we have taken may not prevent misappropriation of our technology, particularly in some foreign countries in which the laws may not protect our proprietary rights as fully as in the United States.

32The matters relating to our Special Committee investigation into our stock option granting practices and the restatement of our financial statements have exposed us to civil litigation claims, regulatory proceedings and government proceedings which could burden Foundry and have a material adverse effect on us.

The inquiries by the Department of Justice (the “DOJ”) and the Securities and Exchange Commission (“SEC”) into, and the investigation by the Special Committee of our Audit Committee of, our past stock option granting practices and the restatement of our fiscal 1999-2005 financial statements have exposed and may continue to expose us to greater risks associated with litigation, regulatory proceedings and government inquiries and enforcement actions. We cooperated with the SEC, and on March 21, 2008, the SEC sent us a letter informing us that its investigation had been terminated and that no enforcement action was recommended to the Commission. We now consider the SEC inquiry to be closed. As described in Note 6, “Commitments and Contingencies — Litigation,” to Condensed Consolidated Financial Statements, several derivative complaints have been filed in state and federal courts against our current directors, some of our former directors and some of our current and former executive officers pertaining to allegations relating to stock option grants. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees in connection with the investigation of our historical stock option practices, the derivative actions, and any future government inquiries, investigations or actions. These actions and inquiries could require us to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against us and the payment of significant fines and penalties by us, which could have a material adverse effect on our financial condition, business, results of operations and cash flow.

Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in our ability to fill orders which could cause us to lose revenue.

Subassemblies for certain products and some complete products are manufactured by contract manufacturers. We then perform final assembly and testing of these products. In addition, some Foundry-branded products are manufactured by third party OEMs. Our agreements with some of these companies 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 suppliers and third-party manufacturers in accordance with our forecasts, although we can generally give notice of order cancellation at least 90 days prior to the delivery date. If actual demand for our products is below our projections, we may have excess inventory as a result of our purchase commitments. We do not have long-term contracts with these suppliers and third-party manufacturers.

We have experienced delays in product shipments from our contract manufacturers and OEMs, which in turn delayed product shipments to our customers. In addition, certain of our products require a long manufacturing lead-time, which may result in delayed shipments. We may in the future experience similar delays or other problems, such as inferior quality, insufficient quantity of product, or acquisition by a competitor or business failure of any of our OEMs, any of which could harm our business and operating results.

~~use~~contract ~~our~~manufacturing ~~products~~capacity orand ~~technology.~~internal ~~These~~test ~~precautions~~and quality ~~may~~functions ~~not~~to ~~prevent~~meet ~~misappropriation~~anticipated ~~or infringement~~demand. The inability of our ~~intellectual~~contract ~~property.~~manufacturers ~~Monitoring~~or ~~unauthorized~~OEMs to ~~use~~provide us with adequate supplies of ~~our~~high-quality products, isthe ~~difficult~~loss of any of our third-party ~~and~~manufacturers, or the ~~steps~~inability weto ~~have~~obtain ~~taken~~components ~~may~~and ~~not~~raw ~~prevent~~materials, ~~misappropriation~~could ofcause a delay in our ability ~~technology~~to fulfill orders. Additionally, ~~particularly~~from intime to time, we transition, via our contract ~~some~~manufacturers, to different manufacturing locations, including lower-cost foreign countries. inSuch transitions ~~which~~are ~~the~~inherently ~~laws~~risky ~~may~~and ~~not~~could ~~protect~~cause a delay in our ~~proprietary~~ability ~~rights~~to asfulfill ~~fully~~orders ason a timely basis or a deterioration in ~~the United~~product ~~States~~quality.

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

If we are unable to effectively develop and retain our sales and support staff, or establish and cultivate relationships with our indirect distribution channels, our ability to grow and increase our revenue could be harmed. Additionally, if our resellers and system integrators are not successful in their sales efforts, sales of our products may decrease and our operating results could suffer. Some of our resellers also sell products that compete with our products. Resellers and system integrators typically sell directly to end-users and often provide system installation, technical support, professional services, and other support services in addition to network equipment sales. System integrators also typically integrate our products into an overall solution, and a number of resellers and service providers are also system integrators. As a result, we cannot assure that our resellers will market our products effectively or continue to devote the resources necessary to provide us with adequate sales, marketing and technical support. Additionally, if we do not manage distribution of our products and services effectively, or if our resellers’ financial conditions or operations weaken our revenue and gross margins could be adversely affected.

In an effort to gain market share and support our customers, we ~~may~~have ~~need~~expanded and expect to continue to expand our direct sales operations and customer service staff to support new and existing customers. The timing and extent of ~~any~~ such expansion are uncertain. We currently outsource our technical support to a third-party provider in Australia to support our customers on that continent. In the future, we may utilize third-party contractors in other regions of the world as part of our expansion effort. Expansion of our direct sales operations, reseller channels, and customer service operations may not be successfully implemented, and the cost of any expansion may exceed the revenue generated.

Our operations in international markets involve inherent risks that we may not be able to control. As a result, our business may be harmed if we are unable to successfully address these risks.

Our success will depend, in part, on increasing international sales and expanding our international operations. Our international sales primarily depend on our resellers, including Pan Dacom GmbH in Europe, Stark Technology in Taiwan, and Samsung Corporation in Korea. The failure of our international resellers to sell our products could limit our ability to sustain and grow our revenue. There are a number of additional risks arising from our international business, including:

	•		seasonal reductions in business activity;

	•		potential recessions in economies outside the United States;

	•		adverse fluctuations in currency exchange rates;

	•		difficulties in managing operations across disparate geographic areas;

	•		export restrictions;

	•		unexpected changes in regulatory requirements;

	•		higher costs of doing business in foreign countries;

	•		longer accounts receivable collection cycles;

	•		potential adverse tax consequences;

	•		difficulties associated with enforcing agreements through foreign legal systems;

	•		infringement claims on foreign patents, copyrights, or trademark rights;

	•		natural disasters and widespread medical epidemics;

	•		military conflict and terrorist activities; and

	•		political instability.

The factors described above could also disrupt our product and component manufacturers and key suppliers located outside of the United States. One or more of such factors may have a material adverse effect on our future international operations and, consequently, on our business, operating results and financial condition.

Generally, our international sales are denominated in United States dollars. As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive on a price basis in international markets. We invoice some of our international customers in local currencies, which could subject us to fluctuations in exchange rates between the United States dollar and the local currencies. See also Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2007 for a review of certain risks associated with foreign exchange rates.

Because our financial results are difficult to predict and may fluctuate significantly, we may not meet quarterly financial expectations, which could cause our stock price to decline.

Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. Our ability to increase revenue in the future is dependent on increased demand for our products and our ability to ship larger volumes of our products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products. Delays in generating or recognizing revenue could cause our quarterly operating results to be below the expectations of public market analysts or investors, which could cause the price of our common stock to fall. We continue our practice of not providing quantitative guidance as to expected revenues for future quarters. In the future, we may begin to provide quantitative guidance again, but could again discontinue the practice if we believe the business outlook is too uncertain to predict. Any such decision could cause our stock price to decline.

We may experience a delay in generating or recognizing revenue for a number of reasons. Unfulfilled orders at the beginning of each quarter are typically substantially less than our expected revenue for that quarter. Therefore, we depend on obtaining orders in a quarter for shipment in that quarter to achieve our revenue objectives. In addition, our reseller agreements typically allow the reseller to delay scheduled delivery dates without penalty. Moreover, demand for our products may fluctuate as a result of seasonality. For example, sales to the United States government are typically stronger in the third calendar quarter and demand from European customers is generally weaker in the summer months.

Orders are generally cancelable at any time prior to shipment. Reasons for cancellation could include our inability to deliver products within the customer’s specified timeframe due to component shortages or high priority government orders that take precedence toover commercial enterprise orders, as well as other reasons.

Our revenue for a particular period may also be difficult to predict and may be adversely affected if we experience a non-linear, or back-end loaded, sales pattern during the period. We typically experience significantly higher levels of sales towards the end of a period as a result of customers submitting their orders late in the period or as a result of manufacturing issues or component shortages which may delay shipments. Such non-linearity in shipments can increase costs, as irregular shipment patterns result in periods of underutilized capacity and additional costs associated with higher inventory levels, and inventory planning ~~and management~~. Furthermore, orders ~~received~~ received towards the end of the period may not ship within the period due to our manufacturing lead times.

33 In addition, we may incur increased costs and expenses related to sales and marketing (including expansion of our direct sales operations and distribution channels), customer support, expansion of our corporate infrastructure, legal matters, and facilities expansion. We base our operating expenses on anticipated revenue levels, and a high percentage of our expenses are fixed in the short-term. As a result, any significant shortfall in revenue relative to our expectations could cause a significant decline in our quarterly operating results.

Because of the uncertain nature of the economic environment and rapidly changing market we serve, period-to-period comparisons

Inof ~~addition,~~operating weresults may ~~incur~~not ~~increased~~be ~~costs~~meaningful. ~~and~~In ~~expenses~~addition, ~~related~~prior results tofor ~~sales~~any ~~and~~period ~~marketing, including~~are ~~expansion~~not ofa ~~our~~reliable ~~direct~~indication ~~sales~~of ~~operations~~future ~~and~~performance. ~~distribution~~In ~~channels,~~the ~~product marketing~~future, our ~~customer~~revenue ~~support,~~may ~~expansion~~remain ofthe ~~our corporate infrastructure~~same, ~~legal~~decrease ~~matters~~or increase, and ~~facilities expansion.~~we Wemay ~~base~~not ~~our~~be ~~operating~~able ~~expenses~~to onsustain ~~anticipated~~or ~~revenue~~increase profitability ~~levels,~~on ~~and~~ a ~~high~~quarterly ~~percentage~~or ~~of our~~annual ~~expenses are fixed in the short-term~~basis. As a ~~result~~consequence, ~~any~~operating ~~significant~~results ~~shortfall~~for ina ~~revenue~~particular ~~relative~~quarter toare ~~our~~extremely ~~expectations~~difficult ~~could~~to ~~cause a significant decline in our quarterly operating results~~predict.

Because of the uncertain nature of the economic environment and rapidly changing market we serve, period-to-period comparisons of operating results may not be meaningful. In addition, prior results for any period are not a reliable indication of future performance. In the future, our revenue may remain the same, decrease or increase, and we may not be able to sustain or increase profitability on a quarterly or annual basis. As a consequence, operating results for a particular quarter are extremely difficult to predict.

We purchase several key components for our products from sole sources; if these components are not available, our revenue may be adversely affected.

We purchase several key components used in our products from suppliers for which we have no readily available alternative, or sole sources, and depend on supply from these sources to meet our needs. The inability of any supplier to provide us with an adequate supply of key components, or the loss of any of our suppliers, may cause a delay in our ability to fulfill orders and may have a material adverse effect on our business and financial condition. We believe lead-times for various components have lengthened as a result of limits on IT spending and economic uncertainty, which has made certain components scarce. As component demand increases and lead-times become longer, our suppliers may increase component costs. If component costs increase, our gross margins may also decline.

Our principal limited or sole-sourced components include high-speed dynamic and static random access memories, commonly known as DRAMs and SRAMs, ASICs, printed circuit boards, optical components, packet processors, switching fabrics, microprocessors and power supplies. Proprietary ASICs used in the manufacture of our products are purchased from sole sources and may not be readily available from other suppliers as the development period required to fabricate our ASICs can be lengthy. In addition, our newer product families integrate customizable network processors from sole source suppliers such as Marvell. We acquire these components through purchase orders and have no long-term commitments regarding supply or pricing from these suppliers. From time to time, we have experienced shortages in allocations of components, resulting in delays in filling orders. We may encounter shortages and delays in obtaining components in the future, which could impede our ability to meet customer orders. Our proprietary ASICs, which provide key functionality in our products, are fabricated in foundries operated by, or subcontracted by, Texas Instruments Inc., Fujitsu Ltd., and Broadcom Corp. An alternative supply for these ASICs would require an extensive development period.

Our reliance on third-party manufacturing vendors to manufacture our products may cause a delay in our ability to fill orders.

Our subassemblies for certain products are manufactured by contract manufacturers. We then perform final assembly and testing of these products. In addition, some Foundry-branded products are manufactured by third party OEMs. Our agreements with some of these companies 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 suppliers and third-party manufacturers in accordance with our forecasts, although we can generally give notice of order cancellation at least 90 days prior to the delivery date. If actual demand for our products is below our projections, we may have excess inventory as a result of our purchase commitments. We do not have long-term contracts with these suppliers and third-party manufacturers.

We intend to regularly introduce new products and product enhancements, which will require us to rapidly achieve volume production by coordinating our efforts with our suppliers and contract manufacturers. We attempt to adjust our material purchases, contract manufacturing capacity and internal test and quality functions to meet anticipated demand. The inability of our contract manufacturers or OEMs to provide us with adequate supplies of high-quality products, the loss of any of our third-party manufacturers, or the inability to obtain components and raw materials, could cause a delay in our ability to fulfill orders. Additionally, from time to time, we transition, via our contract manufacturers, to different manufacturing locations, including lower-cost foreign countries. Such transitions are inherently risky and could cause a delay in our ability to fulfill orders on a timely basis or a deterioration in product quality.

Our gross margins and average selling prices of our products have decreased in the past and may continue to decrease as a result of competitive pressures and other factors.

Our industry has experienced erosion of average product selling prices due to a number of factors, particularly competitive and macroeconomic pressures and rapid technological change. The average selling prices of our products have decreased in the past and may continue to decrease in response to competitive pressures, increased sales discounts, new product introductions by our competitors or other factors. Both we and our competitors occasionally lower sales prices in order to gain market share or create more demand. Furthermore, as a result of cautious capital spending in the technology sector, coupled with more broad macro-economic factors, both we and our competitors may pursue more aggressive pricing strategies in an effort to maintain sales levels. Such intense pricing competition could cause our gross margins to decline and may adversely affect our business, operating results or financial condition.

Our gross margins may be adversely affected if we are unable to reduce manufacturing costs and effectively manage our inventory levels. Although management continues to closely monitor inventory levels, declines in demand for our products could result in additional provisions for excess and obsolete inventory. Additionally, our gross margins may be negatively affected by fluctuations in manufacturing volumes, component costs, the mix of product configurations sold and the mix of distribution channels through which our products are sold. For example, we generally realize higher gross margins on direct sales to an end user than on sales through resellers or to our OEMs. As a result, any significant shift in revenue through resellers or to our OEMs could harm our gross margins. If product or related warranty costs associated with our products are greater than we have experienced, our gross margins may also be adversely affected.

Weak economic and market conditions or geopolitical turmoil may adversely affect our revenue, gross margins and expenses.

Our quarterly revenue and operating results may fluctuate due to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the communications and networking industries. Additionally, current political turmoil in many parts of the world, including terrorist and military actions, may weaken the global economy. If economic conditions in the United States and globally do not improve, or if they worsen, we may experience material negative effects on our business, operating results and financial condition. There can be no assurance that we will be able to improve or even maintain our financial results or that economic and market conditions will continue to improve and will not deteriorate.

We need additional qualified personnel to maintain and expand our business. If we are unable to promptly attract and retain qualified personnel, our business may be harmed.

We believe our future success will depend in large part on our ability to identify, attract and retain highly-skilled managerial, engineering, sales and marketing, finance and manufacturing personnel. Competition for these personnel can be intense, especially in the San Francisco Bay Area, and we may experience some difficulty hiring employees in the timeframe we desire, particularly engineering and sales personnel. Volatility or lack of positive performance in our stock price may also adversely affect our ability to retain key employees, ~~all~~most of whom have been granted stock options and/or restricted stock. In order to improve productivity, we have historically used stock options and/or restricted stock to motivate and retain our employees. The additional compensation expense that must now be recognized in connection with grants of stock options and restricted stock may limit the attractiveness of using stock options and restricted stock as a primary incentive and retention tool. We may not succeed in identifying, attracting and retaining personnel. The loss of the services of any of our key personnel, the inability to identify, attract or retain qualified personnel in the future, or delays in hiring required personnel, particularly engineers and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as timely product introductions.

Our success also depends to a significant degree on the continued contributions of our key management, engineering, sales and marketing, finance and manufacturing personnel, many of whom would be difficult to replace. In particular, we believe that our future success may depend on Bobby R. Johnson, Jr., our President and Chief Executive Officer. We do not have employment contracts or key person life insurance for any of our personnel.

success may depend on Bobby R. Johnson, Jr., our President and Chief Executive Officer. We do not have employment contracts or key person life insurance for any of our personnel.

Our operations in international markets involve inherent risks that we may not be able to control. As a result, our business may be harmed if we are unable to successfully address these risks.

Our success will depend, in part, on increasing international sales and expanding our international operations. Our international sales primarily depend on our resellers, including Pan Dacom GmbH in Europe, Mitsui & Co. Ltd. in Japan, Stark Technology in China, and Samsung Corporation in Korea. The failure of our international resellers to sell our products could limit our ability to sustain and grow our revenue. In particular, our revenue from Japan depends primarily on Mitsui’s ability to sell our products and on the strength of the Japanese economy. There are a number of additional risks arising from our international business, including:

• seasonal reductions in business activity; • potential recessions in economies outside the United States; • adverse fluctuations in currency exchange rates; • difficulties in managing operations across disparate geographic areas; • export restrictions; • unexpected changes in regulatory requirements; • higher costs of doing business in foreign countries; • longer accounts receivable collection cycles; • potential adverse tax consequences; • difficulties associated with enforcing agreements through foreign legal systems; • infringement claims on foreign patents, copyrights, or trademark rights; • natural disasters and widespread medical epidemics; • military conflict and terrorist activities; and • political instability.

Generally, our international sales are denominated in United States dollars. As a result, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive on a price basis in international markets. We invoice some of our international customers in local currencies, which could subject us to fluctuations in exchange rates between the United States dollar and the local currencies. See also Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” for a review of certain risks associated with foreign exchange rates.

Due to the lengthy sales cycles of some of our products, the timing of our revenue is difficult to predict and may cause us to fail to meet our revenue expectations.

Some of our products have a relatively high sales price, and their purchase often represents a significant and strategic decision by a customer. The decision by customers to purchase our products is often based on their internal budgets and procedures involving rigorous evaluation, testing, implementation and acceptance of new technologies. As a result, our sales cycle in these situations can be as long as 12 months and may vary substantially from customer to customer. While our customers are evaluating our products and before they may place an order with us, we may incur substantial sales and marketing expenses and expend significant management effort. Consequently, if sales forecasted from certain customers for a particular quarter are not realized in that quarter, we may not meet our revenue expectations.

We are required to expense equity compensation given to our employees, which has reduced our reported earnings, will significantly impact our operating results in future periods and may reduce our stock price and our ability to effectively utilize equity compensation to attract and retain employees.

We historically have used stock options as a significant component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. The Financial Accounting Standards Board has adopted changes that require companies to record a charge to earnings for employee stock option grants and other equity incentives. Since adoption of this standard, effective January 1, 2006, we ~~were~~have ~~subject~~experienced to a substantial increase in compensation costs, and the accounting change will further significantly impact our operating results in future periods. The adoption of this standard may require us to reduce the availability and amount of equity incentives provided to employees, which may make it more difficult for us to attract, retain and motivate key personnel. Moreover, if securities analysts, institutional investors and other investors adopt financial models that include stock option expense in their primary analysis of our financial results, our stock price could decline as a result of reliance on these models with higher expense calculations. Each of these results could materially and adversely affect our business.

As a result of our delayed filing of our periodic SEC reports, our inability to maintain our Form S-3 eligibility may adversely affect our ability to raise future capital or complete acquisitions.

As a result of our prior delayed filing of our quarterly and annual reports with the SEC, we will be ineligible to register our securities on Form S-3 for sale by us or resale by other security holders until we have timely filed all periodic reports under the Securities Exchange Act of 1934 for one year. In the meantime, if we use Form S-1 to raise capital, our transaction costs could increase.

If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our business may be harmed.

Our ability to implement our business plan and comply with regulations requires an effective planning and management process. We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future. Any delay in the implementation of, or disruption in the transition to, new or ~~enhanced systems, procedures or controls, could harm our ability to accurately forecast~~ ~~sales demand, manage our supply chain and record and report financial and management information on a timely and accurate basis.~~

~~We had a material weakness in internal control over financial reporting in the past and cannot~~40 assure that additional material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal control over financial reporting.

~~statements~~enhanced insystems, ~~prior~~procedures ~~filings with the SEC is a strong indicator of the existence of a “material weakness” in the design~~ or ~~operation of internal control over financial reporting. However~~controls, wecould ~~have concluded~~harm ~~that the control deficiencies that resulted in the restatement of the previously issued~~our ~~consolidated~~ability ~~financial~~to ~~statements~~accurately ~~did~~forecast ~~not~~sales ~~constitute a material weakness as of September 30~~demand, ~~2007, because~~manage ~~management~~our ~~determined~~supply ~~that~~chain ~~as of September 30, 2007 there were effective controls designed~~ and inrecord ~~place to prevent or detect a material misstatement~~ and ~~therefore the likelihood of~~report ~~stock-based~~financial ~~compensation, deferred compensation~~ and ~~deferred~~management ~~tax~~information ~~assets~~on ~~being~~a ~~materially~~timely ~~misstated is~~and ~~not~~accurate ~~more than remote~~basis.

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

In assessing the findings of our voluntary review of our historical stock option granting practices, our management identified material weaknesses in our internal control over financial reporting that existed as of December 31, 2005. The restatement of financial statements in prior filings with the SEC is a strong indicator of the existence of a “material weakness” in the design or operation of internal control over financial reporting. However, we have concluded that the control deficiencies that resulted in the restatement of the previously issued consolidated financial statements did not constitute a material weakness as of December 31, 2006, because management determined that as of December 31, 2006 there were effective controls designed and in place to prevent or detect a material misstatement, and therefore, the likelihood of stock-based compensation, deferred compensation and deferred tax assets being materially misstated is not more than remote.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As a result, we cannot assure that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

WeIf ~~may~~the proposed merger with Brocade does not occur, we might engage in acquisitions that could result in ~~the~~ dilution offor our stockholders, disrupt our operations, cause us to incur substantial expenses and harm our business if we cannot successfully integrate the acquired business, products, technologies or personnel.

Although we focus on internal product development and growth, we may learn of acquisition prospects that would complement our existing business or enhance our technological capabilities. Any acquisition by us could result in large and immediate write-offs, the incurrence of debt and contingent liabilities, or amortization expenses related to amortizable intangible assets, any of which could negatively affect our results of operations. Furthermore, acquisitions involve numerous risks and uncertainties, including:

• difficulties in the assimilation of products, operations, personnel and technologies of the acquired companies; • diversion of management’s attention from other business concerns; • disruptions to our operations, including potential difficulties in completing ongoing projects in a timely manner; • risks of entering geographic and business markets in which we have no or limited prior experience; • exposure to third party intellectual property infringement claims; and • potential loss of key employees of acquired organizations.

~~Although we do not currently have any agreements or plans with respect to any material~~41 acquisitions, we may make acquisitions of complementary businesses, products or technologies in the future. We may not be able to successfully integrate any businesses, products, technologies or personnel that might be acquired, and our failure to do so could harm our business.

The timing of the adoption of industry standards may negatively affect widespread market acceptance of our products.

~~technology.~~• Werisks ~~intend to develop products using new technological advancements and may develop these products prior to the adoption~~ of ~~industry~~entering ~~standards~~geographic ~~related to these technologies. As a result, we may incur significant expenses~~ and ~~losses~~business ~~due~~markets toin ~~lack~~which of customer demand, unusable purchased components for these products and the diversion of our engineers from future product development efforts. Further, if the adoption of industry standards moves too quickly, we ~~may develop~~have ~~products~~no ~~that~~or dolimited ~~not~~prior ~~comply~~experience; ~~with~~• aexposure ~~later-adopted industry standard, which could hurt our ability~~ to ~~sell~~third ~~these~~party ~~products.~~intellectual Ifproperty ~~the~~infringement ~~industry~~claims; ~~evolves to new standards, we may not be able to successfully design~~ and ~~manufacture~~• ~~new~~potential ~~products~~loss ~~in a timely fashion that meet these new standards. Even after industry standards are adopted, the future success~~ of ~~our~~key ~~products~~employees ~~depends on widespread market acceptance~~ of ~~their~~acquired ~~underlying technologies~~organizations. ~~Attempts by third parties to impose licensing fees on industry standards could undermine the adoption of such standards and decrease industry opportunities.~~

If We ~~our~~may ~~products~~make doacquisitions ~~not~~of ~~interoperate~~complementary ~~with~~businesses, ~~our~~products ~~customers’~~or ~~networks,~~technologies ~~our~~in ~~sales~~the future. We may not be ~~delayed~~able to successfully integrate any businesses, products, technologies or personnel ~~cancelled~~that might be acquired, and our failure to do so could harm our business.

The timing of the adoption of industry standards may negatively affect widespread market acceptance of our products.

Our success depends in part on both the adoption of industry standards for new technologies in our market and our products’ compliance with industry standards. Many technological developments occur prior to the adoption of the related industry standard. The absence or delay of an industry standard related to a specific technology may prevent market acceptance of products using the technology. We intend to develop products using new technological advancements and may develop these products prior to the adoption of industry standards related to these technologies. As a result, we may incur significant expenses and losses due to lack of customer demand, unusable purchased components for these products and the diversion of our engineers from alternative future product development efforts. Further, if the adoption of industry standards moves too quickly, we may develop products that do not comply with a later-adopted industry standard, which could hurt our ability to sell these products. If the industry evolves to new standards, we may not be able to successfully design and manufacture new products in a timely fashion that meet these new standards. Even after industry standards are adopted, the future success of our products depends on widespread market acceptance of their underlying technologies. Attempts by third parties to impose licensing fees on industry standards could undermine the adoption of such standards and decrease industry opportunities.

If our products do not interoperate with our customers’ networks, our sales may be delayed or cancelled and our business could be harmed.

Our products need to interface with existing networks, each of which have different specifications and utilize multiple protocol standards and products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products will be required to interoperate with many or all of the products within these networks as well as future products in order to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may have to modify our software or hardware to fix or overcome these errors so that our products will interoperate and scale with the existing software and hardware, which could be costly and negatively impact our operating results. In addition, if our products do not interoperate with those of our customers’ networks, demand for our products could be adversely affected, orders for our products could be cancelled or our products could be returned. This could hurt our operating results, damage our reputation and seriously harm our business and prospects.

If our products contain undetected software or hardware errors, we could incur significant unexpected expenses and lost sales and be subject to product liability claims.

Our products are complex and may contain undetected defects or errors, particularly when first introduced or as new enhancements and versions are released. Despite our testing procedures, these defects and errors may be found after commencement of commercial shipments. Any defects or errors in our products discovered in the future or failures of our customers’ networks, whether caused by our products or another vendors’ products, could result in:

• negative customer reactions; • product liability claims; • negative publicity regarding us and our products; • delays in or loss of market acceptance of our products; • product returns; ~~• lost sales; and • unexpected expenses to remedy defects or errors.~~

	•		lost sales; and

	•		unexpected expenses to remedy defects or errors.

We may incur liabilities that are not subject to maximum loss clauses.

In the ordinary course of business, we enter into purchase orders, sales contracts, and other similar contractual arrangements relating to the marketing, sale, manufacture, distribution, or use of our products and services. We may incur liabilities relating to our failure to address certain liabilities or inability to perform certain covenants or obligations under such agreements, or which result from claims and losses arising from certain external events as outlined within the particular contract. Such agreements may not contain, or be subject to, maximum loss clauses, and liabilities arising from them may result in significant adverse changes to our financial position or results of operations.

Our products may not continue to comply with the regulations governing their sale, which may harm our business.

In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop may be required to comply with regulations or standards established by telecommunications authorities in various countries, as well as those of certain international bodies. Recent environmental legislation within the European Union (the “EU”) may increase our cost of of doing business internationally as we comply with and implement these new requirements. The EU ~~has~~ has issued a ~~Directive~~directive on the restriction of certain hazardous substances in electronic and ~~electrical~~ electrical equipment (the “RoHS” Directive) and enacted the Waste Electrical and Electronic Equipment (“WEEE”) Directive to mandate the funding, collection, treatment, recycling, and recovery of WEEE by producers of electrical or electronic equipment into Europe. Under the RoHS Directive, specified electronic products which we placed on the market in the EU on or after July 1, 2006 ~~were~~ are required to meet restrictions on lead and certain other chemical substances. Implementation of the WEEE Directive in certain of the EU-member countries was delayed until a later date. We have implemented measures to comply with the RoHS Directive and the WEEE Directive as individual countries issue their implementation guidance. Although we believe our products are currently in compliance with domestic and international standards and regulations in countries in which we currently sell, there can be no assurance that our existing and future product offerings will continue to comply with evolving standards and regulations. If we fail to obtain timely domestic or foreign regulatory approvals or certification, we may not be able to sell our products where these standards or regulations apply, which may prevent us from sustaining our revenue or maintaining profitability. Additionally, future changes in tariffs, or their application, by regulatory agencies could affect the sales of some of our products.

Our stock price has been volatile historically, which may make it more difficult to sell shares when needed at attractive prices.

The trading price of our common stock has been, and may continue to be, subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable, speculation in the press or investment community, and news reports relating to trends in our markets. In addition, the stock market in general, and technology companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Additionally, volatility or lack of positive performance in our stock price may adversely affect our ability to retain key employees, ~~all~~most of whom have been granted stock options.

Anti-takeover provisions could make it more difficult for a third party to acquire us.

Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by ~~the~~our stockholders. ~~The~~Although ~~rights~~as part of our proposed acquisition by Brocade, we agreed not to issue any of these preferred shares without Brocade’s consent, we would have the ability to issue such shares if the Brocade acquisition were not consummated. The rights of holders of our common stock may be subject to, and may be adversely affected by, the rights of ~~the~~ holders of any preferred stock that may be issued by us in the future. 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~~our stockholders and may adversely affect the voting and other rights of the holders of common stock. We have no present plans to issue shares of preferred stock. Further, certain provisions of our charter documents, including provisions eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or management of Foundry, which could have an adverse effect on the market price of our stock. In addition, our charter documents do not permit cumulative voting, which may make it more difficult for a third party to gain control of our Board of Directors.

~~Our operations could be significantly hindered by the occurrence of a natural disaster, terrorist~~43 ~~acts or other catastrophic events.~~

Our principal operations are susceptible to outages due to fire, floods, earthquakes, power loss, power shortages, telecommunications failures, break-ins and similar events. In addition, certain of our local and foreign offices, OEMs, and contract manufacturers are located in areas susceptible to earthquakes and acts of terrorism, which could cause a material disruption in our operations. For example, we procure critical components from countries such as Japan and Taiwan, which periodically experience earthquakes and typhoons. The prospect of such unscheduled interruptions may continue for the foreseeable future, and we are unable to predict either their occurrence, duration or cessation. We do not have multiple site capacity for all of our services in the event of any such occurrence. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. We may not carry sufficient insurance to compensate

usmatters ~~for~~at ~~losses~~a ~~that~~meeting ~~may~~of ~~occur~~stockholders aswithout agiving advance ~~result~~notice, ofmay ~~any~~have the effect of ~~these~~delaying ~~events.~~or ~~Any~~preventing ~~such~~changes ~~event~~in control or management of Foundry, which could have ~~a material~~an adverse effect on the market price of our ~~business~~stock. In addition, ~~operating~~our charter ~~results~~documents do not permit cumulative voting, ~~and~~which ~~financial~~may ~~condition~~make it more difficult for a third party to gain control of our Board of Directors.

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

Increases in our provision for income taxes or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results.

Our provision for income taxes is subject to volatility and could be adversely affected by earnings being higher than anticipated; by changes in the valuation of our deferred tax assets and liabilities; by expiration of or lapses in the R&D tax credit laws; by tax effects of share-based compensation; by changes in tax exempt investments; or by changes in tax laws, regulations, accounting principles, including accounting for uncertain tax positions, or interpretations thereof. Significant judgment is required to determine the recognition and measurement attribute prescribed in Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which we adopted on January 1, 2007. In addition, FIN 48 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, our income in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from tax. In addition, we are subject to examinations of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There may be exposure that the outcomes from these examinations will have an adverse effect on our operating results and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None~~The following table provides information with respect to repurchases of common stock by Foundry Networks, Inc. during the three months ended June 30, 2008:


							Maximum
							Approximate Dollar
					Total		Value of Shares
	Total Number		Average Price		Number of Shares		That May Yet Be
	of Shares		Paid per		Purchased as Part of		Purchased Under the
Period	Purchased (1)		Share (1)		Repurchase Program(2)		Repurchase Program (2)
April 1 — 30		858,449	$	12.88		810,300	$	146,535,499
May 1 — 31		413,808	$	12.78		409,900	$	141,289,432
June 1 — 30		4,024	$	11.82		—	$	141,289,432

Total		1,276,281	$	12.84		1,220,200	$	141,289,432


(1)		Includes 56,081 shares repurchased to satisfy tax withholding obligations that arise on the vesting of restricted stock awards.

(2)		In July 2007, the Company’s Board of Directors approved a share repurchase program authorizing the Company to purchase up to $200 million of its common stock. In April 2008, the Company’s Board of Directors approved an increase to the size of the share repurchase program of an additional $100 million. This approval expands the share repurchase authorization to $300 million. During the three months ending June 30, 2008, the Company repurchased and retired 1,220,200 shares of common stock at a weighted average price of $12.84 per share for an aggregate purchase price of approximately $15.7 million including the related transaction fees. Since inception of the stock repurchase program, the Company repurchased and retired 10,020,922 shares of its


		common stock at a weighted-average price of $15.82 per share for an aggregate purchase price of $158.7 million including the related transaction fees. The remaining authorized amount for stock repurchases under this program, including the expansion amount announced in April 2008, was approximately $141.3 million and will expire on December 31, 2008. However, in light of our proposed acquisition of the Company by Brocade, we do not currently anticipate buying back any additional shares under the share repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

On ~~July~~June 235, ~~2007~~2008, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders voted on the following two proposals and cast their votes as follows:

Proposal No. 1: Election of Directors:

Number of Votes

Name of Director Nominee

For

~~Withheld~~Against

~~Abstain~~Withheld

Bobby R. Johnson, Jr.

85129,~~521~~951,~~648~~637

02,086,554

493,~~246~~033,~~156~~708

Alfred J. Amoroso

~~125~~129,~~964~~922,~~871~~243

02,120,350

83,~~802~~029,~~933~~306

C. Nicholas Keating

86129,~~768~~930,~~052~~500

02,115,152

473,~~999~~026,~~752~~247

J. Steven Young

85129,~~774~~906,~~299~~559

02,140,292

483,~~993~~025,~~505~~048

Alan L. Earhart

~~125~~129,~~520~~984,~~715~~173

02,060,162

93,~~247~~027,~~089~~564

Celeste Volz Ford

129,~~025~~943,~~611~~699

02,088,057

53,~~742~~040,~~193~~143

Proposal No. 2: Ratification of Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm:

Number of Votes

For

Against

Abstain

Ratification of appointment

~~128~~131,~~640~~916,~~573~~273

6121,~~069,930~~309

573,~~299~~034,317

Item 5. Other Information

None.

Item 6. Exhibits

Number		Description
3.1		Amended and Restated Certificate of Incorporation of Foundry Networks, Inc. (Amended and Restated Certificate of Incorporation filed as Exhibit 3.2 to registrant’s Registration Statement on Form S-1 (Commission File No. 333-82577) and incorporated herein by reference; Certificate of Amendment to the foregoing filed as Exhibit 3.1 to registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference).
10.22		Foundry Networks Inc. 2008 Executive Performance Incentive Plan (Filed as Exhibit 10.22 to registrant’s current report on Form 8-K on June 11, 2008 and incorporated herein by reference).
3.2		Amended and Restated Bylaws of Foundry Networks, Inc. (Filed as Exhibit 3.2 to registrant’s Current Report on Form 8-K filed on April 24, 2007 and incorporated herein by reference).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350.

4145

SIGNATURE

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 thereunto duly authorized.


		Foundry Networks, Inc.
		(Registrant)

		By:		/s/ Daniel W. Fairfax

				Daniel W. Fairfax
				Vice President, Finance and Administration and
				Chief Financial Officer
				(Principal Financial and Accounting Officer)

Date: ~~November~~August 75, ~~2007~~2008

4246

Exhibit Index

Number		Description
3.1		Amended and Restated Certificate of Incorporation of Foundry Networks, Inc. (Amended and Restated Certificate of Incorporation filed as Exhibit 3.2 to registrant’s Registration Statement on Form S-1 (Commission File No. 333-82577) and incorporated herein by reference; Certificate of Amendment to the foregoing filed as Exhibit 3.1 to registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference.).
10.22		Foundry Networks Inc. 2008 Executive Performance Incentive Plan (Filed as Exhibit 10.22 to registrant’s current report on Form 8-K on June 11, 2008 and incorporated herein by reference).
3.2		Amended and Restated Bylaws of Foundry Networks, Inc. (Filed as Exhibit 3.2 to registrant’s Current Report on Form 8-K filed on April 24, 2007 and incorporated herein by reference.).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350.

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