UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

                                (Mark One)

For the quarterly period ended September 30, 2004

OR

[  ] 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.

2100 Gold Street
P.O. Box 649100
San Jose, CA 95164-9100
(Address of principal executive offices, including zip code)

(408) 586-1700
(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 [X]     No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [X]     No [  ]

As of November 3, 2004, there were 136,718,958 shares of the registrant’s common stock, par value $0.0001, outstanding.

FOUNDRY NETWORKS, INC.
TABLE OF CONTENTS

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FOUNDRY NETWORKS, INC.

(1)

Derived from December 31, 2003 audited consolidated financial statements.

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

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FOUNDRY NETWORKS, INC.

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

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FOUNDRY NETWORKS, INC.

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

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FOUNDRY NETWORKS, INC.

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation

     The condensed interim consolidated financial statements included herein have been prepared by Foundry Networks, Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of Foundry Networks, Inc. and its wholly-owned subsidiaries (collectively “Foundry” or “we”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S 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,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and notes thereto included in Items 7, 7A, and 8, respectively, of the Foundry Networks, Inc. Annual Report on Form 10-K for the year ended December 31, 2003.

     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 financial position, results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2004.

     Principles of Consolidation and Foreign Currency Translation

     Our condensed consolidated financial statements reflect the operations of Foundry and our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. The functional currency of our foreign subsidiaries is deemed to be the local country’s currency. Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate in effect at the applicable balance sheet date, and revenues and expenses are translated into U.S. dollars using average exchange rates prevailing during that period. Translation adjustments have not been material to date and are included as a component of accumulated other comprehensive income or loss within stockholders’ equity.

     Reclassifications

     Certain prior period amounts have been reclassified to conform to the September 30, 2004 presentation.

     Use of Estimates

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

     Cash Equivalents and Investments

     We consider all investments with original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents consist of commercial paper, corporate and government debt securities, and cash deposited in checking

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and money market accounts. Our investment portfolio includes only marketable securities with original maturities of less than two years and with secondary or resale markets to ensure portfolio liquidity.

     Investments in financial instruments that mature less than one year from the balance sheet date are classified as short-term investments and investments that mature greater than one year from the balance sheet date are classified as long-term investments. All of our investments are stated at amortized cost and are held-to-maturity.

     We monitor our investments for impairment on a quarterly basis to determine 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 our carrying value, and our ability and intent to hold investments to maturity. If an investment’s decline in fair value, caused by factors other than changes in interest rates, is deemed to be other-than-temporary, we would reduce its 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 equivalents and investments consist of the following (in thousands):

Inventories

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

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     The networking industry is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, and evolving industry standards. Our inventory purchases and commitments are made based on anticipated demand for our products, as estimated by management, and our expected service requirements. We perform an assessment of our inventory each period, which includes a review of, among other factors, demand requirements, manufacturing lead-times, product life cycles and development plans, component cost trends, product pricing and quality issues. Based on this analysis, we estimate the amount of excess and obsolete inventory on hand and make adjustments to record inventory at the lower of cost or estimated net realizable value. Once inventory has been written down to the lower of cost or estimated net realizable value, it is reflected on our balance sheet at its new carrying value until it is sold or otherwise disposed. We have recorded inventory adjustments of $27.2 million and $25.6 million as of September 30, 2004 and December 31, 2003, respectively, and such adjustments are reflected in the amounts above.

     Concentrations

     Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash equivalents, short and long-term investments and accounts receivable. We seek to reduce credit risk on financial instruments by investing in high-quality debt issuances and, by policy, we limit the amount of credit exposure with any one issuer or fund. Additionally, we grant credit only to customers deemed credit worthy in the judgment of management. As of September 30, 2004 and December 31, 2003, ten customers accounted for approximately 34% and 55%, respectively, of our net outstanding trade receivables.

     Proprietary ASICs used in the manufacture of our products are purchased from sole sources. Our custom designed ASICs may not be readily available from other suppliers as the development period required to fabricate our ASICs can be lengthy. The inability of an ASIC supplier to fulfill our production requirements, or the time required for us to identify new suppliers if a relationship is terminated, could negatively affect our future results of operations.

     Revenue Recognition

     General. We sell our products through our direct sales force to domestic customers and through reseller channels to international customers. We generate the majority of our revenue from sales of chassis and stackable-based networking equipment, with the remainder of our revenue coming from customer support fees, training and installation services. We recognize 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. Shipping terms and related documents, or written evidence of customer acceptance, when applicable, are used to verify delivery or performance. We assess whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. We assess collectibility based on the creditworthiness of the customer as determined by our credit checks and the customer’s payment history with us.

     When sales arrangements contain multiple elements (e.g., hardware and installation), we allocate revenue to each element based on its relative fair value, which is generally the price we charge when we sell the item separately, and recognize revenue for each element when revenue recognition criteria have been met for that element. This is in accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), which was effective for revenue arrangements entered into in fiscal periods beginning after June 15,

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2003. We adopted EITF 00-21 in the third quarter of 2003, and its adoption did not have a material effect on our results of operations or financial position.

     Product. Product revenue is generally recognized at the time of shipment, unless an acceptance period or other contingency exists, in which case 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 revenues.

     At the time product revenue is recognized, we estimate the amount of warranty costs to be incurred and record the amount as a cost of product revenue. Our standard warranty period extends 12 months from the date of sale, and our estimate of the amount necessary to settle warranty claims is based primarily on our past experience. We also provide for estimated sales returns at the time product revenue is recognized and record that amount as a reduction to product revenue. Our sales return provision is based primarily on actual historical sales returns and our return policies. Our resellers generally do not have a right of return and our contracts with original equipment manufacturers only provide for rights of return in the event our products do not meet our published specifications or there is an epidemic failure, as defined in the contracts.

     Services. Service revenues consist primarily of fees for customer support services and, to a lesser extent, training and installation services. Our suite of customer support programs provides customers with access to technical assistance, unspecified software updates and upgrades on a when-and-if available basis, hardware repair and replacement parts.

     Support services are offered under renewable, fee-based contracts. Revenue from customer support contracts is deferred and recognized ratably over the contractual support period, which generally ranges from one to five years.

     Revenue from training and installation services is recognized when services have been performed, and represented less than 1% of total revenues for all periods presented.

     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, or decision-making group, in deciding how to allocate resources and in assessing performance. We are organized as, and operate in, one reportable segment: the design, development, manufacturing and marketing of a comprehensive, end-to-end suite of high-performance data networking solutions, including Ethernet Layer 2 and Layer 3 switches, Metro routers and Internet traffic management products. Our chief operating decision-making group reviews consolidated financial information, accompanied by information about revenues by geographic region and configuration type.

     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. Our foreign offices conduct sales, marketing and support activities. We determine revenues by geographic location based on the physical destination of our product shipments. Net product revenue by region as a percentage of net product revenue was as follows:

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     Sales to the U.S. federal government accounted for approximately 28% and 29% of our total revenues in the three and nine months ended September 30, 2004, respectively, and approximately 31% and 30% of our total revenues in the three and nine months ended September 30, 2003, respectively.

     Net product revenue from customers representing 10% or more of net product revenue for the respective periods was as follows:

     Computation of Per Share Amounts

     Basic earnings or loss per share has been calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share (“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, determined based on the average share price for each period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be received assuming the exercise of all in-the-money stock options are assumed to be used to repurchase shares in the open market. Certain common stock equivalents were excluded from the calculation of diluted EPS because the exercise price of these common stock equivalents was greater than the average market price of the common stock for the respective period or because a net loss was reported for the respective period and, therefore, their inclusion would have been anti-dilutive. There were 17.9 million and 2.2 million anti-dilutive common stock equivalents for the three months ended September 30, 2004 and 2003, respectively. For the nine months ended September 30, 2004 and 2003, there were 6.4 million and 3.3 million anti-dilutive common stock equivalents, respectively.

     Stock-Based Compensation

     As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we follow the intrinsic value method of accounting for employee stock options as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, we recognize compensation expense if options are granted with an exercise price below fair market value at the date of grant or if options are modified subsequent to the date of grant. Any resulting compensation

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expense is recognized either ratably over the vesting period or using variable accounting over the period from the date of modification to exercise or cancellation of the award.

     The following table illustrates the effect on reported net income or loss and earnings or loss per share had we accounted for our employee stock options and employee stock purchase plan under the fair value method prescribed by SFAS 123.

     We estimate the fair value of our stock options using the Black-Scholes option valuation model, which is the most commonly used model for purposes of disclosure pursuant to SFAS 123. The Black-Scholes option-pricing model includes assumptions regarding expected volatility, lives, dividend yields, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market conditions generally outside of our control. The following weighted-average assumptions were used to estimate the fair value of option grants and employee stock purchase plan purchase rights:

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     Recent Accounting Pronouncements

     The Financial Accounting Standard Board (“FASB”) issued an exposure draft entitled “Share-Based Payment, an Amendment of FASB Statements Nos. 123 and 95.” This exposure draft would require stock-based compensation to employees to be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. In the absence of an observable market price for the stock awards, the fair value of the stock options would be based upon a valuation methodology that takes into consideration various factors, including the exercise price of the option, the expected term of the option, the current price of the underlying shares, the expected volatility of the underlying share price, expected dividends on the underlying shares and a risk-free interest rate. The proposed requirements in the exposure draft would be effective for interim periods beginning after June 15, 2005. The FASB intends to issue a final Statement in late 2004. We have not yet assessed the impact of adopting this new standard.

     In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method or the equity method. The Task Force developed a basic three-step model in evaluating whether an investment is other-than-temporarily impaired and reached a consensus that additional disclosures are required for cost method investments. The recognition and measurement guidance is applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. Quantitative and qualitative disclosures required by EITF 03-1 for investments accounted for under SFAS No. 115 are effective for our fiscal year ending December 31, 2004. The adoption of EITF 03-1 did not have a material effect on our results of operations and financial condition.

2.COMPREHENSIVE INCOME OR LOSS

     Comprehensive income or loss is defined as the change in equity of an enterprise excluding changes resulting from stockholder transactions. Non-net income components of comprehensive income or loss for the three and nine months ended September 30, 2004 and 2003 were insignificant and consisted entirely of foreign currency translation adjustments.

3.COMMITMENTS AND CONTINGENCIES

     Guarantees and Product Warranties

     FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), requires that upon issuance of a guarantee, the guarantor must disclose and record a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 is applicable to our product warranty liability and, for disclosure purposes, to indemnification obligations contained in commercial agreements, including customary intellectual property indemnifications for our products contained in agreements with our resellers and end-users.

     We generally provide customers with a standard one-year hardware and 90-day software warranty. Customers can upgrade and/or extend the warranty for up to five years by purchasing one of our customer support programs. Our warranty accrual represents our best estimate of the amount necessary to settle future and existing claims as of the balance sheet date. We periodically assess the adequacy of our warranty accrual and adjust the amount as considered necessary.

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     Changes in product warranty liability for the nine months ended September 30, 2004 were as follows:

     We offer our customers renewable support arrangements, including extended warranties, that generally range from one to five years. We do not separate extended warranty revenues from routine support service revenues, as it is not practical to do so. The change in our deferred support revenue balance was as follows for the nine months ended September 30, 2004:

     In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify the counter-party from any 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 30, 2004 or December 31, 2003 related to these indemnifications as, historically, payments made related to these indemnifications have not been material to our financial position or results of operations.

     Purchase Commitments with Suppliers and Third-Party Manufacturers

     We use contract manufacturers to assemble and test our products. We also utilize third-party original equipment manufacturers (“OEMs”) to manufacture certain Foundry-branded products. In order to reduce manufacturing lead-times and ensure an adequate supply of inventories, our agreements with some of these manufacturers allow them to procure long lead-time component inventory on our behalf based on a rolling production forecast provided by us. We may be contractually obligated to purchase long lead-time component inventory procured by certain manufacturers in accordance with our forecast, unless we give notice of order cancellation at least 90 days prior to the delivery date. In addition, we issue purchase orders to our component suppliers and third-party manufacturers that may not be cancelable at any time. As of September 30, 2004, we had approximately $42.9 million of open purchase orders with our component suppliers and third-party manufacturers that may not be cancelable.

     Litigation

     In December 2000, several similar stockholder class action lawsuits were filed against us and certain of our officers in the United States District Court for the Northern District of California, following our announcement of our anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated as a class action by the District Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, and lead plaintiffs were selected and filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of stockholders who purchased our common stock during the period from September 7, 2000 to December 19, 2000. We then brought four successful motions to dismiss the complaint. Although the District Court granted each of the four dismissal motions, it also provided plaintiffs leave to amend the complaint. On August 29, 2003, following the dismissal of the four amended complaints, the District Court granted our motion to dismiss the case with prejudice and without leave to amend and, on September 2, 2003, entered judgment in our favor, dismissing the plaintiffs’ fifth amended complaint. On September 29, 2003, plaintiffs filed a Notice of Appeal with the United States Court of

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Appeals for the Ninth Circuit (“Court of Appeals”). On January 15, 2004, the plaintiff/appellants filed their opening brief with the Court of Appeals. On April 2, 2004, we filed our responsive brief. On May 14, 2004, the plaintiff appellants filed a reply brief. The briefing is now complete and the parties are awaiting a schedule for oral argument from the Court of Appeals. We believe the District Court’s judgment validates our conviction that the lawsuit is without merit and we will defend the District Court’s judgment vigorously.

     A class action lawsuit was filed on November 27, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of our 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 our common stock from September 27, 1999 through December 6, 2000. The operative amended complaint names as defendants us and three of our officers (the “Foundry Defendants”), including our Chief Executive Officer and Chief Financial Officer; and investment banking firms that served as underwriters for our initial public offering in September 1999. The amended complaint alleged violations of Sections 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the initial public offering (“ IPO”) failed to disclose that (i) the underwriters agreed to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriters, and (ii) the underwriters arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also appears to allege that false or misleading analyst reports were issued. 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. On February 19, 2003, the Court ruled on all defendants’ motions to dismiss. In ruling on motions to dismiss, the Court must treat the allegations in the complaint as if they were true solely for purposes of deciding the motions. The motion was denied as to claims under the Securities Act of 1933 in the case involving us. The same ruling was made in all but 10 of the other cases. The Court dismissed the claims under Section 10(b) of the Securities Exchange Act of 1934 against us and one of the individual defendants and dismissed all of the Section 20(a) “control person” claims. The Court denied the motion to dismiss the Section 10(b) claims against our remaining individual defendants on the basis that those defendants allegedly sold our stock following the IPO, allegations found sufficient purely for pleading purposes to allow those claims to move forward. A similar ruling was made with respect to 62 of the individual defendants in the other cases. We have accepted a settlement proposal presented to all issuer defendants. Under the terms of this settlement, plaintiffs will dismiss and release all claims against the Foundry Defendants in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases and for the assignment or surrender of control of certain claims we may have against the underwriters. The settlement will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to the settlement or opt out of the settlement.

     Since March 2001, we have reported on patent litigation between us and Nortel Networks Corp. (“Nortel”). Nortel filed the initial complaint in United States District Court for the District of Massachusetts. In October 2002, we filed our own patent complaint against Nortel in the United States District Court, Northern District of California. Subsequently, Nortel filed an Answer and Counter Claim asserting additional patents. On October 25, 2004, we entered into a settlement agreement and cross patent license (“the agreements”) covering technologies that were at issue in the case with Nortel. The agreements resolved both the litigation in Massachusetts and in California. Under the terms of the agreements, we paid Nortel $35.0 million in early November 2004.

     In May 2003, Lucent Technologies Inc. (“Lucent”) filed a lawsuit against us in the United States District Court for the District of Delaware alleging that certain of our products infringe several of Lucent’s patents, and seeking injunctive relief, as well as unspecified damages. Lucent also brought suit on the same patents (and one additional patent) against one of our competitors. On August 12, 2003, we filed a motion to sever the cases, and on February 6, 2004, the District Court granted the motion. Fact Discovery is now closed. Initial expert reports have been exchanged and rebuttal reports are due November 22, 2004. A Markman Hearing (claims construction) is scheduled for January 14, 2005. The parties have been instructed by the court to be prepared for trial in the spring of 2005. We have analyzed the validity of Lucent’s claims and believe that Lucent’s suit is without merit. We are committed to vigorously defending ourselves against Lucent’s claims.

     On February 13, 2004, we filed a lawsuit against Lucent in the United States District Court, Eastern District of Texas, Marshall Division. The lawsuit alleges that certain of Lucent’s products infringe one of our patents. We are

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seeking injunctive relief and damages. On March 22, 2004, Lucent filed an Answer and Counter Claim seeking a declaration of invalidity as to our asserted patent. On April 9, 2004, Lucent filed an Amended Answer and Counter Claim asserting infringement of U.S. patent #5649131. We analyzed the validity of Lucent’s counter claim and believe it is without merit. Discovery has begun and is scheduled to close on June 17, 2005. A Markman Hearing (claims construction) is scheduled for March 24, 2005. Trial is scheduled to begin August 1, 2005.

     From time to time, we are subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and other intellectual property rights. In addition, from time to time, third parties assert patent infringement claims against us in the form of letters, lawsuits and other forms of communication. Regardless of the merits of our position, litigation is always an expensive and uncertain proposition. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review the need for any such provision on a quarterly basis and record any necessary adjustments to reflect the effect of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. To date, we have not recorded any such provisions in accordance with SFAS 5. We believe we have valid defenses with respect to the legal matters pending against us. In the event of a determination adverse to us, we could incur substantial monetary liability, and be required to change our business practices. Any unfavorable determination could have a material adverse effect on our financial position, results of operations, or cash flows.

4. INCOME TAXES:

     Our interim effective income tax rate is based on our best estimate of our annual effective income tax rate. During the third quarter of 2004, we changed our estimate of our annual effective income tax rate to 37%, excluding the tax effect of the Nortel settlement, from 38% in the prior quarter, primarily due to a reduction in estimated pre-tax income and an expected increase in tax-exempt interest income. The effect of this change in estimate was a decrease in net loss of $0.7 million for the three months ended September 30, 2004. The effective tax rate for the three and nine months ended September 30, 2004 was 50% and 36%, respectively, compared to 37% and 36% for the three and nine months ended September 30, 2003, respectively. These rates reflect federal and state statutory tax rates, offset by expected tax benefits associated with research and development tax credits, export sales incentives, tax-exempt interest income, and the tax effect of the Nortel settlement. We expect our effective tax rate to be approximately 35% in the fourth quarter of 2004 due to the resolution of certain tax contingencies and the effect of the reinstatement of the research and development credit.

     Our income taxes payable for federal and state purposes has been reduced by the tax benefits associated with taxable dispositions of employee stock options. 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 exercise or disposition and the option price, tax effected. These benefits are recorded in stockholders’ equity and were $20.8 million and $21.3 million for the nine months ended September 30, 2004 and 2003, respectively.

     Management believes Foundry will likely generate sufficient taxable income in the future to realize the tax benefits arising from its existing net deferred tax assets of $35.0 million at September 30, 2004.

5. SUBSEQUENT EVENT:

     On October 25, 2004, we entered into a settlement agreement and cross patent license agreement (“the agreements”) with Nortel. Pursuant to the agreements, we paid $35.0 million to Nortel in early November 2004. As a result of the agreements, Nortel’s actions for monetary damages and an injunction against us will be dismissed, and our suit against Nortel will also be dismissed. In conjunction with the agreements, and based on the results of a third-party valuation analysis, we recorded an operating expense of $30.2 million in the third quarter of 2004. The remaining $4.8 million paid to Nortel represents consideration for a four year license of Nortel’s patents and is recorded as a long-term asset on the accompanying condensed consolidated balance sheet as of September 30, 2004. This amount will be amortized ratably to cost of product revenue over the four year license term.

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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 contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors That May Affect Future Results and the Market Price of Our Stock.” 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

     Founded in 1996, Foundry designs, develops, manufactures and markets a comprehensive, end-to-end suite of high performance data networking solutions, including Ethernet Layer 2 and Layer 3 switches, Metro routers, and Internet traffic management products. Our customers include U.S. government agencies, universities, e-commerce sites, and enterprises such as healthcare, financial, manufacturing and entertainment companies, as well as Internet and Metro service providers.

     Changes to Previously Announced Third Quarter Results

     On October 25, 2004, we entered into a settlement agreement and cross patent license agreement (“the agreements”) with Nortel . Pursuant to the agreements, we paid $35.0 million to Nortel in early November 2004. As a result of the agreements, Nortel’s actions for monetary damages and an injunction against us will be dismissed, and our suit against Nortel will also be dismissed. In conjunction with the agreements, and based on the results of a third-party valuation analysis, we adjusted our previously announced third quarter 2004 results of operations by recording an operating expense of $30.2 million in the third quarter of 2004. The remaining $4.8 million paid to Nortel represents consideration for a four year license of Nortel’s patents and is recorded as a long-term asset on the accompanying condensed consolidated balance sheet as of September 30, 2004. This amount will be amortized ratably to cost of product revenue over the four year license term.

     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 U.S. 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. The results of 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 these estimates under different assumptions or conditions. Management believes critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2003 reflect the more significant judgments and estimates used in preparation of our financial statements. Management has discussed the development, selection, and disclosure of these estimates with the Audit Committee of Foundry’s Board of Directors. Management believes there have been no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2004 compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2003.

     Results of Operations

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     Net Revenues

     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. Chassis use 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 and then reconfigure the chassis to be used 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):

     For the three month period, product revenues decreased slightly primarily due to selling price erosion caused by heightened competition in the IT marketplace and reduced demand for chassis products. The effect of these factors was offset somewhat by the success of our new 10-Gigabit Ethernet FastIron Edge stackable, which was introduced in the second quarter of 2004 and gained customer acceptance in the third quarter. For the nine month period, product revenue increased due to stronger overall demand for networking products in the first quarter of 2004 as compared to the first quarter of 2003, offset somewhat by lower average selling prices resulting from continuing competitive pressures. Sales to the U.S. federal government as a percentage of total revenues were approximately 28% and 31% for the three months ended September 30, 2004 and 2003, respectively, and approximately 29% and 30% for the nine months ended September 30, 2004 and 2003, respectively.

     Service revenues consist primarily of revenue from customer support contracts, and to a lesser extent, from training and installation services. Service revenues increased in absolute dollars in 2004 due to growth in our installed base of networking equipment and increased efforts to renew customer support contracts.

     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. We determine revenues by geographic location based on the physical destination of our product shipments. Net product revenue by region as a percentage of net product revenue was as follows:

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     The shift in product sales from Japan to EMEA in 2004 was due to large deployments of our products in Europe by the U.S. government during 2004, compared to large deployments of our products by major service providers in Japan during 2003. Product sales in the Americas increased slightly during 2004 due to stronger demand for our networking equipment from enterprise customers.

     Net product revenue from customers representing 10% or more of net product revenue was as follows:

Gross Margins

     The following table presents gross margins and the related gross margin percentages for the three and nine months ended September 30, 2004 and 2003 (dollars in thousands):

     Our cost of product revenue consists primarily of material, labor, manufacturing overhead, freight, warranty costs, and provisions for excess and obsolete inventory. The decrease in product gross margins as a percentage of net product revenue for the three months ended September 30, 2004 was due to increased competitive pricing pressure on our products, a shift in product mix to lower margin stackable products, and slightly higher inventory provisions, offset somewhat by reduced component costs for our newer products. During the third quarter of 2004, our product mix shifted from higher-margin chassis products to lower-margin stackable products due to the successful introduction of our new 10-gigabit stackable switches for the network edge. The increase in product gross margins as a percentage of net product revenue for the nine months ended September 30, 2004 was due to increased sales volume and lower contract manufacturing and component costs such as memory devices and printed circuit boards in 2004, offset somewhat by lower average selling prices.

     Our cost of service revenues consists primarily of costs of providing services under customer support contracts. These costs include material costs, labor, and overhead. The decreases in our service gross margin percentages were due primarily to increased inventory provisions associated with carrying higher inventory levels to support a larger customer base and a broader product portfolio, and costs associated with operating more service facilities.

     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 That May Affect Future Results and Market Price of Stock-Our gross margins may decline over time and the average selling prices of our products may decrease as a result of competitive pressures and other factors.”

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     Operating Expenses

     The following table presents operating expenses for the three and nine months ended September 30, 2004 and 2003 (dollars in thousands):

     Research and development expenses consist primarily of salaries and related personnel expenses, prototype materials, costs incurred for the development of our ASICs, software development and testing costs, and depreciation of equipment used in research and development activities. The increases in research and development expenses in 2004 were due primarily to higher depreciation expense as a result of significant purchases of advanced test equipment during the first half of 2004, and to a lesser extent, increased headcount. The effects of these factors were offset somewhat by reduced costs for prototype materials. We believe that investments in research and development, including the recruiting and hiring of engineers, are critical to our ability to remain competitive in the marketplace.

     Sales and marketing expenses consist primarily of salaries, 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. The increase in absolute dollars for the three months ended September 30, 2004 was primarily due to higher incentive compensation as a result of better sales performance relative to sales quotas and increased payroll costs associated with a 5% growth in headcount. The increase in absolute dollars for the nine months ended September 30, 2004 was primarily due to a $4.7 million increase in advertising and trade show expenses to enhance our brand recognition and to announce our new products such as our Terabit-capacity chassis and 10-Gigabit stackable products. Expenses for the nine months ended September 30, 2004 also increased due to higher costs associated with demonstration and evaluation equipment at customer sites and hiring of sales personnel throughout 2004.

     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. The increase in absolute dollars for the three months ended September 30, 2004 was due primarily to an increase of $4.7 million in legal fees related to the Nortel and Lucent patent infringement cases discussed in Note 3 and an increase of $0.5 million for consulting fees related to compliance with Section 404 of the Sarbanes-Oxley Act. The increase in absolute dollars for the nine months ended September 30, 2004 was due to increases of $7.0 million in legal fees related to the Nortel and Lucent patent infringement cases, $1.1 million for consulting fees related to compliance with Section 404 of the Sarbanes-Oxley Act, and $0.9 million from reduced bad debt reserve requirements in 2003, compared to no bad debt reserve requirements in 2004.

     On October 25, 2004, we entered into a settlement agreement and cross patent license agreement (“the agreements”) with Nortel . Pursuant to the agreements, we paid $35.0 million to Nortel in early November 2004. As a result of the agreements, Nortel’s actions for monetary damages and an injunction against us will be dismissed, and our suit against Nortel will also be dismissed. In conjunction with the agreements, and based on the results of a

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third-party valuation analysis, we recorded an operating expense of $30.2 million in the third quarter of 2004. The remaining $4.8 million paid to Nortel represents consideration for a four year license of Nortel’s patents and is recorded as a long-term asset on the accompanying condensed consolidated balance sheet as of September 30, 2004. This amount will be amortized ratably to cost of product revenue over the four year license term.

     Interest and other income, net

     We earn interest income on funds maintained in interest-bearing money market and investment accounts. The increase in net interest and other income in 2004 was primarily a result of higher interest rates and investment balances and, to a lesser extent, realized gains from favorable movements in foreign currency exchange rates. Our total cash and investments increased $164.8 million from September 30, 2003 to September 30, 2004.

     Income Taxes

     Our effective tax rates for the three months ended September 30, 2004 and 2003 were 50% and 37%, respectively. The effective tax rate for the nine months ended September 30, 2004 and 2003 was 36%. During the third quarter of 2004, we changed our estimate of our annual effective income tax rate to 37%, excluding the tax effect of the Nortel settlement, from 38% in the prior quarter, primarily due to a reduction in estimated pre-tax income and an expected increase in tax-exempt interest income. The effect of this change in estimate was a decrease in net loss of $0.7 million for the three months ended September 30, 2004. We expect our effective tax rate to be approximately 35% in the fourth quarter of 2004 due to the resolution of certain tax contingencies and the effect of the reinstatement of the research and development credit.

     Our income taxes payable for federal and state purposes has been reduced, and stockholders’ equity increased, by the tax benefits associated with taxable dispositions of employee stock options. 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. These benefits are recorded in stockholders’ equity and were $20.8 million and $21.3 million for the nine months ended September 30, 2004 and 2003, respectively.

     Liquidity and Capital Resources

     At September 30, 2004, we had cash and investments totaling $620.5 million, an increase of $114.8 million from $505.7 million at December 31, 2003. The increase can be attributed to $88.4 million of cash from operations and $33.0 million of proceeds from the exercise of employee stock options during the nine months ended September 30, 2004, offset by $6.9 million of equipment purchases.

     Net accounts receivable was $75.3 million at September 30, 2004 and $77.1 million at December 31, 2003. Our accounts receivable and days sales outstanding (“DSO”) are primarily affected by sale volume, shipment linearity and collections performance. Our DSO was 66 days as of September 30, 2004, compared to 69 days as of June 30, 2004 and 63 days as of December 31, 2003.

     We receive significant tax benefits in the form of reduced tax payments associated with disqualifying dispositions of employee stock options. If stock option exercise patterns change, we may receive less cash from stock option exercises and may not receive the same level of tax benefits in the future, which could cause our cash payments for income taxes to increase.

     Inventories were $36.7 million and $28.0 million as of September 30, 2004 and December 31, 2003, respectively. We significantly increased our production inventory levels to support a broader product offering, including new products, and also increased our service inventory levels to support a growing installed customer base. Annualized inventory turnover was approximately 3.9 and 5.0 for the three months ended September 30, 2004 and December 31, 2003, respectively. The decrease in inventory turns was due to lower product sales and higher average inventory levels during the third quarter of 2004.

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     In early November 2004, we paid $35.0 million to Nortel in conjunction with the settlement of patent litigation between the parties. Based on past performance and current expectations, we believe 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 existing operations through at least the next twelve months.

     Disclosures about Contractual Obligations and Commercial Commitments

     The following table summarizes our contractual obligations as of September 30, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

     Operating lease obligations represent the minimum lease rental payments under non-cancelable leases for our office space in various locations around the world. Purchase commitments represent agreements to purchase component inventory from our suppliers and third-party manufacturers that are enforceable and legally binding against us.

     Key factors affecting our cash flows include our ability to effectively manage our working capital, in particular inventory and accounts receivable, as well as future demand for our products and related pricing. We may incur higher capital expenditures in the near future if market conditions improve and we expand our operations. Although we do not have any current plans or commitments to do so, from time to time, we may also consider the acquisition of products and businesses complementary to our business. Any acquisition or investment may reduce our current capital or require additional capital.

     Off-Balance Sheet Arrangements

     We do not maintain any off-balance sheet transactions, arrangements, or obligations that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, or capital resources.

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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF OUR STOCK

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

     Our quarterly revenues and operating results may continue to 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 maintain or improve our financial results or that economic and market conditions will continue to improve and will not deteriorate.

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

     Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. Our quarterly revenue and earnings per share guidance is our best estimate at the time we provide guidance. Delays in generating or recognizing forecasted revenues could cause our quarterly operating results to be below our expectations and those of public market analysts or investors, which could cause the price of our common stock to fall.

     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.

     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 to commercial enterprise orders, as well as other reasons.

     Our revenues for a particular period may also be difficult to predict and may be adversely affected if we experience a non-linear (back-end loaded) sales pattern during the period. We sometimes 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 periods when overtime expenses may be incurred, as well as leading to additional costs associated with inventory planning and management. Furthermore, orders received towards the end of the period may not ship within the period due to our manufacturing lead times.

     In addition, we may incur increased costs and expenses related to sales and marketing, including expansion of our direct sales operations and distribution channels, product marketing, 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 of operating results may not be meaningful. In addition, you may not be able to rely on the results for any period as an 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.

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     Although our customer base has increased, we still depend on large, recurring purchases from certain 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 40% and 50% of net product revenue for the nine months ended September 30, 2004 and 2003, respectively. The loss of continued orders from any of our more significant customers, such as the U.S. government or individual agencies within the U.S. government, Mitsui, or Hewlett Packard, 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.

     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 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.

     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. 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.

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

     The market for network solutions is intensely competitive. In particular, Cisco Systems, Inc. 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 reduces margins and, therefore, the 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

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products obsolete. Although we are currently among the top providers of network infrastructure solutions, we cannot assure you 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 Extreme Networks, Juniper Networks, Nortel Networks, Enterasys Networks, 3Com, Huawei, and Alcatel. 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 other factors.

     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 revenues 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.

     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 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 current life cycle of our products is typically 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 revenues than anticipated. During the development of our products, we have also experienced delays in the prototyping of our ASICs, which in turn has led to delays in product introductions.

     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 ASICs, our IronCore, JetCore, and Terathon hardware architecture, 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.

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     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.

     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.

     The networking industry is increasingly characterized by the existence of a large number of patent claims and related litigation regarding patent and other intellectual property rights. In particular, some companies in the networking industry claim extensive patent portfolios. As a result of the existence of a large number of patents and 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 exclusive patent, copyright and trademark rights to technologies and related standards that are important to us. Such third parties may 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 are committed to vigorously defending ourselves against such claims. Regardless of the merits of our position, we may incur substantial expenses in defending against 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.

     In difficult economic times, some companies have attempted to realize revenues from their patent portfolios by using licensing programs. Some of these companies have contacted us regarding a license. We carefully review all license requests, but are unwilling to license technology not required for our product portfolio. However, any asserted license demand can require considerable effort to review and respond. Moreover, a refusal by us to a license request could result in threats of litigation or actual litigation, which, if 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 Part II, Item 1 “Legal Proceedings,” 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.

     Our ability to increase our revenues depends on expanding our direct sales operations and reseller distribution channels and continuing to provide 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 revenue could be harmed. Additionally, if our resellers 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. As a result, we cannot assure you 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.

     In an effort to gain market share and support our customers, we may need 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 in light of the current economic environment. Expansion of our direct sales operations and reseller

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distribution channels may not be successfully implemented and the cost of any expansion may exceed the revenues generated.

     Our gross margins may decline over time and the average selling prices of our products may 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 the recent disruption 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 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 revenues 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.

     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 of whom have been granted stock options. In order to improve productivity, we have historically used stock options to motivate and retain our employees. Some of the proposals currently under consideration by the accounting standard setting body regarding the accounting treatment of stock options could limit our ability to continue to use stock options as an 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 depends on Bobby R. Johnson, Jr., President, Chief Executive Officer and Chairman of the Board. We do not have employment contracts or key person life insurance for any of our personnel.

     Our operations in international markets involves 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 Pervasive Networks and Spot Distribution Ltd. in Europe, Mitsui in Japan, Shanghai Gentek and GTI in China, and Samsung in Korea. The failure of our

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international resellers to sell our products would 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, which has been weak in recent years. There are a number of risks arising from our international business, including:

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

     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 U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive on a price basis in international markets. In the future, we may elect to invoice some of our international customers in local currency, which could subject us to fluctuations in exchange rates between the U.S. dollar and the local currency.

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

     We purchase several key components used in our products from 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. Lead-times for various components have lengthened recently as a result of limits on IT spending and the 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, microprocessors and power supplies. We acquire these components through purchase orders and have no long-term commitments regarding supply or price 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.

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     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.

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

     We subcontract substantially all of our manufacturing to companies that assemble and test our 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 may be contractually obligated to purchase long lead-time component inventory procured by certain suppliers and third-party manufacturers in accordance with our forecast, unless we 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, which in turn delayed product shipments to our customers. We may in the future experience similar delays or other problems, such as inferior quality and insufficient quantity of product, any of which could harm our business and operating results. 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 increase 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 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 or a deterioration in product quality.

     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 often represent 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 a specific customer for a particular quarter are not realized in that quarter, we may not meet our revenue expectations.

     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 successfully 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.

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     In addition, rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual review and evaluation of our internal control systems, and attestation of these systems by our independent auditors. We are currently undergoing a review of our internal control systems and procedures and considering improvements that will be necessary in order for us to comply with the requirements of Section 404 by the end of 2004. Although we believe that our efforts will enable us to provide the required management report and enable our independent auditors to provide their attestation report concerning our assessment and the effectiveness of our internal controls over financial reporting as of our fiscal year end, we can give no assurance that such efforts will be completed in a timely manner and on a successful basis, which could adversely affect the market price of our common stock.

     If we are required to record compensation expense in connection with stock option grants, our profitability may be reduced significantly.

     The Financial Accounting Standards Board (“FASB”) has recently proposed an accounting standard that will require the fair value of all equity-based awards granted to employees be recognized in the statement of operations as compensation expense, beginning in the third quarter of 2005. The various methods for determining the fair value of stock options are based on, among other things, the volatility of the underlying stock. As noted above, our stock price has historically been volatile. Therefore, the adoption of an accounting standard requiring companies to expense stock options could negatively affect our profitability and may adversely affect our stock price. Such adoption could also limit our ability to continue to use stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees. FASB is expected to issue final rules on stock option expensing in late 2004. We will continue to monitor FASB’s progress on the issuance of this standard.

     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, such as MPLS Draft-Martini, 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 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. At least one networking equipment standards body has reportedly stopped all work on a standard in response to assertions by Nortel that it controls the patent rights to certain industry standards. Attempts by third parties to impose licensing fees on industry standards could undermine the adoption of such standards and lessen industry opportunities.

     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;

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•		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.

     Our products may not meet the standards required for 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 standards established by telecommunications authorities in various countries, as well as those of certain international bodies. 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 revenues or maintaining profitability.

     We may engage in acquisitions that could result in the dilution of our stockholders, 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;
•		risks of entering geographic and business markets in which we have no or limited prior experience; and
•		potential loss of key employees of acquired organizations.

     Although we do not currently have any agreements or plans with respect to any material 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.

     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, and news reports relating to trends in our markets. In addition, the stock

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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 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 stockholders. The rights of the holders of 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 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 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 acts or other catastrophic event.

     Our operations are susceptible to outages due to fire, floods, 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 Japan, which periodically experiences 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 us for losses that may occur as a result of any of these events. Any such event could have a material adverse effect on our business, operating results, and financial condition.

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-month period ended September 30, 2004, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4. Controls and Procedures

     We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is made in accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and forms of the Securities and Exchange Commission. This evaluation was made under the supervision, and with the participation of, management, including our principal executive officer and principal financial officer, as of the end of the period covered by this Quarterly Report on Form 10-Q. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Subject to these limitations, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the evaluation date, the disclosure controls and procedures were effective to

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provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

     As required by Section 404 of the Sarbanes Oxley Act of 2002, management is continuing to test and evaluate its internal control structure to determine whether our controls are designed and operating effectively. As a result of our testing and evaluation performed to date, we have noted that improvements could be made in the design or operation of our internal control structure, particularly with respect to general computer controls, segregation of duties, and inventory monitoring. We believe adequate compensating controls exist in these areas; however, we are developing plans to implement improvements. We have disclosed these matters to the audit committee of our board of directors and to our independent auditors. There were no changes to our internal controls during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     In December 2000, several similar stockholder class action lawsuits were filed against us and certain of our officers in the United States District Court for the Northern District of California, following our announcement of our anticipated financial results for the fourth quarter ended December 31, 2000. The lawsuits were subsequently consolidated as a class action by the District Court, under the caption In re Foundry Networks, Inc. Securities Litigation, Master File No. C-00-4823-MMC, and lead plaintiffs were selected and filed a consolidated amended complaint which alleged violations of federal securities laws and purported to seek damages on behalf of a class of stockholders who purchased our common stock during the period from September 7, 2000 to December 19, 2000. We then brought four successful motions to dismiss the complaint. Although the District Court granted each of the four dismissal motions, it also provided plaintiffs leave to amend the complaint. On August 29, 2003, following the dismissal of the four amended complaints, the District Court granted our motion to dismiss the case with prejudice and without leave to amend and, on September 2, 2003, entered judgment in our favor, dismissing the plaintiffs’ fifth amended complaint. On September 29, 2003, plaintiffs filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit (“Court of Appeals”). On January 15, 2004, the plaintiff/appellants filed their opening brief with the Court of Appeals. On April 2, 2004, we filed our responsive brief. On May 14, 2004, the plaintiff appellants filed a reply brief. The briefing is now complete and the parties are awaiting a schedule for oral argument from the Court of Appeals. We believe the District Court’s judgment validates our conviction that the lawsuit is without merit and we will defend the District Court’s judgment vigorously.

     A class action lawsuit was filed on November 27, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of our 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 our common stock from September 27, 1999 through December 6, 2000. The operative amended complaint names as defendants us and three of our officers (the “Foundry Defendants”), including our Chief Executive Officer and Chief Financial Officer; and investment banking firms that served as underwriters for our initial public offering in September 1999. The amended complaint alleged violations of Sections 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the initial public offering (“ IPO”) failed to disclose that (i) the underwriters agreed to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriters, and (ii) the underwriters arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also appears to allege that false or misleading analyst reports were issued. 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. On February 19, 2003, the Court ruled on all defendants’ motions to dismiss. In ruling on motions to dismiss, the Court must treat the allegations in the complaint as if they were true solely for purposes of deciding the motions. The motion was denied as to claims under the Securities Act of 1933 in the case involving us. The same ruling was made in all but 10 of the other cases. The Court dismissed the claims under Section 10(b) of the Securities Exchange Act of 1934 against us and one of the individual defendants and dismissed all of the Section 20(a) “control person” claims. The Court denied the motion to dismiss the Section 10(b) claims against our remaining individual defendants on the basis that those defendants allegedly sold our stock following the IPO, allegations found sufficient purely for pleading purposes to allow those claims to move forward. A similar ruling was made with respect to 62 of the individual defendants in the other cases. We have accepted a settlement proposal presented to all issuer defendants. Under the terms of this settlement, plaintiffs will dismiss and release all claims against the Foundry Defendants in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases and for the assignment or surrender of control of certain claims we may have against the underwriters. The settlement will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to the settlement or opt out of the settlement.

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     Since March 2001, we have reported on patent litigation between us and Nortel. Nortel filed the initial complaint in United States District Court for the District of Massachusetts. In October 2002, we filed our own patent complaint against Nortel in the United States District Court, Northern District of California. Subsequently, Nortel filed an Answer and Counter Claim asserting additional patents. On October 25, 2004, we entered into a settlement agreement and cross patent license (“the agreements”) covering technologies that were at issue in the case with Nortel. The agreements resolved both the litigation in Massachusetts and in California. Under the terms of the agreements, we paid Nortel $35.0 million in early November 2004.

     In May 2003, Lucent Technologies Inc. (“Lucent”) filed a lawsuit against us in the United States District Court for the District of Delaware alleging that certain of our products infringe several of Lucent’s patents, and seeking injunctive relief, as well as unspecified damages. Lucent also brought suit on the same patents (and one additional patent) against one of our competitors. On August 12, 2003, we filed a motion to sever the cases, and on February 6, 2004, the District Court granted the motion. Fact Discovery is now closed. Initial expert reports have been exchanged and rebuttal reports are due November 22, 2004. A Markman Hearing (claims construction) is scheduled for January 14, 2005. The parties have been instructed by the court to be prepared for trial in the spring of 2005. We have analyzed the validity of Lucent’s claims and believe that Lucent’s suit is without merit. We are committed to vigorously defending ourselves against Lucent’s claims.

     On February 13, 2004, we filed a lawsuit against Lucent in the United States District Court, Eastern District of Texas, Marshall Division. The lawsuit alleges that certain of Lucent’s products infringe one of our patents. We are seeking injunctive relief and damages. On March 22, 2004, Lucent filed an Answer and Counter Claim seeking a declaration of invalidity as to our asserted patent. On April 9, 2004, Lucent filed an Amended Answer and Counter Claim asserting infringement of U.S. patent #5649131. We analyzed the validity of Lucent’s counter claim and believe it is without merit. Discovery has begun and is scheduled to close on June 17, 2005. A Markman Hearing (claims construction) is scheduled for March 24, 2005. Trial is scheduled to begin August 1, 2005.

     From time to time, we are subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, patents and other intellectual property rights. In addition, from time to time, third parties assert patent infringement claims against us in the form of letters, lawsuits and other forms of communication. Regardless of the merits of our position, litigation is always an expensive and uncertain proposition. In accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”), we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review the need for any such provision on a quarterly basis and record any necessary adjustments to reflect the effect of ongoing negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case in the period they become known. To date, we have not recorded any such provisions in accordance with SFAS 5. We believe we have valid defenses with respect to the legal matters pending against us. In the event of a determination adverse to us, we could incur substantial monetary liability, and be required to change our business practices. Any unfavorable determination could have a material adverse effect on our financial position, results of operations, or cash flows.

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

     None.

Item 3. Defaults Upon Senior Securities.

     None

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

     None.

Item 5. Other Information.

     Foundry’s independent auditor, Ernst & Young LLP (“E&Y”), has recently advised the Audit Committee of Foundry’s Board of Directors that certain cash handling services performed for a Foundry subsidiary by an E&Y member firm in China, and certain secretarial and directorship services performed by an E&Y associated entity in Singapore, have

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raised questions regarding E&Y’s independence with respect to its performance of audit services for Foundry. The non-audit services described above are not permitted under the auditor independence rules. E&Y has informed the Company and its Audit Committee that it has concluded that the services performed have not impaired its independence with respect to performance of its audit services. The Company and its Audit Committee have considered the impact these services may have had on E&Y’s independence with respect to the Company and concluded there has been no impairment of E&Y’s independence. The fees over the period the services were provided, which was July 2002 through September 2003, totaled approximately $5,900. The services have been discontinued.

Item 6. Exhibits.

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SIGNATURES

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

Date: November 9, 2004

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EXHIBIT INDEX