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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark one)

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 0-26339

JUNIPER NETWORKS, INC.

Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act:   Common stock, $0.00001 par value

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 filings requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2). Yes [X] No [  ]

As of February 28, 2003 there were 376,289,841 shares of the Registrant’s Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant was approximately $1,333,111,000 (based on the closing price for the Common Stock on the NASDAQ National Market on June 28, 2002).

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III is incorporated by reference to specified portions of the Registrant’s definitive Proxy Statement to be issued in conjunction with the Registrant’s 2003 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the Registrant’s fiscal year ended December 31, 2002.

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PART I

This Annual Report on Form 10-K (“Report”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements regarding future events and the future results of Juniper Networks that are based on current expectations, estimates, forecasts, and projections about the industry in which Juniper Networks operates and the beliefs and assumptions of the management of Juniper Networks. Words such as ‘expects,’ ‘anticipates,’ ‘targets,’ ‘goals,’ ‘projects,’ ’intends,’ ‘plans,’ ‘believes,’ ‘seeks,’ ‘estimates,’ variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” and elsewhere, and in other reports Juniper Networks files with the Securities and Exchange Commission (“SEC”), specifically the most recent reports on Form 10-Q, each as it may be amended from time to time. Juniper Networks undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

ITEM 1. Business

     Overview

     We are a leading provider of network infrastructure solutions that transform the business of networking by converting bandwidth — a commodity — into a dependable, secure and highly valuable corporate asset. Our products, services and solutions enable service providers and other network-intensive businesses to support and deliver services and applications on a highly efficient and low cost integrated network. Our products are designed and purpose-built for service provider networks and offer our customers best-in-class performance with less complexity and cost than legacy alternatives. Unlike conventional routers, originally developed for enterprise applications and increasingly inadequate for use in the highly scaled public and private networks, our products are specifically designed to accommodate substantial size, scope and security demands.

     We lead the industry in transforming packets into profit for network service providers, wireless and cable operators, government agencies, research and education networks and information-intensive enterprises. Our acquisition of Unisphere Networks, Inc., completed in July 2002, has enabled us to extend our ability to supply shared access applications expertise to the leading service providers, carriers and PTTs throughout the world.

     We were incorporated in California in 1996 and reincorporated in Delaware in 1997 with our corporate headquarters in Sunnyvale, California. Our corporate mailing address is 1194 North Mathilda Avenue, Sunnyvale, California 94089 and the telephone number at that location is (408) 745-2000. Our website is www.juniper.net.

     Industry Background

     The Internet has evolved from an academic research project into a network of hundreds of separately administered, public and private networks interconnected using Internet Protocol (IP). IP traffic continues to grow, driven by increasing numbers of new users, connected devices and Internet transactions. The result of the widespread use of IP is a ubiquitous network that today carries a large and growing amount of data traffic enabling millions of users to share information and conduct electronic commerce. Industry research firms forecast continued growth worldwide in the Internet and Internet traffic. The importance of IP continues to increase as the number of users, connected devices and transactions over the highly scaled public and private networks increases.

     The rapid adoption of the Internet and the tremendous growth of IP traffic have prompted service providers to construct large-scale data networks. These highly scaled public and private networks are being optimized to transport data traffic as compared to traditional telephone networks, which were

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optimized to transport voice traffic. The architecture of these next generation networks is being driven by two key technologies: packet/cell switching and optical networking.

     Advantages of Packet/Cell Switching. Packet/cell switching technology, which divides data traffic into distinct units called packets or cells and routes each packet or cell independently, provides superior use of available network capacity compared to traditional circuit switching technology. In a circuit switched network, each data stream, such as a voice telephone call between two points, is provided with a dedicated channel, or circuit, for the duration of the telephone call. This approach leads to inefficient use of network resources because a channel is fully dedicated to each transaction, whether or not data is actually flowing at any given moment. As a result, circuit switched architecture is highly inefficient for Internet applications which tend to create large bursts of data traffic followed by long periods of silence. Packet/cell switching architectures enable greater utilization out of a fixed capacity circuit by combining traffic that has different capacity demands of the circuit at different times. Packet/cell switches more efficiently fill the available network bandwidth with packets of data from many users, thereby reducing the wasted bandwidth due to silence from any one particular user. The use of packet/cell switching is driving the architecture of the Internet to be fundamentally different from traditional circuit switched voice based networks. In packet/cell switched networks, IP has emerged as the de facto standard for providing services to end users. Other packet/cell switching products include frame relay switches, asynchronous transfer mode (ATM) switches and routers.

     Rapid Advances in Optical Networking. Optical networking technology uses pulses of light, rather than pulses of electricity, to transmit data in a network, and uses fiber optic connections instead of wires. Optical networking can be used to transmit much more information over a given connection than electrical signals can convey. Optical networking advances, such as dense wavelength division multiplexing, or DWDM, which allows transmission of several frequencies of light over one strand of optical fiber, have enabled still higher data transmission rates and improved efficiency of bandwidth utilization. Packet/cell technologies have not kept up with optical technologies and traditional packet switching equipment is not capable of forwarding packets at rates sufficient to keep pace with optical transmission speeds. Our IP-based products are purpose-built to meet these requirements.

     Fundamental Requirements for Highly Scaled Public and Private Networks

     The reliability and performance of current network infrastructure equipment have become and continue to be critical issues for service providers as they support dramatic growth in IP traffic and increasingly seek to offer new revenue generating, mission-critical and other services. The need for high reliability, high performance, high performance under stressful conditions, scalability, interoperability and cost effectiveness are fundamental requirements in meeting the needs associated with the growth in IP traffic. New requirements will continue to arise for next generation networks, which will drive a set of new requirements for network infrastructure equipment.

     High Reliability. As businesses and consumers increasingly rely on the Internet for mission-critical applications, high network reliability becomes essential. Service providers are increasingly expected to provide a similar degree of reliability on the Internet that users have become accustomed to on the traditional telephone network. The “five nines” (99.999%) reliability standard of the traditional telephone network is becoming the target to which suppliers of next-generation Internet platforms are being compared. As service providers begin to bundle voice and data on their networks, this high degree of reliability is becoming even more critical.

     High Performance. To handle the rapid growth in IP traffic, today’s networks increasingly require routers that can operate at higher speeds. The processing of data packets at these high speeds requires sophisticated forwarding technology to inspect each packet and assign it to a destination based on priority, data type and other considerations. Since a large number of IP packets, many of which perform critical administrative functions, are small in size, high performance Internet routers need to achieve their specified transmission speeds even for small packet sizes. Since smaller packets increase packet processing demands, routing large numbers of smaller packets tends to be more resource intensive than routing of larger packets. A wire speed router, which achieves its specified transmission rate for any type

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of traffic passing through it, can accomplish this task. Thus, provisioning of mission-critical services increasingly requires the high performance enabled by wire speed processing.

     High Performance Under Stressful Conditions. In a large and complex network, individual components inevitably fail. However, the failure of an individual device or link must not compromise the network as a whole. In a typical network, when a failure occurs, the network loses some degree of capacity and, in turn, a greater load falls on the remaining network routers, which must provide alternate routes. Routers must quickly adjust to the new state of the network to maintain packet forwarding rates and avoid dropping significant numbers of packets when active routes are lost or when large numbers of routes change. Routing protocols are used to accomplish this convergence, a process that places even greater stress on the router. Given the complexity of Internet infrastructure, particularly compared to enterprise networks, the convergence process is far more complex and places a far greater load on the routing software, thereby requiring a much more sophisticated device.

     Scalability. Due to the rapid growth in IP traffic, service providers must continuously expand their networks, both in terms of increased numbers of access points of presence (PoPs), and also greater capacity per PoP. To facilitate this expansion process, network infrastructure equipment must be highly scalable. Next generation routers therefore need to be upgradeable and configurable to function within constantly changing networks while incurring minimal downtime.

     Interoperability. Service providers do not have the time or inclination to change their existing networks to favor introduction of new products; rather, new products must be compatible with the existing environment. Given the open and inter-connected nature of the Internet, the complexity of running an Internet backbone network requires a service provider to control and police relations with other service providers. For example, service providers must carefully control what traffic is accepted under what conditions from other providers. The software in each router must offer 100% compatibility with the interior protocols and standards used within each service provider’s backbone network. The compatibility level must be maintained despite changes to software equipment configuration and network architecture and upgrades to the various protocol standards. Thus, routing software must be flexible and quickly upgradeable to support any necessary revisions. This level of compatibility, in turn, cannot impact the performance, scalability or reliability of the equipment. Attaining this sophisticated level of interoperability is highly challenging and requires significant testing to ensure compatibility.

     Cost Effectiveness. Growth in IP traffic and intense price competition in the telecommunications market continues to require service providers to seek solutions that significantly reduce the capital expenditures required to build and operate their networks. In addition to the basic cost of equipment such as routers, service providers incur substantial ancillary costs in terms of space required to deploy the equipment, power consumption and on-going operations and maintenance. Service providers therefore want to deploy dense and varied equipment configurations in limited amounts of rack and floor space. Therefore, in order to continue to scale their networks toward higher data speeds in a cost effective manner, service providers need the ability to mix and match easily many different speed connections at appropriate densities, without significantly increasing the consumption of space or power.

     There is a clear need for next generation routers that can support high speeds and offer new IP-based services. Network operators are eagerly seeking new solutions that increase the level of scalability and reliability within their networks and reduce the cost of their architectures.

     The Juniper Networks Solution

     We developed, marketed and sold the first commercially available purpose-built Internet backbone router optimized for the specific high performance needs of service providers. As the need for core bandwidth continued to increase, the need for service rich platforms at the edge of the network was created. Our products are designed to address the needs at the core and the edge of the network as well as for wireless and cable access by combining the features of high-performance ASIC-based packet forwarding technology, our software and a network-optimized architecture.

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     Software. Our software has been designed to meet the IP network routing, operations and control requirements of the world’s largest service providers and is an integral embedded component of our product family system architecture. The ability of our software to manage the complex network sharing relationships among service providers allows our products to be placed at critical points in the core of a service provider’s network. Our software allows our products to have widespread network placement due to its interoperability with Cisco’s Internetwork Operating System, or IOS, currently the most broadly deployed routing operating system.

     Unconstrained by legacy routing software, we developed our software using a modular design, in which distinct functions are implemented as separate modules with well defined interfaces and interactions, simplifying troubleshooting and maintenance. These features keep functionality distinct, and minimize the impact of any failure that may occur to the specific software application in which the failure occurs. Also, we believe the modularity of our software will enable the continuous upgrade of new enhanced capabilities, while protecting reliability and compatibility with existing networks.

     High Performance ASIC-Based Packet Forwarding Technology. Our products utilize high performance ASIC-based technology. The result is a platform that is substantially faster than today’s general purpose microprocessor based routers in its ability to process and forward IP packets, allowing our products to deliver high performance at wire speed. The ability to enhance and implement large scale ASICs will be a long-term differentiator for us, particularly as the sophistication required to forward traffic across higher speed networks increases.

     Network Optimized Architecture. Our products employ an architecture designed exclusively for the highly scaled public and private networks. The system architecture provides a clean separation between the routing and packet-forwarding functions. Separating these two functions enables us to develop independently a full-featured routing protocol and traffic engineering functionality through our software and wire speed packet forwarding performance through high performance ASICs.

     Juniper Networks Products. Our products have been developed or acquired as part of our strategy to provide the reliable delivery of core, edge, wireless and cable Internet services at scale for the New Public Network.

     As part of our product and services offerings, our Model for Integrated Network Transformation (MINT) provides a business and network framework that enable service providers to transition from a commodity transport business model to a more lucrative, value-added services model. Technologies such as IP routing, multi-protocol label switching (MPLS) and Packet Processing have been successfully deployed in a number of service provider networks for a number of years and have now been enhanced and matured to a degree that they can now be applied to solving issues such as the supply of new IP based services and consolidating legacy networks.

     The MINT provides an operational approach to apply the technologies appropriate to the revenue opportunities being presented to our customers. The MINT advocates a software based approach in the provision of services similar to the model that has proved to be successful in the telephony market. It defines a new operational model for service providers to address the data communications market by:

	•		addressing underserved markets with new services and a low touch/low cost operational model improving the profitability of these service; and
	•		supporting existing services such as Frame Relay, ATM, Internet access with a better cost model – the same service but a better cost model.

     Our M-series and T-series product platforms share common software and services, and common family of ASIC technology for full compatibility and scalability. Critical service provider applications including high-speed access, peering, and hosting are served by our platforms. Physical interfaces are interchangeable between most platforms, increasing user flexibility and allowing common sparing. Our solution provides several key benefits to our customers: carrier class reliability, wire speed performance, scalability, interoperability, flexibility, reduced complexity and cost effectiveness. The M-series and T-

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series products leverage our third generation of high-density silicon and the same proven JUNOS software that is common across all of our M-series and T-series platforms to ensure continuous and predictable service delivery, while minimizing capital and operational costs. This ensures network service providers migrating ATM and FR traffic to MPLS transport are able to do so smoothly and seamlessly without disruption to customer applications.

     Our E-series products are designed to allow simultaneous delivery of high-speed services over dedicated connections, such as T1, T3 and optical interfaces, as well as over DSL, cable and wireless connections from a single system. By delivering multiple high-speed access services from a single system, our products reduce the need to purchase, install and operate multiple pieces of equipment. The combination of our software and hardware allows communications service providers to deploy new high-value data services. Our E-series products support value-added data services for business-critical applications across the Internet, such as virtual private networks and priority service levels, or IP quality of service.

     Our J-series product, developed together with Ericsson A.B., provides a scalable solution for both GPRS and WCDMA networks and supports wireless operators in their evolution from voice-centric GSM networks to the new multimedia-rich 3G networks. Through the use of consistent software features in our M-series routers and the new Ericsson GGSN application software, operators gain scalability advantages, including the ability to natively offer the latest IPv6 standard for IP networking—which includes advanced quality of service (QoS) features, as well as vast new IP addressing capabilities. The J-series products natively support high packet-forwarding performance and robust, standards-based QoS capabilities—including support for Differentiated Services (DiffServ), Multi-Protocol Label Switching (MPLS), and all four 3GPP R3 QoS classes. The result is the first carrier-class GGSN capable of handling demanding high-speed data multimedia services such as streaming video, real-time gaming, videoconferencing and live application sharing. The J-series products can be integrated into an existing backbone network and the operator gains with ease of deployment and cost-of-ownership benefits through using the same infrastructure for GPRS/WCDMA and other types of IP access. We sell the J-series products exclusively through our reseller Ericsson.

     The G-series products, based on CableLabs® DOCSIS™ 1.1 and interim PacketCable specifications, combine the CMTS with our M-series routers allowing cable operators to efficiently deliver advanced IP services, including VoIP through two-way cable plants, and offer interoperability with call management servers, media gateways, billing and provisioning systems and multimedia terminal adapters. The G-series products utilize a purpose-built DOCSIS-compliant integrated circuit – the Broadband Cable Processor ASIC, to allow cable operators to deliver more bandwidth for advanced IP services and with superior RF performance and thereby simultaneously supporting a higher number of cable modems and to lower capital expenses.

     The Juniper Networks Strategy

     Our objective and strategy is to transform the business of networking by converting bandwidth, which is a commodity, into a dependable, secure and highly valuable corporate asset. Our technological leadership and problem solving abilities combined with our experience and fundamental understanding of high performance Packet Processing will help us in meeting our objectives. Key elements of our strategy are described below.

     Maintain and Extend Technology Leadership. Our ASIC technology, software and network-optimized product architecture have been key elements to establishing our technology leadership. We believe that these elements are highly leverageable into future products we are currently developing. We intend to maintain and extend our technological leadership in the network infrastructure market through continued significant investment to enhance the feature richness of our products and to develop future differentiated offerings for service providers.

     Leverage Early Lead as Supplier of Purpose-Built Network Infrastructure. From inception we have focused on designing and building network infrastructure for service providers and have integrated purpose-built software and hardware into a network optimized architecture that specifically meets service

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providers’ needs. We believe that many of these customers will deploy network infrastructure equipment from only a few vendors. The purpose-built advantages of our products provide us with a time-to-market lead, which is a critical advantage in gaining rapid penetration as one of these selected vendors. Once our products are widely deployed in a service provider’s network as the primary or even secondary network infrastructure equipment, we believe we create a significant barrier to entry to potential competitors who do not currently offer commercially-viable next generation routing solutions.

     Work Very Closely With Key Customers. In developing our products, including our software, we worked very closely with customers to design and build a product specifically to meet their complex needs and, over the last four years, we have expanded our understanding of the challenges facing these carriers, enabling us to subsequently design additional features and capabilities into both our software and hardware. We believe our close relationships with, and constant feedback from, our customers have been key elements in our design wins and rapid deployment to date. We plan to continue to work very closely with our key customers to implement enhancements to current products as well as to design future products that specifically meet their evolving needs. We are also actively involved with these customers in developing key standards, such as MPLS, and are an active participant in standards organizations such as the Internet Engineering Task Force and the Optical Internetworking Forum.

     Increase Penetration at Major Service Providers. Our initial focus was to penetrate several of the largest service providers, where operators have the technical sophistication, resources and desire to test and evaluate our solution against potential alternatives. We believe that there is a significant opportunity to further penetrate these large and complex networks given the advantages of our products.

     Enable New IP-Based Services. Our platform enables service providers to build networks cost effectively and to offer new differentiated services for their customers more efficiently than conventional products. We believe that the delivery of IP-based services and applications, including web hosting, outsourced Internet and intranet services, VPNs, outsourced enterprise applications and voice-over IP, will continue to grow and are cost-effectively enabled by our network infrastructure solutions.

     Technology

     Our core technology consists of our backbone router architecture, software and ASIC hardware expertise. Our general-purpose architecture was initially embodied in the M40, but also is designed to serve as the platform for our future generations of core products. We have products based on our M-series and T-series platforms, our E-series platforms, our J-series platform and our G-series platform.

     Our software offers a full suite of scalable, Internet-tested routing protocols. Protocols and software tools, which are used to control and direct network traffic, are critical to a network routing solution. Software control is made more important by the fact that the size and complexity of backbone networks are increasing at a time when service providers are looking to differentiate themselves through value-added service offerings.

     Customers

     Our customers include end users and value added resellers. We recognize revenue from the shipment of products at the time of shipment unless we have future obligations for network interoperability or if we have to obtain customer acceptance. In those cases, we defer recognition of the revenue and related costs until we have met our obligations.

     Ericsson accounted for approximately 17% of our recognized product revenues for the year ended December 31, 2002.

     Sales and Marketing

     We sell and market our products primarily through our direct sales organization and value-added resellers.

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     Direct Sales. Our North American direct sales organization is divided into regional operations with our direct sales efforts focused on the largest service providers. The direct sales account managers cover the market on an assigned account basis and work as a team with account oriented systems engineers. They are directed by a regional operations manager who reports to the North American Vice President of Sales. We also have technical engineers that consult with and provide our customers with guidance and assistance on the evolution of their networks as it relates to the deployment of our products. These consulting engineers also help in defining the features that are required for our products to be successful in specific applications. A key feature of our sales effort is the relationship we establish at various levels in our customers’ organization. Our sales team maintains contact with key individuals who have service planning and infrastructure buildout responsibility.

     Value Added Resellers. We have complemented our direct sales effort in the United States through the addition of several highly focused value added resellers. Our arrangements with value added resellers typically have been non-exclusive and provide the value added reseller with discounts based upon the volume of their orders.

     Strategic Distribution Relationships. We have established a strategic distribution relationship with both Ericsson A.B. and Siemens A.G. We believe that both Ericsson and Siemens have significant customer relationships in place and offer products that complement ours. Our agreements with Ericsson and Siemens allow them to distribute our products on a worldwide, non-exclusive basis with discounts based upon the volume. Ericsson and Siemens provide the first level of support to its customers.

     International Resellers. We have established, in addition to Ericsson and Siemens, strategic value added reseller relationships with Nortel and Alcatel to sell and service our products on a worldwide non-exclusive basis. To further our international sales objectives, we also have established a number of country specific value added resellers. These resellers have expertise in deploying complex network infrastructure equipment in their respective markets and provide the first level of support required by our international customers.

     As of December 31, 2002, we employed 410 people in our sales and marketing organizations.

     Customer Service and Support

     We believe that a broad range of support services is essential to the successful installation and ongoing support of our products and we have hired support engineers with proven network experience to provide those services. We offer the following services: 24 hours a day, seven days a week technical assistance (on-line, telephone and on-site), professional services, educational services, logistics services and web-based information.

     We offer a variety of flexible and comprehensive support programs, including basic hardware and software warranty services, next day onsite parts and labor, 24 hours a day, seven days a week same day parts and labor and on-site resident engineers. We deliver these services directly to major end users and also utilize a multi-tiered support model, leveraging the capabilities of our partners and third party organizations. We also train our partners in the delivery of education and support services.

     Customer service and support provide front line product support and is the problem resolution interface to our partners and direct end users. If customer service and support are unable to resolve an issue themselves, they duplicate the problem scenario and provide the failure information, such as logs, traces and system configuration to appropriate subject matter experts in our engineering department.

     Based on the severity of the problem and the impact to our customers’ network, there are strict escalation guidelines to ensure that the appropriate technical resources and management attention is brought to bear on the problem in a timeframe commensurate with problem priority. The overall goal is to fix the problem, at the appropriate level, in the right timeframe in order to ensure our customers’ satisfaction.

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     As of December 31, 2002, we employed 165 people in our worldwide customer service and support organization.

     Research and Development

     We have assembled a team of skilled engineers with extensive experience in the fields of high end computing, network system design, Internet routing protocols and embedded software. These individuals have been drawn from leading computer data networking and telecommunications companies. In addition to building complex hardware and software systems, the engineering team has experience in delivering very large, highly integrated ASICs and extremely scalable software.

     We believe that strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional applications, incorporating that technology and maintaining the competitiveness of our product and service offerings. We are leveraging our third generation ASICs, developing additional network interfaces targeted to our customer applications and continuing to develop next generation technology to support the anticipated growth in network bandwidth requirements. We continue to expand the functionality of our software to improve performance and scalability, and to provide an enhanced user interface.

     Our research and development process is driven by the availability of new technology, market demand and customer feedback. We have invested significant time and resources in creating a structured process for undertaking all product development projects. This process involves all functional groups and all levels within our Company. Following an assessment of market demand, our research and development team develops a full set of comprehensive functional product specifications based on inputs from the product management and sales organizations. This process is designed to provide a framework for defining and addressing the steps, tasks and activities required to bring product concepts and development projects to market.

     As of December 31, 2002, we employed 704 people in our research and development organization.

     Our research and development expenses totaled $161.9 million for the year ended December 31, 2002, $155.5 million for the year ended December 31, 2001 and $87.8 million for the year ended December 31, 2000.

     Manufacturing

     Our manufacturing operation is outsourced. We currently have manufacturing relationships with Solectron, Celestica and Plexus, under which we have subcontracted our manufacturing activity. This subcontracting activity extends from prototypes to full production and includes activities such as material procurement, final assembly, test, control and shipment to our customers. We design, specify and monitor all of the tests that are required to meet internal and external quality standards. These arrangements provide us with the following benefits:

	•		we conserve the working capital that would be required for funding inventory;
	•		we can adjust manufacturing volumes quickly to meet changes in demand;
	•		we can quickly deliver products to customers with turnkey manufacturing and drop shipment capabilities; and
	•		we operate without dedicating any space to manufacturing operations.

     Our ASICs are manufactured by IBM who is responsible for all aspects of the production of the ASICs using our proprietary designs.

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     Competition

     Competition in the network infrastructure market is intense. Cisco Systems, Inc. has historically dominated the market, with other companies such as Nortel Networks and Lucent Technologies Inc. providing products to a smaller segment of the market. In addition, a number of public and private companies have announced plans for new products to address the same problems that our products address.

     Cisco traditionally has been the dominant supplier of solutions to this market. We believe this is the result of its early leadership position in the enterprise router market. As both large public and private networks and traffic over the Internet has grown rapidly, Cisco has leveraged this position and has developed a broad product line of routers that support all major local area and wide area interfaces. We believe that our ability to compete with Cisco depends upon our ability to demonstrate that our products are superior in meeting the needs of service providers and are extremely compatible with Cisco’s current and future products. Although we believe that we are currently among the top providers of network infrastructure solutions worldwide, we cannot assure you that we will be able to compete successfully with Cisco, currently the leading provider in this market.

     We expect that, over time, large companies with significant resources, technical expertise, market experience, customer relationships and broad product lines, such as Lucent and Nortel, will introduce new products which are designed to compete more effectively in this market. As a result, we expect to face increased competition in the future from larger companies with significantly more resources than we have. Although we believe that our technology and the purpose-built features of our products make them unique and will enable us to compete effectively with these companies, we cannot assure you that we will be successful.

     Many of our current and potential competitors, such as Cisco, Lucent and Nortel, have significantly broader product lines than we do and may bundle their products with other networking products in a manner that may discourage customers from purchasing our products. Also, many of our current and potential competitors have greater name recognition and more extensive customer bases that could be leveraged. Increased competition could result in price reduction, fewer customer orders, reduced gross margins and loss of market share, any of which could seriously harm our operating results.

     There are also many small public and private companies that claim to have products with greater capabilities than our products. Consolidation in this industry has begun, with one or more of these smaller private companies being acquired by large, established suppliers of network infrastructure products, and we believe it is likely to continue. As a result, we expect to face increased competition in the future from larger companies with significantly more resources than we have.

     Several companies also provide solutions that can substitute for some uses of routers. For example, high bandwidth ATM switches are used in the core of certain major backbone service providers. ATM switches can carry a variety of traffic types, including voice, video and data, using fixed, 53 byte cells. Companies that use ATM switches are enhancing their products with new software technologies such as MPLS, which can potentially simplify the task of mixing routers and switches in the same network. These substitutes can reduce the need for large numbers of routers.

     Intellectual Property

     Our success and ability to compete are substantially dependent upon our internally developed technology and know-how. Our engineering teams have significant expertise in ASIC design and we own all rights to the design of the ASICs, which form the core of our products. Our software was developed internally and is protected by United States and other copyright laws.

     While we rely on patent, copyright, trade secret and trademark law to protect our technology, we also believe that factors such as the technological and creative skills of our personnel, new product

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developments, frequent product enhancements and reliable product maintenance are essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology.

     Our success will depend upon our ability to obtain necessary intellectual property rights and protect our intellectual property rights. While we have filed patent applications, we cannot be certain that these applications will issue into patents, that we will be able to obtain the necessary intellectual property rights or that other parties will not contest our intellectual property rights.

     Employees

     As of December 31, 2002, we had 1,542 full-time employees, 704 of whom were engaged in research and development, 410 in sales and marketing, 165 in customer service and 263 in finance, administration, IT and operations. None of our employees are represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be good.

     Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel, none of who is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could have a material adverse effect on our business, financial condition and results of operations. Our future success also depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we can retain our key personnel in the future.

     Available Information

     We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC electronically. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

     You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http://www.juniper.net, by contacting the Investor Relations Department at our corporate offices by calling (888) 586-4737 or by sending an e-mail message to investor-relations@juniper.net.

ITEM 2. Properties

     Our corporate headquarters consists of leased facilities located in Sunnyvale, California where we lease approximately 424,825 square feet located in three buildings. Each building is on an individual lease with various option, extension and expansion rights and expire on the following schedule: Building #1 (144,315 square feet) expires June 30, 2012, Building #2 (122,435 square feet) expires February 14, 2013 and Building #3 (158,075 square feet) expires May 31, 2014. We also own approximately 80 acres of land adjacent to the leased corporate headquarters sites.

     In addition, we have leased facilities in Westford, Massachusetts, with a lease for approximately 225,000 square feet, which expires in 2011. We also lease various sales office locations throughout the U.S. Outside the U.S., we have operations in leased sites in EMEA, Asia Pacific and the Americas. Larger site locations include Ireland, the United Kingdom, the Netherlands, Hong Kong, China, Japan and Australia. We believe that our existing properties are in good condition and suitable for the conduct of our business. For additional information regarding our obligations under leases, see Note 8 of Notes to the Consolidated Financial Statements in Item 8.

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ITEM 3. Legal Proceedings

     The Company is subject to legal claims and litigation arising in the ordinary course of business, including the matters described below. The outcome of these matters is currently not determinable. However, the Company does not expect that such legal claims and litigation will ultimately have a material adverse effect on the Company’s consolidated financial position or results of operations.

     IPO Allocation Case

     In December 2001, a class action complaint was filed in the United States District Court for the Southern District of New York against the Goldman Sachs Group, Inc., Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens, Inc., Royal Bank of Canada (Dain Rauscher Wessels), SG Cowen Securities Corporation, UBS Warburg LLC (Warburg Dillon Read LLC), Chase (Hambrecht & Quist LLC), J.P. Morgan Chase & Co., Lehman Brothers, Inc., Salomon Smith Barney, Inc., Merrill Lynch, Pierce, Fenner & Smith, Incorporated (collectively, the “Underwriters”), the Company and certain of the Company’s officers. This action was brought on behalf of purchasers of the Company’s common stock in the Company’s initial public offering in June 1999 and its secondary offering in September 1999. Specifically, among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company’s initial public offering and its subsequent secondary offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations. Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other companies. These various cases pending in the Southern District of New York have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92. In April 2002, plaintiffs filed a consolidated amended complaint in the action against the Company, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Defendants in the coordinated proceeding filed motions to dismiss. In October 2002, the Company’s officers were dismissed from the case without prejudice pursuant to a stipulation. On February 19, 2003, the Court granted in part and denied in part the motion to dismiss, but declined to dismiss the claims against the Company. The Company believes that it has meritorious defenses to the claims against it and intends to defend itself vigorously.

     Federal Securities Class Action Suit

     During the quarter ended March 31, 2002, a number of essentially identical shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against the Company and certain of its officers and former officers purportedly on behalf of those stockholders who purchased the Company’s publicly traded securities between April 12, 2001 and June 7, 2001. In April 2002, the judge granted the defendants’ motion to consolidate all of these actions into one; in May 2002, the court appointed the lead plaintiffs and approved their selection of lead counsel and an amended complaint was filed in July 2002. The plaintiffs allege that the defendants made false and misleading statements, assert claims for violations of the federal securities laws and seek unspecified compensatory damages and other relief. In September 2002, the defendants moved to dismiss the amended complaint. In March 2003, the judge granted defendants motion to dismiss with leave to amend. The Company continues to believe the claims are without merit and intends to defend the action vigorously.

     State Derivative Claim Based on the Federal Securities Class Action Suit

     In August 2002, a consolidated amended shareholder derivative complaint purportedly filed on behalf of the Company, captioned In re Juniper Networks, Inc. Derivative Litigation, Civil Action No. CV 807146, was filed in the Superior Court of the State of California, County of Santa Clara. The complaint alleges that certain of the Company’s officers and directors breached their fiduciary duties to the Company by engaging in alleged wrongful conduct including conduct complained of in the securities litigation described above. The complaint also asserts claims against a Juniper Networks investor. The Company is named solely as a nominal defendant against whom the plaintiff seeks no recovery. In October 2002, the Company as a nominal defendant and the individual defendants filed demurrers to the consolidated

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amended shareholder derivative complaint. In March 2003, the judge sustained defendants’ demurrers with leave to amend. Plaintiffs must file an amended complaint on or before May 12, 2003. The Company continues to believe the claims are without merit and intends to defend the action vigorously.

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

     No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     Our common stock has been quoted on the NASDAQ National Market under the symbol “JNPR” since June 25, 1999. Prior to that time, there was no public market for the common stock. All stock information has been adjusted to reflect the three-for-one split, effected in the form of a stock dividend to each stockholder of record as of December 31, 1999 and a two-for-one split, effected in the form of a stock dividend to each stockholder of record as of May 15, 2000. Juniper Networks has never paid cash dividends on its common stock and has no present plans to do so. There were approximately 1,623 stockholders of record at February 28, 2003. The following table sets forth the high and low closing bid prices as reported on NASDAQ:

     On February 1, 2002, March 14, 2002, June 20, 2002 and October 31, 2002, 126,743, 271,974, 519,510 and 1,000,769 shares respectively, were issued to former stockholders of Pacific Broadband Communications (“PBC”) as part of an earnout associated with our acquisition of PBC in December 2001. The issuance was exempt from registration under the Securities Act of 1933.

     On July 1, 2002, we issued 36,500,000 shares of common stock to the stockholders of Unisphere Networks, Inc. (“Unisphere Networks”) in connection with the acquisition of Unisphere Networks. The issuance was exempt from registration pursuant to Rule 3a-10 promulgated under the Securities Act of 1933.

ITEM 6. Selected Consolidated Financial Data

     The following selected consolidated financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto in Item 8 “Financial Statements and Supplementary Data.”

     The information presented below reflects the impact of several accounting pronouncements, which makes a direct comparison between 2002 and 2001 difficult. For example, in accordance with Statement of Financial Accounting Standard No. 141, “Business Combinations,” we have only included revenue, cost of revenues and operating expenses from Unisphere Networks, Inc., which was acquired in July 2002, for the second half of 2002. The results for 2003 will include a full year of results for the combined companies. For a complete description of matters affecting the results in the tables below, see Note 3 “Acquisitions,” Note 4 “Goodwill and Purchased Intangible Assets” and Note 9 “Long-Term Debt” of Notes to the Consolidated Financial Statements in Item 8.

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Consolidated Statement of Operations Data

Consolidated Balance Sheet Data

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an on-going basis, we evaluate our estimates, including those related to sales returns, warranty costs, allowance for doubtful accounts, impairment of long-term assets, especially goodwill and intangibles, contract manufacturer exposures for excess and obsolete material, and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Overview

     Juniper Networks, Inc. (“Juniper Networks” or “we”) was founded in 1996 to develop and sell products that would be able to meet the stringent demands of service providers. The world’s leading network operators, government agencies, research and education institutions, and information intensive enterprises now rely upon us as the foundation for uncompromising networks.

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     Critical Accounting Policies

     The preparation of the consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These policies include:

	•		revenue recognition;
	•		the allowance for doubtful accounts, which impacts general and administrative expenses;
	•		the valuation of exposures associated with the contract manufacturing operations and estimating future warranty costs, which impact cost of product revenues and gross margins; and
	•		the initial and continuing valuation of certain long-lived assets, especially goodwill and other purchased intangible assets, which could result in an impairment, which would impact operating expenses.

     We have other equally important accounting policies and practices; however, once adopted, these other policies either generally do not require us to make significant estimates or assumptions or otherwise only require implementation of the adopted policy not a judgment as to policy itself. Despite our intention to establish accurate estimates and assumptions, actual results could differ from those estimates.

     Revenue Recognition

     We recognize product revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” Specifically, product revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured, unless we have future obligations for such things as network interoperability or customer acceptance, in which case revenue and related costs are deferred until those obligations are met. In most cases, we recognize product revenue upon shipment to our customers, including resellers, as it is our policy to ensure an end user has been identified prior to shipment. Our ability to recognize revenue in the future will be impacted by conditions imposed by our customers and by our assessment of collectibility. We assess the probability of collection by reviewing our customers’ payment history, financial condition and credit report. If the probability of collection is not reasonably assured, revenue is deferred until the payment is collected.

     The amount of product revenue recognized in a given period is also impacted by our judgments taken in establishing our reserve for potential future product returns. Although our arrangements do not include any contractual rights of return, and our general policy is that we do not accept returns, under unique circumstances we have and may in the future accept product returns from our customers. Therefore, we do provide a reserve for our estimate of future returns against revenue in the period the revenue is recorded. Our estimate of future returns is based on such factors as historical return data and current economic condition of our customer base. In addition, we get input from our sales and support organizations with respect to specific customer issues. The amount of revenue we recognize going forward will be directly impacted by our estimates made to establish the reserve for potential future product returns.

     Allowance for Doubtful Accounts

     We make ongoing assumptions relating to the collectibility of our accounts receivable. In determining the amount of the allowance, we consider our historical level of credit losses. We also make judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and assess current economic trends affecting our customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. Our reserves have historically been

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adequate to cover our actual credit losses. However, since we cannot predict future changes in the financial stability of our customers or the industries that we sell to, we cannot guarantee that our current level of reserves will continue to be adequate. If actual credit losses were to be significantly greater than the reserves we have established, that would increase our general and administrative expenses. Conversely, if actual credit losses were to be significantly less than our reserves, our general and administrative expenses would decrease.

     Contract Manufacturer Exposures

     We outsource the majority of our manufacturing, repair operations and supply chain management operations to our three independent contract manufacturers. Accordingly, a significant portion of the cost of revenues consists of payments to them. Our independent contract manufacturers procure components and manufacture products based on build forecasts we provide them. Our forecasts are based on our estimates of future demand for our products. Our estimates of future demand for our products are based on historical trends and a bottoms-up analysis from our sales and support organizations, adjusted for overall market conditions. If the actual component usage and product demand are significantly lower than forecast, we have contractual liabilities and exposures with all of the contract manufacturers, such as carrying costs and excess material exposures, which would have an adverse impact on our gross margins and profitability. The majority of the factors that affect component usage and demand for our products are outside of our control.

     Warranty Reserves

     We offer a one-year warranty on all of our hardware products as well as a 90-day warranty on the software embedded in the products. The warranty generally includes parts, labor and 24-hour service center support. The specific terms and conditions of those warranties may vary depending on the products sold and the locations into which they are sold. We estimate the costs that may be incurred under our warranty obligations and record a liability and charge to cost of product sales in the amount of such costs at the time revenue is recognized. Factors that affect our warranty liability include the number of installed units, our estimates of anticipated rates of warranty claims and costs per claim. Our estimates of anticipated rates of warranty claims and costs per claim are primarily based on historical information. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. If actual warranty claims are significantly higher than forecast, or if the actual costs incurred to provide the warranty is greater than the forecast, our gross margins could be adversely affected.

     Valuation of Goodwill and Purchased Intangible Assets

     Goodwill and purchased intangible assets are carried at cost less accumulated amortization. We adopted SFAS 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. For business combinations consummated before July 1, 2001, goodwill was amortized through December 31, 2001 using the straight-line method over an estimated useful life of three years. Goodwill is not amortized for business combinations consummated after June 30, 2001. Amortization of purchased intangibles is computed using the straight-line method over the related expected useful lives of between two and six years.

     When valuing goodwill and purchased intangible assets in connection with the initial purchase price allocation and the ongoing evaluation for impairment, we estimate future cash flows and useful lives. These estimates include discounting to present value the free cash flows expected to be generated by the products with which the technology or other identified intangibles is associated and the periods of time with which the products will be in demand. We perform goodwill impairment tests annually and on an interim basis in certain circumstances. We performed an impairment analysis as of January 1, 2002 and again in November 2002 and determined that there was no impairment of the goodwill at either time. In addition, we review each purchased intangible asset quarterly and assess if the amortization period is still appropriate. Any changes in key assumptions about the business and its prospects, or changes in market conditions or other externalities, could result in an impairment charge and such a charge could have a material adverse effect on our results of operations.

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     Unisphere Business Combination

     In July 2002, we completed our acquisition of Unisphere Networks, Inc. (“Unisphere”), a subsidiary of Siemens Corporation which is a subsidiary of Siemens A.G. (“Siemens”). Following the acquisition and during the remainder of 2002, Siemens, itself and through its local country affiliates, was one of our significant resellers. Unisphere developed, manufactured and sold data networking equipment optimized for applications at the edge of service provider networks. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations,” we have included in our results of operations for 2002 the results of Unisphere from July 1, 2002. The Unisphere acquisition resulted in significant impacts to revenue, cost of revenues and all operating expenses for the second half of 2002. The results for 2003 will include a full year of results of the combined companies.

     Results of Operations

     Net Revenues

     The following table shows product and service net revenues for the years ended December 31, 2002, 2001 and 2000 (in thousands):

     Product net revenues decreased $363.2 million in 2002 compared with 2001. Our net product revenues for 2002 were derived from the sale of all of our products from 2001, plus from the sale of the following new products:

	•		T-Series core Internet routers;
	•		J-series wireless router, which was developed through our joint venture with Ericsson AB;
	•		E-series Internet routers, which includes the product acquired through the Unisphere business combination; and
	•		G-Series cable routers, which are Cable Modem Termination System (“CMTS”) products that were developed using the technology acquired through the Pacific Broadband Communications business combination.

     The decrease in product net revenues in 2002 compared with 2001 was due primarily to a decrease in the demand for our products that resulted from the generally unfavorable economic conditions throughout 2002. The decrease was also due to lower average selling prices as a result of a shift in product mix. For 2002, one customer accounted for 17% of net product revenues, compared to 2001, where three customers each accounted for 14%, 13% and 11% of net product revenues.

     Product net revenues increased $169.6 million in 2001 compared with 2000. Three of our five product platforms available during 2001 (M160, M5 and M10) were introduced during 2000 with the first full year of shipments for these products occurring in 2001 resulting in an increase in net revenues for 2001 compared to 2000. The increase in product net revenues was also the result of the continuing increase in market acceptance of our products and, especially in early 2001, the overall growth in the marketplace due to the growth of data traffic on the Internet and an increase in the number of customers and networks. One customer accounted for 18% of net product revenues in 2000.

     Service net revenues increased $22.8 million in 2002 compared with 2001. Service net revenues increased as a result of a larger installed base of customers and products. A vast majority of service

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revenue is from customers who previously purchased our products and enter into a service contract. In addition to service contracts, service revenue is generated from providing professional and educational services. Service contracts are typically for one-year periods and revenue is recognized ratably over the service period.

     Service net revenues increased $43.9 million in 2001 compared with 2000. The increase in service net revenues was primarily the result of a larger installed base of customers and products resulting from the continuing increase in market acceptance of our products and, especially in early 2001, the overall growth in the marketplace due to the growth of data traffic on the Internet and an increase in the number of customers and networks.

     The following table shows net revenue and the percent of total net revenues by geographic region:

     We experienced a shift in net revenues as a percentage of total net revenues from the Americas region to Europe and Asia in 2002 as the capital spending market in the United States declined.

     Cost of Revenues

     The following table shows cost of product and service revenues and the related gross margin percentages for the years ended December 31, 2002, 2001 and 2000 (in thousands):

     Our gross margins are highly variable and dependent on many factors, some of which are outside of our control. We have outsourced the majority of our manufacturing, repair operations and supply chain management operations. Accordingly, a significant portion of the cost of revenues consists of payments to our three independent contract manufacturers. The independent contract manufacturers manufacture our products using quality assurance programs and standards that we established. Controls around manufacturing, engineering and documentation are conducted at our facilities in Sunnyvale, California and Westford, Massachusetts. Our independent contract manufacturers have facilities in Milpitas, California, Neenah, Wisconsin and Toronto, Canada. As of December 31, 2002 two of our contract manufacturers retained title to the underlying components and finished goods inventory until our customers take title to the assembled final product upon shipment from the contract manufacturer’s facility. As of December 31, 2002, the third contract manufacturer retained title until title is transferred to our customers upon shipment from our Westford facility, where the contract manufacturer performs final configuration, assembly, testing and packaging. As of January 31, 2003, the third contract manufacturer performs all manufacturing and final configuration, assembly, testing and packaging at its facilities and retains title to the underlying components and finished goods inventory until our customers take title upon shipment from the contract manufacturer’s facility. As of December 31, 2002, we had inventory valued at $1.4 million located at our Westford facility included in other current assets.

     Cost of product revenues decreased $139.2 million in 2002 compared with 2001. The decrease in absolute dollars was directly related to the decrease in product revenue, which was primarily a result of

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unfavorable economic conditions many customers experienced throughout 2002, as well as to a 2001 charge of $39.9 million for excess materials exposure with our contract manufacturers. No significant such charges were recorded in 2002 for materials exposure matters, but, in accordance with the purchase accounting rules of SFAS 141, we did recognize one-time charges of $5.1 million in 2002 relating to the Unisphere acquisition. The charge of $5.1 million included $3.6 million for backlog orders and $1.5 million for an inventory write-up adjustment. Product gross margins were flat as a result of operational costs being cut as the demand for our products decreased. We did not utilize any previously reserved inventory in 2002. We expect our product gross margins to slightly increase in 2003, as compared to 2002.

     Cost of product revenues increased $112.3 million in 2001 compared with 2000. The increase in absolute dollars was primarily related to the increase in product net revenues, as well as head count increases in our manufacturing support organizations. In addition, in 2001, we incurred a charge of $39.9 million relating to an excess materials exposure with our contract manufacturers. The decrease in product gross margins was primarily a result of costs in our manufacturing support organizations increasing more than our product revenues as we originally intended to increase the size of the organization to meet future demand; however as the economy weakened in 2001, the expected demand did not materialize. In addition, the excess materials charge of $39.9 million negatively impacted the 2001 gross margin, as compared to 2000.

     Cost of service revenues decreased $3.4 million in 2002 compared with 2001. The decrease in absolute dollars and increase in service gross margins were primarily due to realized savings in our Service organization for personnel and other related costs associated with our restructuring activities, while service revenue increased as a result of a larger installed base of customers and products. The increase in gross margin reflects the benefits of increased service revenues and a more appropriately sized service organization for our current level of operations. We expect our service gross margins to increase in 2003, as compared to 2002.

     Cost of service revenues increased $22.9 million in 2001 compared with 2000. The increase in absolute dollars is primarily related to the increase in service contracts, which necessitated head-count increases in our Service organization. The increase in gross margins was primarily a result of the Service organization being built in 2000 to meet anticipated future demand.

     Research and Development, Sales and Marketing and General and Administrative Expenses

     The following table shows research and development, sales and marketing and general and administrative expenses for the years ended December 31, 2002, 2001 and 2000 (in thousands):

     The $6.4 million increase in research and development expenses in 2002 compared with 2001 was primarily a result of an increase in headcount related expenses, the use of outside services and certain overhead costs, partially offset by savings in prototype equipment. Headcount related expenses and overhead costs increased primarily due to the Unisphere acquisition. We realized savings in internally developed and prototype equipment expense during 2002 because throughout 2001 we were preparing for the release of our high-end T series products, as well as certain M-series and J-series products, and developing and testing our application specific integrated circuits (ASICS).

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     The $67.7 million increase in research and development expenses in 2001 compared with 2000 was primarily related to increased salary and related personnel costs as we increased headcount to expand development efforts in new products such as T320, T640, M40e and J20.

     We expense our research and development costs as they are incurred. Several components of our research and development effort require significant expenditures, the timing of which can cause significant quarterly variability in our expenses. For example, a large number of prototypes are required to build and test our products and the building and testing process occurs over a short period of time. Our ASIC development requires a payment for non-recurring engineering charges at the beginning of the process to design and develop the ASIC. We expense such charges immediately. In addition, per unit costs are payable when we purchase the prototype ASICs. With several large ASICs in our architecture, we will incur large non-recurring engineering and prototype expenses with each significant enhancement of the existing products and for any new product development. We expect to continue to devote substantial resources to the development of new products and the enhancement of existing products. We believe that research and development is critical to our strategic product development objectives and that to leverage our leading technology and meet the changing requirements of our customers, we will need to fund investments in several development projects in parallel. Although we may experience significant quarterly variability in our research and development expenses, we expect our annual research and development expenses to be flat to slightly increase in absolute dollars in the next year.

     The $13.6 million decrease in sales and marketing expenses in 2002 compared with 2001 was a result of decreases in employee and partner events, the reduced use of demonstration equipment, which is expensed immediately, and consolidation of excess facilities. To date, we have not incurred significant advertising expenses.

     The $51.4 million increase in sales and marketing expenses in 2001 compared with 2000 was primarily attributable to salaries, commissions and related expenses for personnel engaged in sales, marketing and customer engineering support functions as we increased headcount during the year. In addition, costs associated with promotional and other marketing activities such as product launches and equipment for demonstration and competitive labs contributed to the increase in 2001.

     We intend to continue to focus and expand our sales and marketing efforts across all the geographies and markets we serve in order to increase market awareness of our products and to better support our existing customers worldwide. We believe that continued investment in sales and marketing is critical to our success and expect these expenses to slightly increase in absolute dollars in the next year as we initiate additional sales and marketing programs to support our products.

     General and administrative expenses decreased $3.3 million in 2002 compared with 2001. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting and human resources personnel, as well as recruiting expenses, professional fees, bad debt provisions and other corporate expenses. The decrease was due to savings in headcount related expenses and decreases in the use of outside services. We expect that general and administrative expenses will slightly decrease in 2003, as compared to 2002.

     General and administrative expenses increased $16.4 million in 2001 compared with 2000. The increase was primarily attributable to the costs associated with additional headcount to support increased levels of business activity, as well as increases in the bad debt provision.

     Other Operating Expenses

     The following table shows other operating expenses for the years ended December 31, 2002, 2001 and 2000 (in thousands):

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     In July 2002, we completed the acquisition of Unisphere, a subsidiary of Siemens. Following the acquisition and during the remainder of 2002, Siemens was one of our significant resellers. The acquisition resulted in the payment of $375.0 million cash and the issuance of 36.5 million shares of our common stock with a fair value of approximately $359.9 million to the former stockholders of Unisphere. We accounted for this acquisition under the purchase method of accounting, in accordance with SFAS 141. Accordingly, we originally recorded goodwill of $769.9 million, purchased intangible assets of $74.0 million, in-process research and development (“IPR&D”) of $82.7 million and deferred compensation on unvested stock options of $0.5 million. In accordance with SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” the goodwill is not amortized but rather we are required to test the goodwill for impairment at least annually, and at interim periods if necessary. The purchased intangible assets are being amortized over their estimated useful lives, generally between two and six years. The deferred compensation is being amortized over four years using the graded-vesting method.

     In December 2002, we adjusted the originally recorded goodwill of $769.9 by decreasing it by $2.8 million, primarily related to the valuation of certain assets where we were awaiting further information when we originally allocated the purchase price. The purchase price allocation depicted is preliminary and subject to change as we continue to obtain additional information concerning the fair values of certain liabilities of Unisphere.

     In December 2001 and 2000, we acquired Pacific Broadband Communications (“Pacific Broadband”) and Micro Magic Inc. (“Micro Magic”), respectively. We accounted for both of these acquisitions under the purchase method of accounting. Accordingly, we recorded goodwill and other intangible assets of $137.5 million and $125.7 million, respectively, representing the excess of the purchase price paid over the fair value of net tangible assets acquired. The goodwill and other intangibles were being amortized over their respective useful lives, which we determined to be between two and three years. In accordance with SFAS 142, there was no goodwill amortization related to the Pacific Broadband acquisition in 2001 and beginning on January 1, 2002, we no longer amortized goodwill relating to the Micro Magic acquisition. During 2002, goodwill from the Pacific Broadband business combination increased as a result of the earn-out provisions of the acquisition agreement and decreased for certain liabilities that were accrued for at the time of acquisition that were not realized. Neither of these transactions had an impact on our results of operations for the year ended December 31, 2002.

     There was no amortization of goodwill in 2002 in accordance with SFAS 142. Amortization of goodwill increased $35.9 million in 2001 compared with 2000. The increase was a result of a full year of amortization of goodwill from the Micro Magic, Inc. acquisition.

     Amortization of purchased intangibles and deferred stock compensation decreased $62.5 million in 2002 compared with 2001. Amortization of purchased intangibles was $13.9 million and $2.7 million in 2002 and 2001, respectively. The increase was due to the acquisition of Unisphere, which contributed $7.3 million in amortization of purchased intangibles during the second half of 2002, and a full year of amortization during 2002 from the Pacific Broadband acquisition. Amortization of deferred stock compensation was $0.4 million and $74.1 million in 2002 and 2001, respectively. The primary reason for the decrease was a reversal, as required by APB 25, of $33.5 million in previously recognized stock compensation expense. This reversal related to the difference between the expense that had been

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previously recognized under the graded-vesting method for former employees and the expense that would have been recorded using the straight-line method. Finally, the decrease in expense is also a result of using the graded vesting method, which expenses a larger percent in the earlier months.

     Amortization of purchased intangibles and deferred stock compensation increased $63.6 million in 2001 compared with 2000. The increase was almost entirely due to a full year of amortization of purchased intangibles and deferred stock compensation from the Micro Magic acquisition.

     The amortization of purchased intangibles and deferred stock compensation will increase in 2003 as a result of a full year of amortization of purchased intangible assets acquired from Unisphere and may increase further in the future if we make other acquisitions of companies or technologies.

     During the third quarter of 2002, in connection with the acquisition of Unisphere, we approved and initiated plans to restructure the operations to eliminate certain duplicative activities, focus on strategic product and customer bases, reduce cost structure and better align product and operating expenses with existing general economic conditions. Consequently, we recorded restructuring expenses of approximately $14.9 million, net of a $2.6 million adjustment for costs that were not going to be incurred due to a change in estimate, associated primarily with workforce related costs, costs of vacating duplicative facilities, contract termination costs, non-inventory asset impairment charges and other associated costs. These costs are accounted for under EITF Issue No. 94-3 (“EITF 94-3”), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” and have been included as a charge to the results of operations for the year ended December 31, 2002.

     We also recognized a charge of approximately $5.3 million during the quarter ended September 30, 2002 related to the land acquired in January 2001 located in Sunnyvale, California. The charge was primarily for costs of exiting certain contractual obligations associated with the land. We currently have no plans to continue developing the land in the foreseeable future. The carrying value of the land increased $2.3 million during 2002 primarily due to certain development costs incurred in the first half of 2002.

     In June 2001, we announced a restructuring program in an effort to better align our business operations with the current market and service provider industry conditions. The restructuring program included a worldwide workforce reduction, consolidation of excess facilities and restructuring of certain business functions. The costs associated with the restructuring program totaled $12.3 million and were recorded during the three months ended June 30, 2001 as operating expenses.

     Restructuring and other costs increased $7.9 million in 2002 compared with 2001. This increase was a result of the restructuring activities and land charge in the third quarter of 2002.

     Of the total Unisphere purchase price, approximately $82.7 million has been allocated to in-process research and development (“IPR&D”) and was expensed in the quarter ended September 30, 2002. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility and which have no alternative future use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development. At the time of acquisition, Unisphere had multiple IPR&D efforts under way for certain current and future product lines. These efforts included developing new cards and modules for different bandwidths and various software developments. We utilized the discounted cash flow (“DCF”) method to value the IPR&D, using rates ranging from 30% to 35%. In applying the DCF method, the value of the acquired technology was estimated by discounting to present value the free cash flows expected to be generated by the products with which the technology is associated, over the remaining economic life of the technology. To distinguish between the cash flows attributable to the underlying technology and the cash flows attributable to other assets available for generating product revenues, adjustments were made to provide for a fair return to fixed assets, working capital and other assets that provide value to the product lines. At the time of acquisition, it was estimated that these development efforts were 55% complete and would be completed over the next six to twelve months. As of December 31, 2002 these development efforts were 90% complete and estimate that they will be completed over the next twelve months.

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     In connection with the acquisition of Pacific Broadband in December 2001, we allocated $4.2 million of the $148.3 million purchase price as IPR&D. The applications from the in-process technology project have been integrated into our products. The efforts required to complete the acquired in-process technology included the completion of all planning, designing and testing activities that were necessary to establish that the product can be produced to meet its design requirements, including functions, features and technical performance requirements. The value of the acquired in-process technology was computed using a discounted cash flow analysis rate of 30% on the anticipated income stream of the related product revenues. The discounted cash flow analysis was based on management’s forecast of future revenues, cost of revenues, and operating expenses related to the products and technologies purchased from Pacific Broadband. The calculation of value was then adjusted to reflect only the value creation efforts of Pacific Broadband prior to the close of the acquisition. At the time of the acquisition, the product was approximately 75% complete. The majority of the costs to complete the project was incurred in fiscal 2002 and was not material. The resultant value of in-process technology was further reduced by the estimated value of core technology and was expensed in the period the transaction was consummated. The project was complete as of December 31, 2002.

     In connection with the acquisition of Micro Magic in December 2000, we allocated $10.0 million of the $259.3 million purchase price as IPR&D. The applications from the in-process technology project have been integrated within our engineering department. The efforts required to complete the acquired in-process technology included the completion of all planning, designing and testing activities that were necessary to establish that the product can be produced to meet its design requirements, including functions, features and technical performance requirements. The value of the acquired in-process technology was computed using a discounted cash flow analysis rate of 19% on the anticipated income stream of the related product revenues. The discounted cash flow analysis was based on management’s forecast of future revenues, cost of revenues, and operating expenses related to the products and technologies purchased from Micro Magic. The calculation of value was then adjusted to reflect only the value creation efforts of Micro Magic prior to the close of the acquisition. At the time of the acquisition, the product was approximately 88% complete and the project was completed in 2001. The resultant value of in-process technology was further reduced by the estimated value of core technology and was expensed in the period the transaction was consummated.

     We incurred integration expenses of approximately $2.5 million in the quarter ended September 30, 2002 resulting from our acquisition of Unisphere. Integration expenses are one-time incremental costs directly related to the integration of the two companies that have no go forward benefit, which consisted principally of workforce related expenses for individuals transitioning their positions and professional fees during the quarter ended September 30, 2002. We expect that all of the integration costs relating to the Unisphere integration have been incurred and that there will be no additional integration costs in the future related to Unisphere.

     There were charitable contributions of $10.0 million in 2000 in connection with common stock issued to a charitable foundation. We have not made any similar contributions in 2002 or 2001 and we currently do not expect to make similar contributions in the foreseeable future.

     Other Income and Expenses

     The following table shows other income and expenses for the years ended December 31, 2002, 2001 and 2000 (in thousands):

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     Interest income decreased $38.3 million in 2002 compared with 2001. The decrease was the result of lower cash and investment balances throughout 2002 as we spent $146.0 million to retire a portion of our convertible subordinated notes and $375.0 million in the Unisphere acquisition. In addition, interest rates were lower in 2002 as compared to 2001.

     Interest income increased $5.8 million in 2001 compared with 2000. The increase was the result of larger cash and investment balances throughout 2001, partially offset by a decline in interest rates.

     Interest expense decreased $5.8 million in 2002 compared with 2001, namely due to less interest being owed as a result of the retirement of a portion of our convertible subordinated notes during the quarter ended September 30, 2002.

     Interest expense increased $13.3 million in 2001 compared with 2000. The increase was due to a full year of interest incurred in 2001 on our convertible subordinated notes. These notes were issued in March 2000.

     Equity in net loss of joint venture decreased $2.8 million in 2002 compared with 2001. During the quarter ended June 30, 2001, we entered into a joint venture agreement with Ericsson A.B., through our respective subsidiaries, to develop and market products for the wireless Internet infrastructure market. Accordingly, we began recording our 40% share of the joint venture’s loss. During 2002, our share of the joint venture’s loss totaled approximately $1.3 million. To date, we have funded the joint venture in the amount of $5.4 million. In addition to this joint venture, Ericsson is also one of our significant resellers, representing greater than 10% of our revenues in 2002 and 2001. As of December 31, 2002, we have no further obligations to fund this joint venture.

     In the quarter ended September 30, 2002, we paid approximately $146.0 million to retire a portion of our 4.75% Convertible Subordinated Notes Due March 15, 2007 (the “Notes”). This partial retirement resulted in a gain of approximately $62.9 million, which was the difference between the carrying value of the Notes, including unamortized debt issuance costs, at the time of their retirement, and the amount paid to extinguish such Notes. We are currently evaluating plans to retire additional Notes in the future, therefore, we do not consider the gains associated with this repurchase to be extraordinary, based on the guidance in SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”

     Provision for Income Taxes

     Provision for income taxes decreased to $4.5 million in 2002 from $30.0 million in 2001. The effective tax rates for 2002 and 2001 were
- -3.9% and 181%, respectively. The tax rates for 2002 and 2001 include the effects of write-downs in equity investments and acquisition related charges for goodwill and in-process research and development, which are non-deductible.

     Provision for income taxes decreased to $30.0 million in 2001 from $82.5 million in 2000. In 2000, we recorded tax provisions of $82.5 million resulting in an effective tax rate of 36%.

     The IRS is currently auditing the Company’s federal income tax returns for fiscal years 1999 and 2000. Proposed adjustments have not been received for these years. Management believes the ultimate outcome of the IRS audits will not have a material adverse impact on the Company’s financial position or results of operations.

     Liquidity and Capital Resources

     We have funded our business by selling our common stock in the public market, issuing convertible subordinated notes and through our operating activities.

     At December 31, 2002, we had cash and cash equivalents of $194.4 million, short-term investments of $384.0 million and long-term investments of $583.7 million. We regularly invest excess funds in money

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market funds, commercial paper and government and non-government debt securities with maturities of up to five years.

     Net cash provided by operating activities was $2.4 million, $292.8 million and $269.1 million in 2002, 2001 and 2000, respectively. Net cash provided by operating activities during 2002 was due to the net loss of $119.7 million, offset by non-cash charges such as depreciation and amortization expense, in-process research and development charges from the Unisphere acquisition, impairment of minority equity investments, increases in accounts receivable, a gain on retirement of convertible subordinated notes and decreases in other accrued liabilities. Net cash provided by operating activities in 2001 were primarily attributed to non-cash charges such as amortization of goodwill, purchased intangibles and deferred stock compensation, write-down of minority investments, depreciation and a tax benefit from employee stock option plans, as well as decreases in accounts receivable; offset by cash used in operating activities in 2001 consisting of net decreases in accounts payable and other accrued liabilities (excluding the impact of acquisitions), a net loss and decreases in accrued warranty. Net cash provided by operating activities in 2000 was primarily attributed to the net income, increases in accounts payable and other accrued liabilities, a tax benefit from employee stock option plans and non-cash charges such as amortization of goodwill, purchased intangibles and deferred stock compensation; offset by cash used in operating activities in 2000 consisting of increases in accounts receivable and other assets.

     Cash used in investing activities was $295.5 million, $307.4 million and $894.2 million in 2002, 2001 and 2000, respectively. Cash used during all periods was due to the purchase of capital equipment and available-for-sale investments, offset by maturities of available-for-sale investments. In addition, we used cash in 2002 for the Unisphere acquisition. During 2001, the increase in fixed assets included the purchase of approximately 80 acres of land in Sunnyvale, California.

     Cash used in financing activities was $119.4 million in 2002, compared to cash provided by financing activities in 2001 and 2000 of $58.5 million and $1.03 billion, respectively. Cash used in financing activities in 2002 consisted of $146.0 million spent to retire a portion of the Notes, offset by $26.6 million received from issuance of common stock, as a result of employee stock option exercises and the employee stock purchase plan. Cash provided by financing activities in 2001 was due to proceeds from the issuance of common stock, namely through employee option exercises. Cash provided by financing activities in 2000 was due to $1.1 billion received from the issuance of the Notes and $36.7 million from the issuance of common stock, namely through employee option exercises. Cash provided by financing activities in 2000 was offset by expenditures of $130.0 million to repurchase outstanding common stock.

     As of December 31, 2002, our principal commitments consisted of obligations outstanding under operating leases, firm purchase commitments with our independent contract manufacturers and Notes. We have potential contractual liabilities and exposures to all of the independent contract manufacturers, such as carrying costs and excess material exposures, in the event that they procure components and build products based on our build forecasts and the actual component usage and product sales are significantly lower than forecast. As of December 31, 2002, we had accrued $27.8 million for potential exposures with our contract manufacturers, such as carrying costs and excess material. The following table summarizes our principal contractual obligations at December 31, 2002 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

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     Although we believe our existing cash balances will be sufficient to fund operations for at least the next 12 months, there can be no assurance that we will not require additional financing within this time frame or that such additional funding, if needed, will be available on acceptable terms.

     Recent Accounting Pronouncements

     In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with an Exit or Disposal Activity.” SFAS No. 146 revises the accounting for exit and disposal activities under Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring),” by spreading out the reporting of expenses related to restructuring activities. A commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most restructuring activities. Instead, companies will record exit or disposal costs when they are “incurred” and can be measured at fair value. In addition, the resultant liabilities will be subsequently adjusted for changes in estimated cash flows. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. Companies may not restate previously issued financial statements for the effect of the provisions of SFAS No. 146, and liabilities that a company previously recorded under EITF Issue 94-3 are grandfathered. We adopted SFAS No. 146 on January 1, 2003. If we enter into any restructuring activities in the future, the adoption of SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized under such costs.

     In November 2002, the FASB issued Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires certain guarantees to be recorded at fair value, which is different from current practice, where a liability is recorded when a loss is probable and reasonably estimable. In addition, FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote, which is another change from current practice. FIN 45 is applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We have adopted the disclosure requirements in FIN 45 regarding warranties herein this annual report (see Note 7 of Notes to the Consolidated Financial Statements in Item 8). We are currently evaluating the other requirements of FIN 45. If it is determined that the other requirements of FIN 45 apply to us, revenues, cost of goods sold and or operating expenses could be negatively affected.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 amends SFAS 123 to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB 25. Since we account for our stock-based compensation under APB 25, and have no current plans on switching to SFAS 123, the impact of SFAS 148 will be limited to the annual and interim reporting of the effects on net income and earnings per share as if we accounted for stock-based compensation under SFAS 123. SFAS 148 is effective for fiscal years ending after December 15, 2002.

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), an interpretation of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements.” FIN 46 establishes accounting guidance for consolidation of a variable interest entity (“VIE”), formerly referred to as special purpose entities. FIN 46 applies to any business enterprise, both public and private, that has a controlling interest, contractual relationship or other business relationship with a VIE. FIN 46 provides guidance for determining when an entity (the “Primary Beneficiary”) should consolidate another entity, a VIE, that functions to support the activities of the Primary Beneficiary. We

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currently have no contractual relationship or other business relationship with a VIE and therefore the adoption will not have an effect on our consolidated financial position or results of operations.

     Risk Factors

     Set forth below and elsewhere in this Report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report.

     We face intense competition that could reduce our market share.

     Competition in the network infrastructure market is intense. This market has historically been dominated by Cisco with other companies such as Nortel Networks and Lucent Technologies providing products to a smaller segment of the market. In addition, a number of other small public or private companies have announced plans for new products to address the same challenges that our products address.

     If we are unable to compete successfully against existing and future competitors from a product offering standpoint or from potential price competition by such competitors, we could experience a loss in market share and/or be required to reduce prices, resulting in reduced gross margins, either of which could materially and adversely affect our business, operating results and financial condition.

     The current economic conditions, combined with the financial condition of some of our customers, limit our visibility and makes revenue forecasting difficult.

     The continuing economic downturn generally, and in the telecommunication industry specifically, combined with our own relatively limited operating history in the context of such a continuing economic downturn, makes it difficult to accurately forecast revenue.

     We have experienced and expect, in the foreseeable future, to continue to experience limited visibility into our customers’ spending plans and capital budgets. This limited visibility complicates our revenue forecasting process. Additionally, many customers funded their network infrastructure purchases through a variety of debt and similar instruments and many of these same customers are carrying a significant debt burden and are experiencing reduced cash flow with which to carry the cost of the debt and the corresponding interest charges, which reduces their ability to both justify and make future purchases. The telecommunications industry has experienced consolidation and rationalization of its participants and we expect this trend to continue. There have been adverse changes in the public and private equity and debt markets for telecommunications industry participants, which have affected their ability to obtain financing or to fund capital expenditures. In some cases the significant debt burden carried by these customers has reduced their ability to pay for the purchases made to date. This has contributed, and we expect it to continue to contribute, to the uncertainty of the amounts and timing of capital expenditures, further limiting visibility and complicating the forecasting process. Certain of these customers have filed for bankruptcy as a result of their debt burdens. Although these customers generally expect that they will emerge from the bankruptcy proceedings in the future, a bankruptcy proceeding can be a slow and cumbersome process further limiting the visibility and complicating the revenue forecasting process as to these customers. Even if they should emerge from such proceedings, the extent and timing of any future purchases of equipment is uncertain. This uncertainty will further complicate the revenue forecasting process.

     In addition, our operating expenses are largely based on anticipated revenue trends and a high percentage of our expenses are, and will continue to be, fixed in the short-term. If we do not achieve our expected revenues, the operating results will be below our expectations and those of investors and market analysts, which could cause the price of our common stock to decline.

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     Our failure to increase our revenues may prevent us from being profitable in future periods.

     We have large fixed expenses and net revenues have declined over the past year. There can be no assurances that net revenues will grow or that we will be profitable in future periods.

     Although our customer base has increased substantially, there are still a limited number of customers who comprise a significant portion of our revenues and any decrease in revenue from these customers could have an adverse effect.

     Even though our customer base has increased substantially, we expect that a large portion of our net revenues will continue to depend on sales to a limited number of customers. Any downturn in the business of these customers or potential new customers could significantly decrease sales to such customers that could adversely affect our net revenues and results of operations.

     We rely on distribution partners to sell our products, and disruptions to these channels could adversely affect our ability to generate revenues from the sale of our products.

     We believe that our future success is dependent upon establishing successful relationships with a variety of distribution partners. We have entered into agreements with several value added resellers, some of which also sell products that compete with our products. We cannot be certain that we will be able to retain or attract resellers on a timely basis or at all, or that the resellers will devote adequate resources to selling our products.

     Our products are highly technical and if they contain undetected software or hardware errors, our business could be adversely impacted.

     Our products are highly technical and are designed to be deployed in very large and complex networks. Certain of our products can only be fully tested when deployed in networks that generate high amounts of data and/or voice traffic. As a result, we may experience errors in connection with such product and for new products and enhancements. Any defects or errors in our products discovered in the future could result in loss of or delay in revenue, loss of customers, increased service and warranty cost all of which could adversely impact our business and our results of operations.

     If our products do not interoperate with our customers’ networks, installations will be delayed or cancelled and could result in substantial product returns, which could harm our business.

     Our products are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocol standards. Many of our customers’ networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products must interoperate with all of the products within these networks as well as future products in order to meet our customers’ requirements. If we find errors in the existing software used in our customers’ networks, we must modify our software to fix or overcome these errors so that our products will interoperate and scale with the existing software and hardware. If our products do not interoperate with those of our customers’ networks, installations could be delayed, orders for our products could be cancelled or our products could be returned. This would also damage our reputation, which could seriously harm our business and prospects.

     Problems arising from use of our products in conjunction with other vendors’ products could disrupt our business and harm our financial condition.

     Service providers typically use our products in conjunction with products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems.

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     Traditional telecommunications companies generally require more onerous terms and conditions of their vendors. As we seek to sell more products to such customers we may be required to agree to terms and conditions that may have an adverse impact on our business.

     Traditional telecommunications companies because of their size generally have had greater purchasing power and accordingly have requested and received more favorable terms, which often translate into more onerous terms and conditions for their vendors. As we seek to sell more products to this class of customer, we may be required to agree to such terms and conditions which may include terms that impact our ability to recognize revenue and have an adverse effect on our business and financial condition.

     In addition, many of this class of customer have purchased products from other vendors who promised certain functionality and failed to deliver such functionality and/or had products that caused problems and outages in the networks of these customers. As a result, this class of customer may request additional features from us and require substantial penalties for failure to deliver such features or may require substantial penalties for any network outages that may be caused by our products. These additional requests and penalties, if we are required to agree to them, may impact our ability to recognize the revenue from such sales, which may negatively impact our business and our financial condition.

     Our success depends on our ability to anticipate market needs and to develop products and product enhancements that will meet those needs and gain market acceptance.

     We cannot ensure that we will be able to anticipate future market needs or that we will be able to develop new products or product enhancements to meet such needs or to meet them in a timely manner. If we fail to anticipate the market requirements or to develop new products or product enhancements to meet those needs, such failure could substantially decrease market acceptance and sales of our present and future products, which would significantly harm our business and financial results. Even if we are able to anticipate and develop and commercially introduce new products and enhancements, there can be no assurance that new products or enhancements will achieve widespread market acceptance. Any failure of our future products to achieve market acceptance could adversely affect the business and financial results.

     We depend on key personnel to manage our business effectively in a rapidly changing market and if we are unable to retain or hire key personnel, our ability to develop, market and sell products could be harmed.

     Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing and support personnel. None of the officers or key employees is bound by an employment agreement for any specific term.

     The loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers, could delay the development and introduction of and negatively impact our ability to develop, market or sell our products.

     In addition, although we completed the acquisition of Unisphere on July 1, 2002, integration of the products, product roadmap and operations is a continuing activity and will be for the foreseeable future. As a result of these activities, we may lose opportunities and employees, which could disrupt our business and harm our financial results.

     If we fail to accurately predict our manufacturing requirements, we could incur additional costs or experience manufacturing delays.

     Our contract manufacturers are not obligated to supply products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order because we do not have long-term supply contracts with them. In addition, lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. We provide to our contract manufacturers a

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demand forecast. If we overestimate our requirements, the contract manufacturers may assess charges that could negatively impact our gross margins (as was the case for the quarter ended September 30, 2001). If we underestimate our requirements, the contract manufacturers may have inadequate inventory, which could interrupt manufacturing of our products and result in delays in shipments and revenues.

     We currently depend on contract manufacturers with whom we do not have long-term supply contracts, and changes to those relationships, expected or unexpected, may result in delays or disruptions that could cause us to lose revenue and damage our customer relationships.

     We depend on third party contract manufacturers (each of whom is a third party manufacturer for numerous companies) to manufacture our products. We do not have a long-term supply contract with such manufacturers and if we should fail to effectively manage our contract manufacturer relationships or if one or more of them should experience delays, disruptions or quality control problems in its manufacturing operations, our ability to ship products to our customers could be delayed which could adversely affect our business and financial results.

     In connection with the acquisition of Unisphere we added a third contract manufacturer and as part of the integration activities we are consolidating our contract manufacturing at two of the three current contract manufacturers. The transition from three to two contract manufacturers may result in disruptions or quality control problems in manufacturing operations, delays in our ability to ship products to our customers all of which could adversely affect our business and financial results. The transition is expected to be completed by the end of the first quarter of 2003, however, this transition could be delayed be a number of factors, including, but not limited to, systems integration, economic conditions and process planning.

     Further, Unisphere received semi-finished goods from its contract manufacturer and engaged in final test and assembly of finished product at its facility in Westford, Massachusetts. As a result, Unisphere carried inventory on its books. As part of the integration of Unisphere we are outsourcing those activities to be consistent with our full-outsource model. If we should fail to effectively manage these activities we could experience disruptions or quality control problems or delays in shipments to our customers, all of which could adversely impact our business and financial results.

     The long sales and implementation cycles for our products, as well as our expectation that customers will sporadically place large orders with short lead times may cause revenues and operating results to vary significantly from quarter to quarter.

     A customer’s decision to purchase our products involves a significant commitment of its resources and a lengthy evaluation and product qualification process. As a result, the sales cycle may be lengthy. Throughout the sales cycle, we often spend considerable time educating and providing information to prospective customers regarding the use and benefits of our products. Even after making the decision to purchase, customers tend to deploy the products slowly and deliberately. Timing of deployment can vary widely and depends on the skill set of the customer, the size of the network deployment, the complexity of the customer’s network environment and the degree of hardware and software configuration necessary to deploy the products. Customers with large networks usually expand their networks in large increments on a periodic basis. Accordingly, we expect to receive purchase orders for significant dollar amounts on an irregular basis. These long cycles, as well as our expectation that customers will tend to sporadically place large orders with short lead times, may cause revenues and operating results to vary significantly and unexpectedly from quarter to quarter.

     We face risks associated with our restructuring plans that may adversely affect our business, operating results and financial condition.

     In response to industry and market conditions, we have restructured our business and reduced our workforce. The assumptions underlying our restructuring efforts will be assessed on an ongoing basis and may prove to be inaccurate and we may have to restructure our business again in the future to achieve certain cost savings and to strategically realign our resources.

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     Our restructuring plan is based on certain assumptions regarding the cost structure of our business and the nature, severity, and duration of the current industry adjustment, which may not prove to be accurate. While restructuring, we have assessed, and will continue to assess, whether we should further reduce our workforce, as well as review the recoverability of our tangible and intangible assets, including the land purchased in January 2001. Any such decisions may result in the recording of additional charges, such as workforce reduction costs, facilities reduction costs, asset write-downs, and contractual settlements.

     Additionally, estimates and assumptions used in asset valuations are subject to uncertainties, as are accounting estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets, including goodwill and other intangible assets. As a result, future market conditions may result in further charges for the write down of tangible and intangible assets.

     We may not be able to successfully implement the initiatives we have undertaken in restructuring our business and, even if successfully implemented, these initiatives may not be sufficient to meet the changes in industry and market conditions and to achieve future profitability. Furthermore, our workforce reductions may impair our ability to realize our current or future business objectives. Lastly, costs actually incurred in connection with restructuring actions may be higher than the estimated costs of such actions and/or may not lead to the anticipated cost savings. As a result, our restructuring efforts may not result in our return to profitability.

     We could become subject to litigation regarding intellectual property rights, which could seriously harm the business.

     In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Although we are not involved in any intellectual property litigation, we may be a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others’ intellectual property. Claims for alleged infringement and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights and may require us to stop selling, incorporating or using products that use the challenged intellectual property. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention.

     Necessary licenses of third-party technology may not be available to us or may be very expensive.

     We integrate third-party licensed technology in certain of our products. From time to time we may be required to license additional technology from third parties to develop new products or product enhancements. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms. Our inability to maintain or re-license any third party licenses required in our current products or our inability to obtain third-party licenses necessary to develop new products and product enhancements, could require us to obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could seriously harm our business, financial condition and results of operations.

     Our business is subject to risks from global operations.

     We conduct significant sales and customer support operations in countries outside of the United States and also depend on our contract manufacturers’ manufacturing operations, which are located within and outside of the United States. Accordingly, our future results could be materially adversely affected by a variety of uncontrollable and changing factors including, among others, political or social unrest or economic instability in a specific country or region; trade protection measures and other regulatory requirements which may affect our ability to import or export our products from various countries; and difficulties in staffing and managing international operations. Any or all of these factors could adversely impact our business and financial results.

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     We are exposed to fluctuations in currency exchange rates.

     Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in non-US currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows.

     The majority of our revenue and expenses are transacted in US Dollars. We also have some transactions that are denominated in foreign currencies, primarily the Japanese Yen, Hong Kong Dollar, British Pound and the Euro, related to our sale and service operations outside of the United States. An increase in the value of the US Dollar could increase the real cost to our customers of our products in those markets outside the United States where we sell in US Dollars, and a weakened dollar could increase the cost of local operating expenses and procurement of raw materials to the extent we must purchase components in foreign currencies.

     Currently, we hedge only those currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and periodically will hedge anticipated foreign currency cash flows. The hedging activities undertaken by us are intended to offset the impact of currency fluctuations on certain nonfunctional currency assets and liabilities. Our attempts to hedge against these risks may not be successful resulting in an adverse impact on our net income.

     Any acquisition we make could disrupt the business and harm our financial condition.

     We have made and may continue to make acquisitions and investments in order to enhance our business. Acquisitions involve numerous risks, including problems combining the purchased operations, technologies or products, unanticipated costs, diversion of management’s attention from our core business, adverse effects on existing business relationships with suppliers and customers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. There can be no assurance that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire.

     We intend to make investments in complementary companies, products or technologies. In the event of any such investments or acquisitions, we could issue stock that would dilute our current stockholders’ percentage ownership, incur debt, assume liabilities, incur amortization expenses related to purchases of intangible assets, or incur large and immediate write-offs.

     We are a party to lawsuits, which, if determined adversely to us, could result in the imposition of damages against us and could harm our business and financial condition.

     We and certain of our former officers and current and former members of our board of directors are subject to various lawsuits brought by classes of stockholders alleging, among other things, violations of federal and state securities laws breach of various fiduciary obligations. There can be no assurance that actions that have been or will be brought against us will be resolved in our favor. Any losses resulting from these claims could adversely affect our profitability and cash flow.

     The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

     Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, including many of which are outside of our control and any of which may cause our stock price to fluctuate.

     The factors that may impact the unpredictability of our quarterly results include the reduced visibility into customers’ spending plans, the changing market conditions, which have resulted in some customer and potential customer bankruptcies, a change in the mix of our products sold, from higher priced core products to lower priced edge products, and long sales and implementation cycle. As a result, we believe

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that quarter-to-quarter comparisons of operating results are not a good indication of future performance. It is likely that in some future quarters, operating results may be below the expectations of public market analysts and investors in which case the price of our common stock may fall.

     Our stock price has been volatile and could decline substantially.

     The market price of our common stock has fluctuated significantly in the past, will likely continue to fluctuate in the future and may decline. Among the factors that could affect our stock price are:

	•		variations in our quarter-to-quarter operating results;
	•		announcements by us or our competitors of significant contracts, new or enhanced products or services, acquisitions, distribution partnerships, joint ventures or capital commitments;
	•		changes in financial estimates or investment recommendations by securities analysts following our business;
	•		our sale of common stock or other securities in the future;
	•		changes in economic and capital market conditions for companies in our sector;
	•		changes in market valuations or earnings of our competitors;
	•		changes in business or regulatory conditions; and
	•		the trading volume of our common stock.

     We are dependent on sole source and limited source suppliers for several key components.

     With the current demand for electronic products, component shortages are possible and the predictability of the availability of such components may be limited. We currently purchase several key components, including ASICs, from single or limited sources. We may not be able to develop an alternate or second source in a timely manner, which could hurt our ability to deliver product to customers. If we are unable to buy these components on a timely basis, we will not be able to deliver product to our customers, which would seriously impact present and future sales, which would, in turn, adversely affect our business.

     If we fail to adequately evolve our systems and processes in a changing business environment, our ability to manage our business and results of operations may be negatively impacted.

     Our ability to successfully offer our products and implement our business plan in a rapidly evolving market requires an effective planning and management process. We expect that we will need to continue to improve our financial and managerial control and our reporting systems and procedures. If we fail to continue to evolve our systems and processes, our ability to manage our business and results of operations may be negatively impacted.

     Our business substantially depends upon the continued growth of the Internet and Internet-based systems; changes in industry structure could lead to product discontinuances.

     A substantial portion of our business and revenue depends on growth of the Internet and on the deployment of our product by customers that depend on the continued growth of the Internet. As a result of the economic slowdown and the reduction in capital spending, which have particularly affected telecommunications service providers, spending on Internet infrastructure has declined, which has had a material adverse effect on our business. To the extent that the economic slowdown and reduction in capital spending continue to adversely affect spending on Internet infrastructure, we could continue to experience material adverse effects on our business, operating results and financial condition.

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     We face risks from the uncertainties of regulation of the telecommunications industry as well as the Internet and commerce over the Internet.

     The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in the regulations relating to the telecommunications industry. Also, there are few laws or regulations that apply directly to access to or commerce on the Internet. We could be adversely affected by regulation of the Internet and Internet commerce in any country where we operate. Such regulations could include matters such as voice over the Internet or using Internet Protocol, encryption technology, and access charges for Internet service providers. The adoption of regulation of the Internet and Internet commerce could decrease demand for our products, and at the same time increase the cost of selling our products, which could have a material adverse effect on our business, operating result and financial condition.

ITEM 7a. Quantitative and Qualitative Disclosure about Market Risk

     Interest Rate Risk

     We maintain an investment portfolio of various holdings, types and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on the Consolidated Balance Sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss).

     At any time, a rise in interest rates could have a material adverse impact on the fair value of our investment portfolio. Conversely, declines in interest rates could have a material impact on interest earnings of our investment portfolio. We do not currently hedge these interest rate exposures.

     The following table presents the hypothetical changes in fair value of the financial instruments held at December 31, 2002 that are sensitive to changes in interest rates (in thousands):

     These instruments are not leveraged and are held for purposes other than trading. The modeling technique used measures the changes in fair value arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS and 150 BPS, which are representative of the historical movements in the Federal Funds Rate.

     Foreign Currency Risk and Foreign Exchange Forward Contracts.

     The majority of our revenue and expenses are transacted in US dollars. However, since we have sales and service operations outside of the US, we do have some transactions that are denominated in foreign currencies, primarily the Euro, Japanese Yen, Hong Kong Dollar, British Pound and the Australian Dollar.

     We enter into foreign exchange forward contracts to mitigate the effect of gains and losses generated by the remeasurement of certain assets and liabilities denominated primarily in the Euro, Japanese Yen, British Pound and Australian Dollar. These derivatives are not designated as hedges under SFAS No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities.” At December 31,

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2002, the notional and fair values of these contracts were not material. We do not expect gains and losses on these contracts to have a material impact on our financial results.

     We also use foreign exchange forward contracts to hedge foreign currency forecasted transactions related to certain operating expenses, denominated primarily in the Euro, Japanese Yen, British Pound and Australian Dollar. These derivatives are designated as cash flow hedges under SFAS 133. At December 31, 2002, the notional and fair values of these contracts were not material. We do not expect gains and losses on these contracts to have a material impact on our financial results.

     These contracts have original maturities ranging from one to three months. We do not enter into foreign exchange contracts for speculative or trading purposes. We attempt to limit our exposure to credit risk by executing foreign contracts with credit worthy financial institutions.

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ITEM 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

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Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Juniper Networks, Inc.

We have audited the accompanying consolidated balance sheets of Juniper Networks, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Juniper Networks, Inc. at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respect the information set forth therein.

Effective January 1, 2002, the Company changed its method of accounting for goodwill. See Note 1 of the Notes to Consolidated Financial Statements.

/s/ Ernst & Young LLP

San Francisco, California
January 14, 2003

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Juniper Networks, Inc.
Consolidated Balance Sheets
(in thousands, except par values)

See accompanying Notes to Consolidated Financial Statements

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Juniper Networks, Inc.
Consolidated Statement of Operations
(in thousands, except per share amounts)