JUNIPER NETWORKS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

[X]

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


		For the quarterly period ended September 30, 2003


[ ]		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.

(Exact name of registrant as specified in its charter)


Delaware		77-0422528

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1194 North Mathilda Avenue
Sunnyvale, California 94089		(408) 745-2000

(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

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

There were approximately 389,238,000 shares of the Company’s Common Stock, par value $0.00001, outstanding as of October 31, 2003.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Report on Form 8-K
SIGNATURES
Exhibit Index
EXHIBIT 3.2
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

Table of Contents


PART I – FINANCIAL INFORMATION		1
	Item 1. Financial Statements	1
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4. Controls and Procedures	30
PART II – OTHER INFORMATION		31
	Item 1. Legal Proceedings	31
	Item 6. Exhibits and Report on Form 8-K	32
SIGNATURES		34

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Balance Sheets
(in thousands)


			September 30,			December 31,
			2003			2002

			(unaudited)			(a)
ASSETS
Current assets:
	Cash and cash equivalents		$	457,510		$	194,435
	Short-term investments			309,143			384,036
	Accounts receivable, net			48,526			78,501
	Prepaid expenses and other current assets			24,409			23,957

		Total current assets		839,588			680,929
Property and equipment, net				243,526			266,962
Long-term investments				557,346			583,664
Restricted cash				24,983			—
Goodwill				983,397			987,661
Purchased intangible assets, net and other long-term assets				79,076			95,453

		Total assets	$	2,727,916		$	2,614,669

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	54,057		$	51,747
	Accrued warranty			32,598			32,358
	Other accrued liabilities			120,723			111,773
	Deferred revenue			53,779			46,146

		Total current liabilities		261,157			242,024
Convertible subordinated notes				542,076			942,114
Convertible senior notes				400,000			—

Commitments and contingencies

Stockholders’ equity:
	Common stock and additional-paid-in-capital			1,532,209			1,461,910
	Deferred stock compensation			(1,849	)		(11,113	)
	Accumulated other comprehensive income			7,175			17,052
	Accumulated deficit			(12,852	)		(37,318	)

		Total stockholders’ equity		1,524,683			1,430,531

		Total liabilities and stockholders’ equity	$	2,727,916		$	2,614,669

(a) The balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)


			Three months ended						Nine months ended
			September 30,						September 30,

			2003			2002			2003			2002

Net revenues:
	Product		$	147,110		$	130,264		$	423,351		$	333,822
	Service			25,018			21,762			71,087			57,459

		Total net revenues		172,128			152,026			494,438			391,281
Cost of revenues:
	Product			48,694			54,336			145,868			130,200
	Service			14,245			14,529			40,852			36,816

		Total cost of revenues		62,939			68,865			186,720			167,016

Gross margin				109,189			83,161			307,718			224,265
Operating expenses:
	Research and development			44,932			48,771			131,409			117,610
	Sales and marketing			34,710			37,749			101,404			91,221
	General and administrative			6,524			9,108			21,292			27,761
	Restructuring			13,985			22,830			13,985			22,830
	In-process research and development			—			83,479			—			83,479
	Integration			—			2,507			—			2,507
	Amortization of purchased intangible assets and deferred stock compensation ⁽¹⁾			1,998			8,727			17,323			17,640

		Total operating expenses		102,149			213,171			285,413			363,048

Operating income (loss)				7,040			(130,010	)		22,305			(138,783	)
Interest and other income				8,031			13,987			27,300			46,119
Interest and other expenses				(9,386	)		(13,631	)		(33,689	)		(43,526	)
Gain on sale of investments				—			—			8,739			—
Write-down of investments				—			(19,851	)		—			(50,451	)
Gain on partial retirement of convertible subordinated notes				9,220			62,855			14,108			62,855
Equity in net loss of joint venture				—			(180	)		—			(1,316	)

Income (loss) before income taxes				14,905			(86,830	)		38,763			(125,102	)
Provision for income taxes				7,700			1,500			14,297			3,000

Net income (loss)			$	7,205		$	(88,330	)	$	24,466		$	(128,102	)

Net income (loss) per share:
	Basic		$	0.02		$	(0.24	)	$	0.06		$	(0.37	)

	Diluted		$	0.02		$	(0.24	)	$	0.06		$	(0.37	)

Shares used in computing net income (loss) per share:
	Basic			384,795			369,944			379,792			343,423

	Diluted			408,083			369,944			399,525			343,423


⁽¹⁾ Amortization of deferred stock compensation relates to the following cost and expense categories by period:
	Cost of revenues		$	(287	)	$	294		$	(48	)	$	927
	Research and development			(2,098	)		2,197			1,414			5,356
	Sales and marketing			(573	)		609			127			1,705
	General and administrative			(346	)		325			(77	)		1,058

		Total	$	(3,304	)	$	3,425		$	1,416		$	9,046

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


				Nine months ended
				September 30,

				2003			2002

OPERATING ACTIVITIES:
Net income (loss)				$	24,466		$	(128,102	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
	Depreciation				35,754			28,919
	Amortization of purchased intangibles, deferred stock compensation, debt costs and other non-cash transactions				23,597			25,735
	In-process research and development				—			83,479
	Gain on sale of investments				(8,739	)		—
	Write-down of investments				—			50,451
	Gain on retirement of convertible subordinated notes				(14,108	)		(62,855	)
	Changes in operating assets and liabilities:
		Accounts receivable, net			29,975			40,563
		Prepaid expenses, other current assets and other assets			1,268			10,222
		Accounts payable			5,783			(18,351	)
		Accrued warranty			240			3,778
		Other accrued liabilities			9,740			(31,877	)
		Deferred revenue			7,633			(5,828	)

			Net cash provided by (used in) operating activities		115,609			(3,866	)
INVESTING ACTIVITIES:
Purchases of property and equipment, net					(14,136	)		(24,755	)
Purchases of available-for-sale investments					(671,826	)		(707,688	)
Maturities and sales of available-for-sale investments					770,334			882,902
Increase in restricted cash					(25,000	)		—
Cash paid in connection with the Unisphere Networks acquisition, net of cash and cash equivalents acquired					—			(375,803	)
Minority equity investments					(900	)		(1,075	)

			Net cash Provided by (used in) investing activities		58,472			(226,419	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock					77,403			18,185
Proceeds from issuance of convertible senior notes					392,750			—
Retirement of convertible subordinated notes					(381,159	)		(145,975	)

			Net cash provided by (used in) financing activities		88,994			(127,790	)

			Net increase (decrease) in cash and cash equivalents		263,075			(358,075	)
			Cash and cash equivalents at beginning of period		194,435			606,845

			Cash and cash equivalents at end of period	$	457,510		$	248,770

Supplemental Disclosure of Cash Flow Information:
	Cash paid for interest			$	42,863		$	53,787
Supplemental disclosure of non-cash investing and financing activities:
	Common stock issued in connection with the Unisphere Networks acquisition			$	—		$	359,888
	Common stock issued in connection with the Pacific Broadband earn-out provision			$	—		$	10,844

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)

Note 1. Description of Business

Juniper Networks, Inc. (“Juniper Networks” or the “Company”) was founded in 1996 to develop and sell products that would be able to meet the stringent demands of service providers. Juniper Networks is a leading provider of network infrastructure solutions that transform the business of networking. The Company’s products enable customers to convert their business models from one of providing a commodity service to that of providing more differentiation and value to end users as well as increased reliability and security, thereby making the network a more valuable asset. The Company sells and markets its products through its direct sales organization and value-added resellers.

In July 2002, the Company completed its acquisition of Unisphere Networks, Inc. (“Unisphere”), a subsidiary of Siemens Corporation, which itself is a subsidiary of Siemens AG (“Siemens”). Unisphere developed, manufactured and sold data networking equipment optimized for applications at the edge of service provider networks. Although the Company took a one-time restructuring charge in connection with the acquisition of Unisphere to eliminate certain duplicative activities and to rationalize costs consistent with its existing business model, the acquisition enabled the Company to add a complementary product to its existing product line without reorganizing its existing organization or modifying its cost and business structure. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations,” the Company included in its results of operations for 2002, the results of Unisphere from July 1, 2002. Therefore, results for the nine months ended September 30, 2002 only include the results of Unisphere for the three months ended September 30, 2002, whereas results for the nine months ended September 30, 2003 include the results of the combined companies for the entire nine-month period.

Note 2. Summary of Significant Accounting Policies

Stock-Based Compensation

The Company’s stock option plans are accounted for under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As the exercise price of all options granted under these plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost, other than acquisition-related compensation, is recognized in net income (loss). The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to employee stock benefits, including shares issued under the stock option plans and under the Company’s Stock Purchase Plan, collectively called “options.” Pro forma information, net of the tax effect, follows (in thousands, except per share amounts):


		Three months ended						Nine months ended
		September 30,						September 30,

		2003			2002			2003			2002

Net income (loss) as reported		$	7,205		$	(88,330	)	$	24,466		$	(128,102	)
Add: amortization of deferred stock compensation included in reported net income (loss), net of tax			(2,048	)		2,124			878			5,609
Deduct: total stock-based employee compensation expense determined under fair value based method, net of tax			(8,081	)		(24,760	)		(43,839	)		(71,198	)

Pro forma net loss		$	(2,924	)	$	(110,966	)	$	(18,495	)	$	(193,691	)

Basic net income (loss) per share:
	As reported	$	0.02		$	(0.24	)	$	0.06		$	(0.37	)
	Pro forma	$	(0.01	)	$	(0.30	)	$	(0.05	)	$	(0.56	)


Diluted net income (loss) per share:
	As reported	$	0.02		$	(0.24	)	$	0.06		$	(0.37	)
	Pro forma	$	(0.01	)	$	(0.30	)	$	(0.05	)	$	(0.56	)

Guarantees

Financial Accounting Standards Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), was issued in November 2002. FIN 45 requires that the Company recognize the fair value for guarantee and indemnification arrangements issued or modified by the Company after December 31, 2002 if these arrangements are within the scope of FIN 45. In addition, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under previously existing generally accepted accounting principles, in order to identify if a loss has occurred. If the Company determines it is probable that a loss has occurred then any such estimable loss would be recognized under those guarantees and indemnifications. The Company has entered into agreements with some of its customers that contain indemnification provisions relating to potential situations where claims could be alleged that the Company’s products infringes the intellectual property rights of a third party. Other examples of the Company’s guarantees or indemnification arrangements include guarantees of product performance and standby letters of credits for certain lease facilities. The Company has not recorded a liability related to these indemnification and guarantee provisions. The Company implemented the provisions of FIN 45 as of January 1, 2003 and it has not had any significant impact on the Company’s financial position, results of operations or cash flows. In addition, the Company does not believe that FIN 45 will have a material impact on its financial position, results of operations or cash flows in the future.

Revenue Recognition

In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The Company adopted EITF 00-21 for transactions entered into after July 1, 2003. The adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

Recent Accounting Pronouncements

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. The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003; however, the FASB has deferred the effective date for VIEs created before February 1, 2003 to the period ended December 31, 2003, for calendar year companies. Early adoption of the provisions of FIN 46 prior to the deferred effective date was permitted. The Company currently has no contractual relationship or other business relationship with a VIE in which it is a Primary Beneficiary and, therefore, the adoption did not affect its consolidated financial position, results of operations or cash flows.

Note 3. Long-Term Debt

In June 2003, Juniper Networks received $392.8 million of net proceeds from an offering of $400.0 million aggregate principal amount of Zero Coupon Convertible Senior Notes due June 15, 2008 (the “Senior Notes”). The Senior Notes are senior unsecured obligations, rank on parity in right of payment with all of the Company’s existing and future senior unsecured debt, and rank senior to all of the Company’s existing and future debt that expressly provides that it is subordinated to the notes, including

the 4.75% Convertible Subordinated Notes due March 15, 2007 (the “Subordinated Notes”). The Senior Notes are convertible into shares of Juniper Networks common stock, subject to certain conditions, at any time prior to maturity or their prior repurchase by Juniper Networks. The conversion rate is 49.6512 shares per each $1,000 principal amount of convertible notes, subject to adjustment in certain circumstances.

During the nine months ended September 30, 2003, the Company paid approximately $381.2 million to retire a portion of the Subordinated Notes. This partial retirement resulted in a gain of $14.1 million in the nine months ended September 30, 2003 for the difference between the carrying value of the Subordinated Notes at the time of their retirement, including unamortized debt issuance costs, and the amount paid to extinguish such Subordinated Notes. The Company may retire additional portions of the Subordinated Notes in the future.

Note 4. Restructuring Expenses

2003

In the third quarter of 2003, the Company announced that it is no longer developing its G-series CMTS products and recorded a one-time charge of approximately $14.0 million that comprised of workforce reduction costs, non-inventory asset impairment, vacating facilities costs, the costs associated with termination of contracts and other related costs. The Company’s Board of Directors approved the discontinuance and related restructuring charge and expects that the plan will facilitate the focus on core competencies and reducing cost structure. A charge of $5.6 million associated with the workforce reduction related primarily to the termination of 76 employees that were primarily engineers located in the Americas and Europe regions. The Company expects to pay the remaining balance of the severance accrual by the end of the first quarter of 2004. A non-inventory asset impairment of $2.9 million was primarily for long-lived assets that were no longer needed. Facility charges of $3.5 million consisted primarily of the cost of vacating facilities that were dedicated to the G-series CMTS products and the impairment cost of certain leasehold improvements. The net present value of the facility charge was calculated using the Company’s risk-adjusted borrowing rate. Amounts related to the net facility charge will be paid over the respective lease terms through July 2008. The difference between the actual future rent payments and the net present value will be recorded as operating expenses when incurred. Contractual commitments and other charges consist primarily of $0.9 million of excess material charges from the Company’s contract manufacturers and suppliers for on-hand and on-order material related to the G-series CMTS products and $0.9 million of costs to satisfy end-of-life commitments in certain customer contracts. All of these costs were accounted for in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and have been included as a charge to the results of operations in the quarter ended September 30, 2003. Changes to the estimates of executing the currently approved plans of restructuring will be reflected in results of operations. As of September 30, 2003, the balance of the accrued restructuring charge consisted of the following (in thousands):


										Remaining
										liability as of
		Initial		Non-cash			Cash			September 30,
		charge		charges			payments			2003

Workforce reduction		$	5,550	$	(744	)	$	(2,485	)	$	2,321
Asset impairment			2,887		(2,887	)		—			—
Facilities			3,455		—			—			3,455
Contractual commitments and other charges			2,093		—			(257	)		1,836

	Total	$	13,985	$	(3,631	)	$	(2,742	)	$	7,612

2002

During the third quarter of 2002, in connection with the acquisition of Unisphere, Juniper Networks’ Board of Directors approved and management initiated plans to restructure operations to eliminate certain duplicative activities, focus on strategic product and customer bases, reduce costs and better align

product and operating expenses with then existing general economic conditions. Consequently, Juniper Networks recorded restructuring expenses of approximately $14.9 million, net of a $2.6 million adjustment made during the fourth quarter of 2002 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 were included as a charge to the results of operations for the year ended December 31, 2002. As of September 30, 2003, the balance of the accrued restructuring charge consisted of the following (in thousands):


													Remaining
													liability as of
		Initial		Non-cash			Cash						September 30,
		charge		charges			payments			Adjustments			2003

Workforce reduction		$	10,522	$	—		$	(8,975	)	$	(1,547	)	$	—
Asset impairment			944		(944	)		—			—			—
Consolidation of excess facilities			6,083		—			(1,626	)		(1,054	)		3,403

	Total	$	17,549	$	(944	)	$	(10,601	)	$	(2,601	)	$	3,403

Amounts related to the net lease expense due to the consolidation of facilities will be paid over the respective lease terms through 2009. The Company’s estimated costs to exit these facilities are based on available commercial rates for potential subleases. The actual loss incurred in exiting these facilities could be different from the Company’s estimates.

Juniper Networks also recorded approximately $14.4 million of similar restructuring costs in connection with restructuring the Unisphere organization, net of a $0.4 million reduction to goodwill in the quarter ended June 30, 2003 for certain estimated acquisition costs that were not incurred. These costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Unisphere. As of September 30, 2003, there was approximately $6.9 million of such costs remaining to be paid, primarily for facilities, which will be paid over the respective lease terms through 2009, and professional services.

Note 5. Warranties

Juniper Networks generally offers a one-year warranty on all of its hardware products as well as a 90-day warranty on the media that contains 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. The Company estimates the costs that may be incurred under its warranty obligations and records a liability in the amount of such costs at the time revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Company’s warranty reserve during the nine months ended September 30, 2003 are as follows (in thousands):


Balance as of December 31, 2002	$	32,358
Provisions made during the period		21,963
Actual costs incurred during the period		(21,723	)

Balance as of September 30, 2003	$	32,598

Note 6. Acquisitions

In July 2002, Juniper Networks completed its acquisition of 100% of Unisphere, a subsidiary of Siemens, which also was a significant customer during the three and nine months ended September 30, 2003. Total consideration for the acquisition was $914.5 million, which consisted of $375.0 million of cash, the issuance of 36.5 million shares of Juniper Networks’ common stock with a fair value of approximately $359.9 million, the assumption of all of the outstanding stock options of Unisphere with a

fair value of approximately $151.2 million, direct costs associated with the acquisition of approximately $13.6 million and an estimated liability of approximately $14.8 million, consisting primarily of workforce reduction charges, including severance and other employee benefits, costs of vacating duplicate facilities and the cost of exiting certain contractual obligations.

In the quarter ended June 30, 2003, the Company reversed approximately $4.3 million to goodwill, primarily related to liabilities that were accrued at the time of the acquisition and certain acquisition costs that were not realized. The total purchase price has been allocated as follows (in thousands):


Net tangible assets acquired (liabilities assumed)			$	(5,619	)
Amortizable intangible assets:
	Completed technology			61,100
	Service contract relationships			6,900
	Non-compete agreements			2,400
	Order backlog			3,600

		Total amortizable intangible assets		74,000
In-process research and development				82,700
Deferred compensation on unvested stock options				499
Goodwill				762,953

	Total purchase price		$	914,533

Note 7. Goodwill and Purchased Intangible Assets

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


				Accumulated
As of September 30, 2003		Gross		Amortization			Net

Technology		$	75,359	$	(28,630	)	$	46,729
Other			10,576		(4,089	)		6,487

	Total	$	85,935	$	(32,719	)	$	53,216

As of December 31, 2002

Technology		$	75,359	$	(14,964	)	$	60,395
Other			10,576		(1,848	)		8,728

	Total	$	85,935	$	(16,812	)	$	69,123

Amortization expense of purchased intangible assets was included in operating expenses in the amounts of $5.3 million and $15.9 million for the three and nine months ended September 30, 2003, respectively, and $5.3 million and $8.6 million for the three and nine months ended September 30, 2002, respectively.

The estimated future amortization expense of purchased intangible assets for the next five years is as follows (in thousands):


Year ending December 31,		Amount

2003 (remaining three months)		$	4,753
2004			14,025
2005			13,425
2006			12,813
2007			7,150
2008			1,050

	Total	$	53,216

The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows (in thousands):


Balance as of December 31, 2002	$	987,661
Goodwill acquired during the period		—
Additions to existing goodwill		—
Reductions to existing goodwill		(4,264	)

Balance as of September 30, 2003	$	983,397

The Company is required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. The Company performed an impairment analysis during November 2002 and determined that there was no impairment of the goodwill at that time. The Company considered the G-series CMTS product discontinuance as an impairment indicator and, accordingly, reviewed goodwill to determine if there was any impairment. Since the Company has one reportable segment, the Company compared its estimated fair value, as measured by it’s market capitalization, to its net assets as of July 31, 2003 and since the fair value was substantially greater than the net assets, the Company concluded that there was no impairment of goodwill at the time of the CMTS product discontinuance.

Note 8. Equity Investments

As of September 30, 2003 and December 31, 2002, the carrying values of the Company’s minority equity investments in privately held companies were $5.7 million and $5.0 million, respectively. During the nine months ended September 30, 2003, the Company made additional investments of approximately $0.9 million in certain privately held companies. During the quarter ended March 31, 2003, the Company sold its entire position in one privately held company for approximately $0.3 million, which did not result in a material gain or loss. During the nine months ended September 30, 2002, the Company wrote down certain investments for declines in value determined to be other than temporary by $50.5 million. No such write-downs have been made during the nine months ended September 30, 2003.

In addition to the equity investments in privately held companies, the Company held certain marketable equity securities classified as available-for-sale. During the quarter ended March 31, 2003, the Company sold some of these investments, which had a cost basis of approximately $2.1 million, and recognized a gain of approximately $4.4 million. During the quarter ended June 30, 2003, the Company sold its remaining marketable equity securities classified as available-for-sale, which had a cost basis of $2.2 million, and recognized a gain of approximately $4.4 million.

Note 9. Restricted Cash

In the quarter ended June 30, 2003, the Company established a trust in the amount of $25.0 million to secure its indemnification obligations to certain directors and officers arising from their activities as such in the event that the Company does not provide or is financially incapable of providing indemnification. The Company can terminate the trust at the five-year anniversary of establishment and each five-year anniversary thereafter. Upon termination, the Company has the right to any amounts remaining in the trust. The trust corpus is restricted cash and is reported as a long-term asset. The $25.0 million is invested per the Company’s investment policy and the investments are classified as available-for-sale; therefore, any changes in valuation are reflected on the balance sheet.

Note 10. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company operates as one operating segment. The following table shows net revenues by geographic region (in thousands):


		Three months ended				Nine months ended
		September 30,				September 30,

		2003		2002		2003		2002

Americas		$	75,906	$	76,882	$	205,102	$	225,822
Europe			40,870		34,170		129,769		95,564
Asia			55,352		40,974		159,567		69,895

	Total	$	172,128	$	152,026	$	494,438	$	391,281

The Americas region includes net revenues from countries other than the United States of approximately $11.0 million and $7.8 million for the three months ended September 30, 2003 and 2002, respectively, and approximately $34.4 million and $17.7 million for the nine months ended September 30, 2003 and 2002, respectively.

During the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003, Ericsson Telekom AB (“Ericsson”) and Siemens each accounted for greater than 10% of net revenues. Ericsson was the only customer that accounted for greater than 10% of revenue for the nine months ended September 30, 2002.

Note 11. Net Income (Loss) Per Share

The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):


			Three months ended						Nine months ended
			September 30,						September 30,

			2003			2002			2003			2002

Numerator:
	Net income (loss)		$	7,205		$	(88,330	)	$	24,466		$	(128,102	)

Denominator:
	Weighted-average shares of common stock outstanding			384,879			370,367			379,941			344,110
	Weighted-average shares subject to repurchase			(84	)		(423	)		(149	)		(687	)

		Denominator for basic net income (loss) per share		384,795			369,944			379,792			343,423
	Common stock equivalents			23,288			—			19,733			—

		Denominator for diluted net income (loss) per share		408,083			369,944			399,525			343,423

Consolidated net income (loss) applicable to common stockholders per share:
	Basic		$	0.02		$	(0.24	)	$	0.06		$	(0.37	)

	Diluted		$	0.02		$	(0.24	)	$	0.06		$	(0.37	)

For the three and nine months ended September 30, 2002, Juniper Networks excluded approximately 11.4 million and 12.0 million common stock equivalents from the calculation of diluted loss per share because such securities were antidilutive in that period due to the net loss. Employee stock options to purchase approximately 9.8 million shares and 60.1 million shares in the three months ended September 30, 2003 and 2002, respectively, and approximately 11.0 million shares and 24.5 million shares in the nine months ended September 30, 2003 and 2002, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and, therefore, the effect would have been antidilutive. For each of the periods presented, the Subordinated Notes were also excluded from the calculation of diluted loss per share because the effect of the assumed conversion of the notes would have been antidilutive. In addition, for the three and nine months ended September 30, 2003, the Senior Notes were excluded from the calculation of the diluted loss per share because the Senior Notes were not convertible by their terms.

Note 12. Other Comprehensive Income (Loss)

Comprehensive income (loss) is as follows (in thousands):


	Three months ended						Nine months ended
	September 30,						September 30,

	2003			2002			2003			2002

Net income (loss)	$	7,205		$	(88,330	)	$	24,466		$	(128,102	)
Less: realized gain on sale of equity investments		—			—			(8,739	)		—
Unrealized gains (losses) on equity investments, net of realized gain		(3,478	)		7,229			(2,703	)		(2,889	)
Foreign currency translation gains (losses)		(545	)		(228	)		1,565			(923	)

Total comprehensive income (loss)	$	3,182		$	(81,329	)	$	14,589		$	(131,914	)

Note 13. 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 issuers. 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. A proposal has been made for the settlement and release of claims against the issuer defendants, including the Company. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court. If the settlement does not occur, and litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the case vigorously.

Federal Securities Class Action Suit

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 plaintiffs filed their amended complaint in April 2003 and the defendants moved to dismiss the amended complaint in May 2003. The hearing on defendants’ motion to dismiss was held on September 12, 2003. The judge has not yet ruled on the motion. There has been no discovery to date and no trial is scheduled. 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 amended shareholder derivative complaint. In March 2003, the judge sustained defendants’ demurrers with leave to amend. The plaintiffs lodged their amended complaint in May 2003 and the defendants demurred to the amended complaint and moved to stay the consolidated action pending resolution of the federal action. On August 25, 2003, the Court sustained defendants’ demurrer with leave to amend and denied the motion to stay without prejudice. Plaintiffs’ third amended complaint is due December 16, 2003. There has been limited discovery to date and no trial is scheduled. The Company continues to believe the claims are without merit and intends to defend the action vigorously.

Note 14. Subsequent Events

During October 2003, the Company called for the redemption on November 26, 2003, of $400.0 million principal amount of its 4.75% Convertible Subordinated Notes due March 15, 2007 (the “Subordinated Notes”). Prior to November 26, 2003, holders may convert their Subordinated Notes called for redemption into shares of Juniper Networks common stock at a price of approximately $163.9559 per share, or 6.0992 shares of Juniper Networks common stock per $1,000 principal amount of the Subordinated Notes. Cash will be paid in lieu of fractional shares. Alternatively, if holders do not elect to convert their Subordinated Notes, they will be redeemed on November 26, 2003. Upon redemption, holders will receive a total of $1,036.508 per $1,000 principal amount of the Subordinated Notes (consisting of the redemption price of $1,027.14 per $1,000 principal amount of the Subordinated Notes, plus accrued and unpaid interest thereon from September 15, 2003 up to but not including November 26, 2003, of $9.368 per $1,000 principal of the Subordinated Notes). Any of the Subordinated Notes called for redemption and not converted on or before November 25, 2003, will be redeemed automatically on November 26, 2003, and no further interest will accrue.

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

This Report on Form 10-Q (the “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 our Annual Report on Form 10-K filed March 11, 2003 under the section entitled “Risk Factors” and “Factors That May Affect Future Results” included herein. Juniper Networks undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

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. We are a leading provider of network infrastructure solutions that transform the business of networking. Our products enable customers to convert their business models from one of providing a commodity service to that of providing more differentiation and value to end users as well as increased reliability and security, thereby making the network a more valuable asset. We sell and market our products through our direct sales organization and value-added resellers.

Critical Accounting Policies

The preparation of the condensed 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 condensed 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 impacts cost of product revenues and gross margins. We base our estimates on our historical experience and also on assumptions that we believe are standard and reasonable.

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 the 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 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. Service revenue is recognized over the service period. Beginning July 1, 2003, we recognized revenue on arrangements where products and services are bundled in accordance with EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” We allocate the total fee on such arrangements to the individual deliverables either based on their relative fair values or using the residual method, as circumstances dictate. Our ability to recognize revenue in the future may be affected if actual selling prices are significantly less than

the fair values. In addition, 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 made 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 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 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 most of our manufacturing, repair and supply chain management operations to our 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 an analysis from our sales and marketing 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, that would have an adverse impact on our gross margins and profitability. The majority of factors that affect component usage and demand for our products are outside of our control.

Warranty Reserves

We generally offer a one-year warranty on all of our hardware products as well as a 90-day warranty on the media that contains 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. 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.

Results of Operations

In July 2002, we completed our acquisition of Unisphere Networks, Inc. (“Unisphere”), a subsidiary of Siemens Corporation, which itself is a subsidiary of Siemens AG (“Siemens”). Following the acquisition, Siemens, directly and indirectly 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. Although we took a one-time restructuring charge in connection with our acquisition of Unisphere, the acquisition enabled us to add a complementary product to our existing product line without reorganizing our existing organization or modifying our cost and business structure. We included in our results of operations for 2002 the results of Unisphere from July 1, 2002. Therefore, results for the nine months ended September 30, 2002 only include the results of Unisphere for the three months ended September 30, 2002, whereas the nine months ended September 30, 2003 include the results of the combined companies for the entire nine-month period.

Net Revenues

The following table shows product and service net revenues for the three and nine months ended September 30, 2003 and 2002 (in thousands):


			Three months ended September 30,										Nine months ended September 30,

					% of net					% of net					% of net					% of net
			2003		revenues			2002		revenues			2003		revenues			2002		revenues

Net revenues:
	Product		$	147,110		85	%	$	130,264		86	%	$	423,351		86	%	$	333,822		85	%
	Service			25,018		15	%		21,762		14	%		71,087		14	%		57,459		15	%

		Total net revenues	$	172,128				$	152,026				$	494,438				$	391,281

Product net revenues for the three and nine months ended September 30, 2003 increased 13% and 27% compared to the three and nine months ended September 30, 2002, respectively. The increases for both periods were due primarily to increases in the number of units of 26% and 28% for the three and nine months ended September 30, 2003, compared to the three and nine months ended September 30, 2002, respectively. The increase in units sold is attributed to greater demand. The change in product net revenues for the three and nine-month periods was also affected by shifts in our product mix. We did not experience any significant pricing pressure on our products during the periods reported on herein.

Service net revenues for the three and nine months ended September 30, 2003 increased 15% and 24% compared to the three and nine months ended September 30, 2002, respectively. The increase for both periods was primarily a result of a larger installed base of customers and products. Our service revenue primarily is from customers who previously purchased our products and enter into service contracts. In addition to product-related service contracts, service revenue is generated from providing professional and educational services.

The following table shows net revenues and the percent of total net revenues by geographic region for the three and nine months ended September 30, 2003 and 2002 (in thousands):


		Three months ended September 30,										Nine months ended September 30,

				% of net					% of net					% of net					% of net
		2003		revenues			2002		revenues			2003		revenues			2002		revenues

Americas		$	75,906		44	%	$	76,882		51	%	$	205,102		42	%	$	225,822		58	%
Europe			40,870		24	%		34,170		22	%		129,769		26	%		95,564		24	%
Asia			55,352		32	%		40,974		27	%		159,567		32	%		69,895		18	%

	Total	$	172,128				$	152,026				$	494,438				$	391,281

For the three and nine months ended September 30, 2003, we experienced a shift in net revenues as a percentage of total net revenues from the Americas region to Europe and Asia compared to the three

and nine months ended September 30, 2002. The shift was primarily due to both the decline in spending for capital expenditures in the United States, as well as the increase in the number of our international customers, particularly in Asia.

Cost of Revenues

The following table shows cost of product and service revenues and the related gross margin percentages for the three and nine months ended September 30, 2003 and 2002 (in thousands):


			Three months ended September 30,										Nine months ended September 30,

					Gross					Gross					Gross					Gross
			2003		margin %			2002		margin %			2003		margin %			2002		margin %

Cost of revenues:
	Product		$	48,694		67	%	$	54,336		58	%	$	145,868		66	%	$	130,200		61	%
	Service			14,245		43	%		14,529		33	%		40,852		43	%		36,816		36	%

		Total cost of revenues	$	62,939		63	%	$	68,865		55	%	$	186,720		62	%	$	167,016		57	%

Most of our manufacturing, repair and supply chain management operations are outsourced to independent contract manufacturers; accordingly, most of the cost of revenues consists of payments to our independent contract manufacturers. The independent contract manufacturers manufacture our products using quality assurance programs and standards that we establish. Controls around manufacturing, engineering and documentation are conducted at our facilities in Sunnyvale, California and Westford, Massachusetts. Our independent contract manufacturers have facilities in Neenah, Wisconsin and Toronto, Canada. Generally, our contract manufacturers retain 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.

Cost of product revenues was 33% and 42% of product revenue for the three months ended September 30, 2003 and 2002, respectively. Cost of product revenues was 34% and 39% of product revenue for the nine months ended September 30, 2003, and 2002, respectively. The decrease in both periods was primarily due to a one-time charge of $5.1 million recognized in the three months ended September 30, 2002 related to the Unisphere acquisition and savings in the three months ended September 30, 2003 in outsourced manufacturing costs as a result of improved efficiencies and cost cutting initiatives at our contract manufacturers.

Cost of service revenues was 57% and 67% of service revenue for the three months ended September 30, 2003 and 2002, respectively. Cost of service revenues was 57% and 64% of service revenue for the nine months ended September 30, 2003 and 2002, respectively. The decrease in both periods was primarily due to improved efficiencies in our customer service organization. In addition, the decrease in the three-month period was due to less spares being shipped on a comparative basis.

We expect our overall gross margin to remain relatively consistent next quarter as compared to this quarter.

Operating Expenses

The following table shows operating expenses for the three and nine months ended September 30, 2003 and 2002 (in thousands):


	Three months ended September 30,										Nine months ended September 30,

			% of net					% of net					% of net					% of net
	2003		revenues			2002		revenues			2003		revenues			2002		revenues

Research and development	$	44,932		26	%	$	48,771		32	%	$	131,409		27	%	$	117,610		30	%
Sales and marketing	$	34,710		20	%	$	37,749		25	%	$	101,404		21	%	$	91,221		23	%
General and administrative	$	6,524		4	%	$	9,108		6	%	$	21,292		4	%	$	27,761		7	%
Restructuring	$	13,985		8	%	$	22,830		15	%	$	13,985		3	%	$	22,830		6	%
In-process research and development	$	—				$	83,479		55	%	$	—				$	83,479		21	%


	Three months ended September 30,										Nine months ended September 30,

			% of net					% of net					% of net					% of net
	2003		revenues			2002		revenues			2003		revenues			2002		revenues

Integration	$	—				$	2,507		2	%	$	—				$	2,507		1	%
Amortization of purchased intangible assets and deferred stock compensation	$	1,998		1	%	$	8,727		6	%	$	17,323		4	%	$	17,640		5	%

For the three months ended September 30, 2003, research and development expenses decreased 8% compared to the three months ended September 30, 2002. The change was primarily due to a 67% decrease in expenses for outside services and a 5% decrease in headcount related expenses. Outside services primarily consist of certain certification expenses, outsourced development costs and costs associated with independent contractors. The decrease in headcount related expenses was primarily due to the savings realized from the restructuring activities performed in 2003 in connection with the discontinuance of the G-series CMTS product.

For the nine months ended September 30, 2003, research and development expenses increased 12% compared to the nine months ended September 30, 2002. The change was primarily due to a 20% increase in headcount related expenses, partially offset by a 47% decrease in outside services and a 50% decrease in prototype expenses. The increase in headcount related expenses was primarily due to a full nine months of results of the combined company after the Unisphere acquisition, compared to only three months of combined results for the nine months ended September 30, 2002. Outside services primarily consist of certain certification expenses, outsourced development costs and costs associated with independent contractors. The decrease in prototype expenses was due to a product launch in the third quarter of 2002, which required more prototype expenses than in 2003.

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. 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 next quarter’s research and development expenses to be relatively consistent in absolute dollars as compared to this quarter.

For the three months ended September 30, 2003, sales and marketing expenses decreased 8% compared to the three months ended September 30, 2002. The change was primarily due to a 57% decrease in demonstration equipment and a 12% decrease in facility related allocations. The decrease in demonstration equipment costs was due to higher expenditures in the third quarter of 2002 as a result of the Unisphere acquisition, and cost cutting initiatives implemented over the past year.

For the nine months ended September 30, 2003, sales and marketing expenses increased 11% compared to the nine months ended September 30, 2002. The change was primarily due to a 16% increase in headcount related expenses and a 13% increase in marketing programs, partially offset by a 15% decrease in demonstration equipment. The increase in headcount related expenses was a result of the Unisphere acquisition and higher commissions associated with the increase in revenues. The increase in marketing programs costs was primarily due to the increase in revenues. The decrease in demonstration equipment costs was due to higher expenditures in the third quarter of 2002 as a result of the Unisphere acquisition, and cost cutting initiatives implemented over the past year.

We expect next quarter’s sales and marketing expenses to remain relatively consistent in absolute dollars as compared to this quarter.

For the three and nine months ended September 30, 2003, general and administrative expenses decreased 28% and 23% compared to the three and nine months ended September 30, 2002, respectively. The decrease in the three-month period was almost entirely a result of decreases in bad debt expenses. The decrease in the nine-month period was also due to decreases in bad debt expenses, partially offset by a 16% increase in professional services. The increase in professional services was due

to certain strategic consulting activities. We expect next quarter’s general and administrative expenses to remain relatively consistent in absolute dollars compared to this quarter.

In the third quarter of 2003, we announced that we are no longer developing our G-series CMTS products and recorded a one-time charge of approximately $14.0 million that was comprised of workforce reduction costs, non-inventory asset impairment, vacating facilities costs, the costs associated with termination of contracts and other related costs. Our Board of Directors approved the discontinuance and the related restructuring charge and expects that the plan will facilitate the focus on core competencies and reducing our cost structure. A charge of $5.6 million associated with the workforce reduction related primarily to the termination of 76 employees that were mainly located in the Americas and Europe regions. We expect to pay the remaining balance of the severance accrual by the end of the first quarter of 2004. A non-inventory asset impairment of $2.9 million was primarily for long-lived assets that were no longer needed as a result of the discontinuance of the product line. Facility charges of $3.5 million consisted primarily of the cost of vacating facilities that were dedicated to the G-series CMTS products and the impairment cost of certain leasehold improvements. The net present value of the facility charge was calculated using our risk-adjusted borrowing rate. Amounts related to the net facility charge will be paid over the respective lease term through July 2008. The difference between the actual future rent payments and the net present value will be recorded as operating expenses when incurred. Contractual commitments and other charges consist primarily of $0.9 million of excess material charges from our contract manufacturers and suppliers for on-hand and on-order material related to the G-series CMTS products and $0.9 million of costs to satisfy end-of-life commitments in certain customer contracts. All of these costs were accounted for in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and have been included as a charge to the results of operations in the quarter ended September 30, 2003. Changes to the estimates of executing the currently approved plans of restructuring will be reflected in results of operations.

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 costs and better align product and operating expenses with then existing general economic conditions. Consequently, we recorded restructuring expenses of approximately $14.9 million, net of a $2.6 million adjustment made during the fourth quarter of 2002 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 during the third quarter of 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.

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 September 30, 2003 these development efforts were substantially completed.

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 incremental costs directly related to the integration of the two companies that have no future benefit, which consisted principally of workforce related expenses for individuals transitioning their positions and professional fees during the quarter ended September 30, 2002.

We amortize purchased intangible assets and deferred stock compensation over their estimated lives. The amortization expense of intangible assets for the three-month period ended September 30, 2003 was the same as the amortization expense for the three-month period ended September 30, 2002. Amortization expense of intangible assets for the nine months ended September 30, 2003 increased 85% compared to the nine months ended September 30, 2002 due to the intangible assets purchased in the Unisphere acquisition in July 2002. The amortization expense of deferred stock compensation resulted in a credit of approximately $3.3 million for the three months ended September 30, 2003 due to employees who forfeited options for which compensation expense had been recognized on the graded vesting method, but which were unvested on the date their employment was terminated. These employees were primarily a part of the restructuring plan in the current quarter. Amortization of deferred stock compensation in the nine months ended September 30, 2003 decreased 84% compared to the nine months ended September 30, 2002 primarily due to a reduction of stock-based compensation expense recorded in the three months ended September 30, 2003 relating to employees who forfeited options for which compensation expense had been recognized on the graded vesting method, but which were unvested on the date their employment was terminated.

Other Income and Expenses

The following table shows other income and expenses for the three and nine months ended September 30, 2003 and 2002 (in thousands):


	Three months ended						Nine months ended
	September 30,						September 30,

	2003			2002			2003			2002

Interest and other income	$	8,031		$	13,987		$	27,300		$	46,119
Interest and other expense	$	(9,386	)	$	(13,631	)	$	(33,689	)	$	(43,526	)
Gain on sale of investments	$	—		$	—		$	8,739		$	—
Write-down of investments	$	—		$	(19,851	)	$	—		$	(50,451	)
Gain on retirement of convertible subordinated notes	$	9,220		$	62,855		$	14,108		$	62,855
Equity in net loss of joint venture	$	—		$	(180	)	$	—		$	(1,316	)

For the three and nine months ended September 30, 2003, interest and other income decreased $6.0 million and $18.8 million compared to the three and nine months ended September 30, 2002. The decrease in both periods was primarily due to lower interest rates earned on cash, cash equivalents and investments compared to the same period a year ago. The decrease in the nine-month period was partially offset by a $1.2 million deposit received related to the Pacific Broadband acquisition that, because of concerns regarding recoverability, was not valued in the allocation of the purchase price.

For the three and nine months ended September 30, 2003, interest and other expense decreased $4.2 million and $9.8 million compared to the three and nine months ended September 30, 2002, respectively. The decrease was a result of the partial retirement of the Subordinated Notes in the third quarter of 2002 and second and third quarters of 2003.

During the first and second quarters of 2003, we sold some of our marketable equity securities classified as available-for-sale, which had a cost basis of approximately $4.3 million, and recognized gains of approximately $8.7 million.

During the first and third quarters of 2002, we recorded impairment write-downs of our minority equity investments of $50.5 million. There have been no such an impairments recorded in the nine months ended September 30, 2003.

During the second and third quarters of 2003, we paid approximately $381.2 million to retire a portion of our Subordinated Notes. This partial repurchase resulted in a gain of approximately $14.1 million, which was the difference between the carrying value of the notes at the time of their retirement, including unamortized debt issuance costs, and the amount paid to extinguish such Subordinated Notes.

In October 2003 we called for redemption on November 26, 2003, $400.0 million principal amount of our Subordinated Notes. Prior to November 26, 2003, holders may convert their Subordinated Notes into shares of our common stock at a price of approximately $163.9559 per share and cash for any fractional shares. If the holders do not elect to convert the Subordinated Notes, they will be redeemed for which the holders will receive a total of $1,036.508 per $1,000 principal amount of the Subordinated Notes, consisting of the redemption price of $1,027.14 per $1,000 principal amount of the Subordinated Notes, plus accrued and unpaid interest from September 15, 2003 of $9.368 per $1,000 principal of the Subordinated Notes. Any of the Subordinated Notes called for redemption and not converted before November 26, 2003 will be redeemed automatically on November 26, 2003 and no further interest will accrue.

During the third quarter of 2002, we paid approximately $146.0 million to retire a portion of our Subordinated Notes. This partial repurchase resulted in a gain of $62.9 million, which was the difference between the carrying value of the notes at the time of their retirement, including unamortized debt issuance costs, and the amount paid to extinguish such Subordinated Notes.

Equity in net loss of joint venture was $0.1 million and $1.1 million for the three and nine months ended June 30, 2002. During the quarter ended June 30, 2001, we entered into a joint venture agreement with Ericsson, 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. In addition to this joint venture, Ericsson is also one of our significant resellers, representing greater than 10% of our revenues in each of the three and nine-month periods ending September 30, 2003 and 2002. To date, we have funded the joint venture in the amount of $5.4 million; however, we had no further funding obligations related to this joint venture after December 31, 2002.

Provision for Income Taxes

We recorded tax provisions of $7.7 million and $14.3 million for the three and nine months ended September 30, 2003, or effective tax rates of 52% and 37%, respectively. The rate for the nine months ended September 30, 2003 reflects taxes payable in certain foreign jurisdictions, the benefit of research credits and capital loss carryforwards and the inability to benefit certain charges and losses. The rate for the most recent three-month period is higher because of these unbenefited charges and losses.

For the three and nine months ended September 30, 2002, we recorded tax provisions of $1.5 million and $3.0 million, or effective rates
of -2% and -2%, respectively, reflecting taxes payable in certain foreign jurisdictions and the inability to benefit certain charges and losses.

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

Operating Activities

Net cash provided by operating activities was $115.6 million for the nine months ended September 30, 2003, compared to cash used in operations of $3.9 million for the nine months ended September 30, 2002. Net cash provided by operating activities during the nine months ended September 30, 2003 was due to our net income of $24.5 million, which was adjusted by:

• non-cash charges, including depreciation and amortization expenses;

• a decrease in accounts receivable; and

• increases in accounts payable, other accrued liabilities and deferred revenue;

• partially offset by gains on the sale of available-for-sale investments and the partial retirement of the Subordinated Notes.

Net cash used in operating activities during the nine months ended September 30, 2002 was due to our net loss of $128.1 million, which was adjusted by:

• non-cash charges, including depreciation and amortization expenses, in-process research and development charges, and the write-down of investments;

• decreases in accounts receivable and other assets; and

• increases in accrued warranty;

• partially offset by the gains on the sale of available-for-sale investments; and

• decreases in accounts payable, other accrued liabilities and deferred revenue.

Investing Activities

Cash provided by investing activities was $58.5 million for the nine months ended September 30, 2003. The cash provided by investing activities was a result of maturities and sales of available-for-sale investments, partially offset by purchases of available-for-sale investment, increases in restricted cash and purchases of capital equipment. The increase in restricted cash was due to the establishment of a trust to secure our indemnification obligations to certain directors and officers.

Cash used in investing activities was $226.4 million for the nine months September 30, 2002 due to purchases of available-for-sale investments, the Unisphere acquisition and purchases of capital equipment, partially offset by maturities and sales of available-for-sale investments.

Financing Activities

Cash provided by financing activities was $89.0 million for the nine months ended September 30, 2003 due to proceeds from the issuance of the Senior Notes and common stock through employee option exercises and employee stock purchase plans, partially offset by the partial retirement of our Subordinated Notes.

Cash used in financing activities was $127.8 million for the nine months ended September 30, 2002 due to the partial retirement of our Subordinated Notes, partially offset by the issuance of common stock through employee option exercises and employee stock purchase plans.

Cash Requirements and Contractual Obligations

As of September 30, 2003, our principal commitments consisted of obligations outstanding under operating leases, the 4.75% Convertible Subordinated Notes due March 15, 2007 (“Subordinated Notes”) and the Zero Coupon Convertible Senior Notes due June 15, 2008 (“Senior Notes”). The contractual obligations under operating leases are primarily for our facilities.

Interest is paid semi-annually on March 15 and September 15 for the Subordinated Notes at an annual rate of 4.75%. Anytime we retire a portion of the Subordinated Notes, the interest accrued on that portion is due. For the nine months ended September 30, 2003, we have paid approximately $42.9 million in interest related to the Subordinated Notes.

During November 2003, we will redeem $400.0 million principal amount of our Subordinated Notes. Holders may convert their Subordinated Notes into shares of our common stock at a price of approximately $163.9559 per share, or cash, for which they will receive a total of $1,036.508 per $1,000 principal amount of the Subordinated Notes, consisting of the redemption price of $1,027.14 per $1,000 principal amount of the Subordinated Notes, plus accrued and unpaid interest from September 15, 2003 of $9.368 per $1,000 principal of the Subordinated Notes. If we do not retire any additional Subordinated Notes before March 15, 2004, our interest payment at that time will be approximately $3.4 million.

The Senior Notes were issued in June 2003 and are senior unsecured obligations, rank on parity in right of payment with all of our existing and future senior unsecured debt, and rank senior to all of our existing and future debt that expressly provides that it is subordinated to the notes, including our Subordinated Notes. The Senior Notes bear no interest, but are convertible into shares of our common stock, subject to certain conditions, at any time prior to maturity or their prior repurchase by Juniper Networks. The conversion rate is 49.6512 shares per each $1,000 principal amount of convertible notes, subject to adjustment in certain circumstances.

We do not have firm purchase commitments with our contract manufacturers; however, we do have potential contractual liabilities and exposures to 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 lower than forecast. As of September 30, 2003, we had accrued $20.6 million for potential exposures with our contract manufacturers, such as excess material and carrying costs.

Sources of Cash

We have funded our business by issuing securities and through our operating activities. At September 30, 2003, we had cash and cash equivalents of $457.5 million, short-term investments of $309.1 million and long-term investments of $557.3 million. We regularly invest excess funds in money market funds, commercial paper and government and non-government debt securities with maturities of up to five years.

Based on past performance and current expectations, we believe that our cash and cash equivalents, short-term investments, and cash generated from operations will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our existing operations through at least the next 12 months. In addition, there are no transactions, arrangements, and other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of our requirements for capital resources.

Factors That May Affect Future Results

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 our business, results of operations or financial condition to be harmed and 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 and adversely affect our ability to generate revenues.

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, make it difficult to predict revenues for a particular period and a shortfall in revenues may harm our operating results.

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 the 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.

A limited numbers of customers comprise a significant portion of our revenues and any decrease in revenue from these customers could have an adverse effect on us.

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. During the three months ended September 30, 2003 and 2002 and the nine months ended September 30, 2003, Ericsson and Siemens each accounted for greater than 10% of net revenues. Ericsson was the only customer that accounted for greater than 10% of revenue for the nine months ended September 30, 2002. 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 and maintaining 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 products 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 and increased service and warranty cost, any 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 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, any of which could adversely affect our business and financial condition.

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 effect 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 effect 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 affect our ability to recognize the revenue from such sales, which may negatively affect our business and our financial condition.

If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, we may not be able to compete effectively and our ability to generate revenues will suffer.

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 our business and financial results.

Our ability to develop, market and sell products could be harmed if we are unable to retain or hire key personnel.

Our future success depends upon the continued services of our executive officers and other key engineering, sales, marketing and support personnel. None of our 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.

If we fail to accurately predict our manufacturing requirements, we could incur additional costs which would harm our results of operations or experience manufacturing delays which would harm our business.

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 demand forecast. If we overestimate our requirements, the contract manufacturers may assess charges that could negatively impact our gross margins. For example, for the quarter ended September 30, 2001, we recorded a charge for approximately $39.9 million associated with contractual liabilities and carrying charges on excess materials at our contract manufacturers. 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 independent 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.

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.

If our restructuring initiatives are not sufficient to meet industry and market conditions and to achieve future profitability, we may undertake further restructuring initiatives, which 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.

Our restructuring initiatives are 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.

If we become subject to litigation regarding intellectual property rights, such litigation will likely be time consuming and require a significant amount of resources to prosecute or defend, we may have to expend a substantial amount of resources to make our products non-infringing and may have to pay a substantial amount of money in damages.

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 redesign or stop selling, incorporating or using products that use the challenged intellectual property, all of which could seriously harm our business. These lawsuits, regardless of their ultimate outcome, would likely be time-consuming and expensive to resolve and would divert management time and attention.

Our products incorporate and rely upon licensed third-party technology and if licenses of third-party technology do not continue to be available to us or become very expensive, our revenues and ability to develop and introduce new products could be adversely affected.

We integrate licensed third-party 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 harm our business, financial condition and results of operations.

Due to the global nature of our operations, economic or social conditions or changes in a particular country or region could adversely affect our sales or increase our costs and expenses, which would have a material adverse impact on our financial condition.

We conduct significant sales and customer support operations directly and indirectly through our distributors in countries outside of the United States and also depend on the operations of our contract manufacturers that are located outside of the United States. For the nine months ended September 30, 2003 and 2002, we derived approximately 58% and 42% of our revenues, respectively, from sales outside North America. 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; service provider and government spending patterns affected by political considerations; and difficulties in staffing and managing international operations. Any or all of these factors could have a material adverse impact on our revenue, costs, expenses and financial condition.

We are exposed to fluctuations in currency exchange rates which could negatively affect our financial results and cash flows.

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 our business and harm our financial condition if we are not able to successfully integrate acquired businesses and technologies or if expected synergies do not materialize.

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.

The integration of businesses that we have acquired into our business has been and will continue to be a complex, time consuming and expensive process. We must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices to be successful. For example, although we completed the acquisition of Unisphere Networks 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.

We also 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 require us to pay damages which 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. Regardless of whether they are in our favor, these lawsuits are, and any future lawsuits to which we may become a party in the future will likely be, expensive and time consuming to defend or resolve. Any losses resulting from these claims could adversely affect our profitability and cash flow.

Our quarterly results are inherently unpredictable and subject to substantial fluctuations and, as a result we may fail to meet the expectations of securities analysts, which could 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 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.

We are dependent on sole source and limited source suppliers for several key components which may make us susceptible to supply shortages or price fluctuations.

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. For example, IBM is our ASIC supplier. 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 financial and managerial control and reporting systems and processes, our ability to manage and grow our business will 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 in order to manage our business effectively in the future. If we fail to continue to implement improved systems and processes, our ability to manage our business and results of operations may be negatively impacted.

We sell our products to customers that use those products to build networks and Internet infrastructure and if the Internet and Internet-based systems do not continue to grow then our business, operating results and financial condition will be adversely affected.

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.

Regulation of the telecommunications industry as well as the Internet and commerce over the Internet could harm our operating results and future prospects.

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. Currently, 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 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We maintain an investment portfolio of various holdings, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the Condensed 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 September 30, 2003 that are sensitive to changes in interest rates (in thousands):


	Valuation of Securities Given an Interest						Fair Value		Valuation of Securities Given an Interest
	Rate Decrease of X Basis Points (BPS)						as of		Rate Increase of X BPS
							September
Issuer	(150 BPS)		(100 BPS)		(50 BPS)		30, 2003		50 BPS		100 BPS		150 BPS

Government treasury and agencies	$	275,325	$	273,793	$	272,261	$	270,729	$	269,197	$	267,666	$	266,134
Corporate bonds and notes		481,800		479,183		476,567		473,950		471,333		468,716		466,099
Asset backed securities and other		298,350		297,921		297,491		297,061		296,631		296,201		295,772

Total	$	1,055,475	$	1,050,897	$	1,046,319	$	1,041,740	$	1,037,161	$	1,032,583	$	1,028,005

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 re-measurement 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 September 30,

2003, 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 September 30, 2003, 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.

Item 4. Controls and Procedures

(a) We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in our Exchange Act filings.

(b) There have been no significant changes in our internal controls over the financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to affect our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

IPO Allocation Case

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 plaintiffs filed their amended complaint in April 2003 and the defendants moved to dismiss the amended complaint in May 2003. The hearing on defendants’ motion to dismiss was held on September 12, 2003. The judge has not yet ruled on the motion. There has been no discovery to date and no trial is scheduled. 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

Item 6. Exhibits and Report on Form 8-K

(a) List of Exhibits:


Exhibit Number		Description of Document

3.1		Juniper Networks, Inc. Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 to the Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2000)

3.2		Amended and Restated Bylaws of Juniper Networks, Inc.

10.1		Form of Indemnification Agreement entered into by the Registrant with each of its directors, officers and certain employees


Exhibit Number		Description of Document


31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (this certification is furnished to the Securities and Exchange Commission pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934

(b) Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in this City of Sunnyvale, State of California, on the 14th day of November 2003.


		Juniper Networks, Inc.

		By:		/s/ Marcel Gani

				Marcel Gani
				Chief Financial Officer
				(Duly Authorized Officer and Principal
				Financial and Accounting Officer)

Exhibit Index


Exhibit Number		Description of Document

3.1		Juniper Networks, Inc. Amended and Restated Certificate of Incorporation (incorporated by reference to exhibit 3.1 to the Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2000)

3.2		Amended and Restated Bylaws of Juniper Networks, Inc.

10.1		Form of Indemnification Agreement entered into by the Registrant with each of its directors, officers and certain employees

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (this certification is furnished to the Securities and Exchange Commission pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934

	•		non-cash charges, including depreciation and amortization expenses;

	•		a decrease in accounts receivable; and

	•		increases in accounts payable, other accrued liabilities and deferred revenue;

	•		partially offset by gains on the sale of available-for-sale investments and the partial retirement of the Subordinated Notes.

	•		non-cash charges, including depreciation and amortization expenses, in-process research and development charges, and the write-down of investments;

	•		decreases in accounts receivable and other assets; and

	•		increases in accrued warranty;

	•		partially offset by the gains on the sale of available-for-sale investments; and

	•		decreases in accounts payable, other accrued liabilities and deferred revenue.