UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)
þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2005
		OR
o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from                                          to

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 þ No o

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

     There were approximately 560,769,944 shares of the Company’s Common Stock, par value $0.00001, outstanding as of July 15, 2005.

 

 

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			18
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			39
		Item 4.		Controls and Procedures			40
PART II – OTHER INFORMATION							41
		Item 1.		Legal Proceedings			41
		Item 4.		Submission of Matters to a Vote of Security Holders			42
		Item 6.		Exhibits			43
SIGNATURES							44
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets
(in thousands)

		June 30,				December 31,
		2005				2004
		(unaudited)				(A)
ASSETS
Current assets:
Cash and cash equivalents (B)		$	857,061			$	713,182
Short-term investments (B)			445,465				404,659
Accounts receivable, net			205,366				187,306
Prepaid expenses and other current assets			106,540				108,586
Total current assets			1,614,432				1,413,733
Property and equipment, net			291,705				275,612
Long-term investments (B)			580,124				595,234
Restricted cash			38,390				31,226
Goodwill			4,576,088				4,427,930
Purchased intangible assets, net and other long-term assets			283,077				255,979
Total assets		$	7,383,816			$	6,999,714
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	116,145			$	113,890
Other accrued liabilities			218,124				229,197
Deferred revenue			219,797				159,750
Total current liabilities			554,066				502,837
Deferred revenue, net of current portion			30,476				22,700
Convertible senior notes and other long-term liabilities			476,388				481,440
Commitments and contingencies
Stockholders’ equity:
Common stock and additional paid-in capital			6,045,410				5,888,220
Deferred stock compensation			(19,175	)			(32,394	)
Accumulated other comprehensive loss			(5,422	)			(716	)
Retained earnings			302,073				137,627
Total stockholders’ equity			6,322,886				5,992,737
Total liabilities and stockholders’ equity		$	7,383,816			$	6,999,714

See accompanying Notes to the Condensed Consolidated Financial Statements

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net revenues:
Product		$	423,732			$	263,670			$	816,012			$	457,854
Service			69,296				43,229				126,128				73,098
Total net revenues			493,028				306,899				942,140				530,952
Cost of revenues:
Product			121,324				73,887				233,803				130,452
Service			33,897				22,883				64,612				40,337
Total cost of revenues			155,221				96,770				298,415				170,789
Gross margin			337,807				210,129				643,725				360,163
Operating expenses:
Research and development			81,238				58,093				157,366				104,723
Sales and marketing			102,280				75,657				193,708				119,197
General and administrative			15,395				17,371				30,862				26,236
In-process research and development			1,900				27,500				1,900				27,500
Integration costs			—				5,087				—				5,087
Restructuring costs			(6,560	)			(3,835	)			(6,560	)			(3,835	)
Amortization of purchased intangibles and deferred stock compensation (1)			23,929				35,060				45,893				39,189
Total operating expenses			218,182				214,933				423,169				318,097
Operating income (loss)			119,625				(4,804	)			220,556				42,066
Interest and other income			13,418				5,309				24,495				10,295
Interest and other expense			(1,095	)			(1,480	)			(1,875	)			(3,980	)
Loss on redemption of convertible subordinated notes			—				(4,107	)			—				(4,107	)
Income (loss) before income taxes			131,948				(5,082	)			243,176				44,274
Provision for income taxes			42,937				7,472				78,730				23,288
Net income (loss)		$	89,011			$	(12,554	)		$	164,446			$	20,986
Net income (loss) per share:
Basic		$	0.16			$	(0.02	)		$	0.30			$	0.05
Diluted		$	0.15			$	(0.02	)		$	0.28			$	0.04
Shares used in computing net income (loss) per share:
Basic			546,662				506,189				544,622				450,343
Diluted			591,050				506,189				589,953				489,738

Cost of revenues — Product		$	106			$	1,283			$	181			$	1,295
Cost of revenues — Service			227				—				611				—
Research and development			2,424				8,733				4,431				9,121
Sales and marketing			1,065				7,718				1,748				7,778
General and administrative			198				1,094				472				1,107
Total		$	4,020			$	18,828			$	7,443			$	19,301

See accompanying Notes to the Condensed Consolidated Financial Statements

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

		Six months ended
		June 30,
		2005				2004
Operating Activities:
Net income		$	164,446			$	20,986
Adjustments to reconcile net income to net cash from operating activities:
Depreciation			24,618				18,712
Amortization of purchased intangibles, deferred stock compensation and debt issuance costs			46,734				42,557
Tax benefit of employee stock option plans			64,595				—
In-process research and development			1,900				27,500
Gain on redemption of convertible subordinated notes			—				4,107
Changes in operating assets and liabilities:
Accounts receivable, net			(13,142	)			(34,742	)
Prepaid expenses, other current assets and other long-term assets			(23,390	)			(16,242	)
Accounts payable			2,181				8,151
Accrued warranty			(2,849	)			5,757
Other accrued liabilities			(31,420	)			41,302
Deferred revenue			66,836				73,689
Net cash provided by operating activities			300,509				191,777
Investing Activities:
Purchases of property and equipment, net			(40,637	)			(19,680	)
Purchases of available-for-sale investments			(426,810	)			(348,140	)
Maturities and sales of available-for-sale investments			398,859				520,221
Increase in restricted cash			(7,164	)			(90	)
Minority equity investments			(968	)			(1,180	)
Acquisition of businesses, net of cash and cash equivalents			(155,256	)			40,889
Net cash (used in) provided by investing activities			(231,976	)			192,020
Financing Activities:
Proceeds from issuance of common stock			75,346				71,469
Redemption of convertible subordinated notes			—				(144,967	)
Net cash provided by (used in) financing activities			75,346				(73,498	)
Net increase in cash and cash equivalents			143,879				310,299
Cash and cash equivalents at beginning of period			713,182				365,606
Cash and cash equivalents at end of period		$	857,061			$	675,905
Supplemental Disclosure of Non-Cash Investing Activities
Common stock issued in connection with business combinations		$	—			$	3,651,226
Stock options assumed in connection with business combinations		$	28,806			$	520,503

See accompanying Notes to the Condensed Consolidated Financial Statements

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. Today Juniper Networks enables secure and assured communications over a single IP network. The Company’s purpose-built, high performance IP platforms enable customers to support many different services and applications at scale. Service providers, enterprises, governments and research and education institutions worldwide rely on Juniper Networks to deliver products for building networks that are tailored to the specific needs of their users, services and applications. Juniper Networks’ portfolio of proven networking and security solutions supports the complex scale, security and performance requirements of the world’s most demanding networks. The Company sells and markets its products through its direct sales organization, value-added resellers and distributors.

     In April 2004, the Company completed its acquisition of NetScreen Technologies, Inc. (“NetScreen”) in order to expand its customer base and portfolio of products. In May 2005, the Company acquired Kagoor Networks, Inc. (“Kagoor”) and Redline Networks, Inc. (“Redline”) in order to expand its portfolio of products. NetScreen developed, marketed and sold a broad array of integrated network security solutions for enterprises, carriers and government entities. Kagoor developed session border control products to enhance voice-over-Internet Protocol networking for global carriers. Redline developed application front end platforms for enterprise data centers and public web sites. As a result of these acquisitions, the Company now offers two categories of products as well as services which resulted in three operating segments: Infrastructure, Service Layer Technologies (“SLT”), and Service. The SLT products include the NetScreen, Kagoor, and Redline products. In July 2005, the Company completed the acquisition of Peribit Networks, Inc. (“Peribit”) and will include the Peribit products in the SLT product line in its financial statements ending September 30, 2005. The Service segment is managed as one organization and delivers services to customers of the Infrastructure and SLT segments. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, the Company has included in its results of operations the results of NetScreen beginning on April 16, 2004; therefore, revenues, cost of revenues and operating expenses are significantly greater during the six months ended June 30, 2005 compared to the six months ended June 30, 2004. Beginning on May 2, 2005, the Company has included in the results of operations the results of Kagoor and Redline, which has a slight impact on the revenues, cost of revenues, and operating expenses for the three and six months ended June 30, 2005 when compared to the three and six months ended June 30, 2004.

Note 2. Summary of Significant Accounting Policies

     Interim Financial Statements

     The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

     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. The following table illustrates the effect on net income and earnings 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. Pro forma information, net of the tax effect, follows (in millions, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income (loss) as reported		$	89.0			$	(12.6	)		$	164.4			$	21.0
Add: amortization of deferred stock compensation included in reported net income, net of tax			2.5				11.7				4.6				11.9
Deduct: total stock-based employee compensation expense determined under fair value based method, net of tax			(24.9	)			(23.5	)			(49.8	)			(39.0	)
Pro forma net income (loss)		$	66.6			$	(24.4	)		$	119.2			$	(6.1	)
Basic net income (loss) per share:
As reported		$	0.16			$	(0.02	)		$	0.30			$	0.05
Pro forma		$	0.12			$	(0.05	)		$	0.21			$	(0.01	)
Diluted net income (loss) per share:
As reported		$	0.15			$	(0.02	)		$	0.28			$	0.04
Pro forma		$	0.11			$	(0.05	)		$	0.20			$	(0.01	)

     Guarantees

     The Company recognizes the fair value of guarantee and indemnification arrangements issued or modified after December 31, 2002 if these arrangements are within the scope of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). In addition, the Company monitors 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 infringe 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 and its guarantees and indemnification arrangements have not had any significant impact on the Company’s financial position, results of operations or cash flows.

     Derivatives

     It is the Company’s policy to use derivatives to partially offset its market exposure to fluctuations in foreign currencies. The Company does not enter into derivatives for speculative or trading purposes.

     The Company uses foreign currency forward contracts to mitigate transaction gains and losses generated by certain foreign currency denominated monetary assets and liabilities. These derivatives are carried at fair value with changes recorded in other income/(expense). Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. These foreign exchange contracts have maturities between one and two months.

     The Company uses foreign currency forward and/or option contracts to hedge certain forecasted foreign currency transactions relating to operating expenses. These derivatives are designated as cash flow hedges under SFAS No.133, Accounting for Derivative Instruments and Hedging Activities,

and have maturities of less than one year. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income, and upon occurrence of the forecasted transaction, is subsequently reclassified into the consolidated statement of operations line item to which the hedged transaction relates. The Company records any ineffectiveness of the hedging instruments, which was immaterial during the three and six months ended June 30, 2005 and 2004, in other income/(expense) on its consolidated statements of operations.

     In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the Company reclassifies the gain or loss on the related cash flow hedge from accumulated other comprehensive income to other income/(expense) on the consolidated statements of operations at that time. For the three and six months ended June 30, 2005 and 2004, there were no material net gains or losses recognized in other income/(expense) relating to hedges of forecasted transactions that did not occur.

     Recent Accounting Pronouncements

     In June 2005, the FASB issued FSP 143-1 (“FSP 143-1”), Accounting for Electronic Equipment Waste Obligations. FSP 143-1 was issued to address the accounting for obligations associated with Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”) adopted by the European Union. The Directive obligates a commercial user to incur costs associated with the retirement of a specified asset that qualifies as historical waste equipment effective August 13, 2005. FSP 143-1 requires commercial users to apply the provisions of SFAS 143, Accounting for Conditional Asset Retirement Obligations, and the related FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, to the obligation associated with historical waste. It is effective the later of the first reporting period ending after June 8, 2005 or the date of the adoption of the law by the applicable European Union-member. The Company is in the process of evaluating the impact this guidance will have on its financial statements.

     In June 2005, The FASB issued SFAS No. 154 (“SFAS 154”), Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. The Company does not expect the effect of SFAS 154 will have material impact on its financial statements.

     In December 2004, the FASB revised SFAS No. 123 (“SFAS 123(R)”), Share-Based Payment, which requires companies to expense the estimated fair value of employee stock options and similar awards. The accounting provisions of SFAS 123(R) will be effective for the Company beginning on January 1, 2006. The Company will adopt the provisions of SFAS 123(R) using a modified prospective application. Under a modified prospective application, SFAS 123(R) will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123. The Company is in the process of determining how the new method of valuing stock-based compensation as prescribed in SFAS 123(R) will be applied to valuing stock-based awards granted after the effective date and the impact the recognition of compensation expense related to such awards will have on its financial statements.

     In March 2005, the SEC staff issued guidance on SFAS 123(R). Staff Accounting Bulletin No. 107 (“SAB 107”) was issued to assist preparers by simplifying some of the implementation challenges of SFAS 123(R) while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required by preparers to successfully implement SFAS 123(R), specifically when valuing employee stock options; and

(b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation models – SAB 107 reinforces the flexibility allowed by SFAS 123(R) to choose an option-pricing model that meets the standard’s fair value measurement objective; (b) expected volatility – SAB 107 provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term – the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).

Note 3. Business Combinations

     In May 2005, the Company completed the acquisitions of Kagoor and Redline. The purchase price for each acquisition consisted of the following (in millions):

		Kagoor				Redline
Cash paid		$	58.2			$	97.5
Pre-acquisition loan forgiven			—				3.0
Stock options assumed			7.6				21.1
Assumed liabilities			—				1.0
Acquisition direct costs			0.5				0.5
Total purchase price		$	66.3			$	123.1

     Kagoor Acquisition

     Kagoor was a leading provider of session border control products for voice-over-Internet Protocol (VoIP) networking. The purchase price for Kagoor included $58.2 million in cash and assumed stock options with an aggregate fair value of $7.6 million. The stock options were valued using the Black-Scholes option pricing model with the inputs of 43% for volatility, 1.58 years for expected life, 3.5% for risk-free interest rate and a market value of Juniper Networks common stock of $21.64 per share, which was determined by using the average closing price of the Company’s common stock over a five-day trading period beginning two days before and ending two days after the date the transaction was announced. The Company also incurred direct costs associated with the acquisition of approximately $0.5 million. Excluded from the aggregate purchase price of $66.3 million is an escrow payment of $6.8 million related to Kagoor’s indemnity obligations which will expire on the first anniversary of the closing date.

     Redline Acquisition

     Redline was a pioneer in the development of Application Front End (“AFE”) technology and designed network solutions that improve the performance, flexibility, and scalability of web-enabled enterprise data centers and public web sites. The purchase price for Redline included a cash payment of $97.5 million, a $3 million pre-acquisition loan by the Company to Redline which was forgiven, and assumed stock options with an aggregate fair value of $21.1 million. The stock options were valued using the Black-Scholes option pricing model with the inputs of 43% for volatility, 1.56 years for expected life, 3.5% for risk-free interest rate and a market value of Juniper Networks common stock of $22.62 per share, which was determined by using the average closing price of the Company’s common stock over a five-day trading period beginning two days before and ending two days after the date the transaction was announced. The Company also assumed $1.0 million in net liabilities and incurred direct costs associated with the acquisition of approximately $0.5 million. Excluded from the aggregate purchase price of $123.1 million is an escrow payment of $13.2 million related to Redline’s indemnity obligations which will expire on the first anniversary of the closing date.

     The Company preliminarily allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed, including in-process research and development, based on their fair values, and deferred stock compensation. The excess purchase price over those fair values is recorded as goodwill. A summary of the asset allocations is as follows (in millions):

		Kagoor				Redline
Net tangible assets assumed		$	1.9			$	—
Amortizable intangible assets:
Existing technology			6.9				17.2
Maintenance agreements			0.1				—
Patents and core technology			2.1				4.9
End-User relationships			1.7				2.0
Value-added reseller and distributor relationships			0.7				1.5
Order backlog			0.1				—
Total amortizable intangible assets			11.6				25.6
In-process research and development			1.9				—
Deferred compensation on unvested stock options			2.0				3.8
Goodwill			48.9				93.7
Total purchase price		$	66.3			$	123.1

     Purchased Intangible Assets

     Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective estimated useful lives. The following table presents details of the purchased intangible assets acquired during the six months ended June 30, 2005 (in millions, except years):

										Customer & Distributor
		Technology								Relationships								Other								Total
		Estimated								Estimated								Estimated
		Useful Life								Useful Life								Useful Life
Acquisition		(in years)				Amount				(in years)				Amount				(in years)				Amount				Amount
Kagoor			6			$	9.0				7			$	2.4				0-6			$	0.2			$	11.6
Redline			4				22.1				5				3.5				—				—				25.6
Total						$	31.1							$	5.9							$	0.2			$	37.2

     In-Process Research & Development

     The Company’s methodology for allocating the purchase price for purchase acquisitions to in-process research and development (“IPR&D”) is determined through established valuation techniques

in the high-technology communications equipment industry. IPR&D is expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist. Total IPR&D expense was $1.9 million for both of the three and six months ended June 30, 2005, respectively, and was entirely related to the Kagoor acquisition.

     Deferred Stock-Based Compensation

     Deferred stock-based compensation represents the intrinsic value of the unvested portion of any options assumed, or options canceled and replaced with the Company’s options, and is amortized as compensation expense over the remaining vesting periods. The balance for deferred stock-based compensation is reflected as a reduction to additional paid-in capital.

     The following table presents the activity of deferred stock-based compensation for the three and six months ended June 30, 2005 and June 30, 2004 (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Balance at beginning of period		$	21.1			$	0.7			$	32.4			$	1.2
Acquisitions			5.8				68.8				5.8				68.8
Amortization			(4.0	)			(0.3	)			(7.4	)			(0.8	)
Canceled unvested options			(3.7	)			—				(11.6	)			—
Balance at end of period		$	19.2			$	69.2			$	19.2			$	69.2

     The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations in connection with the Kagoor and Redline acquisitions have not been presented because the effects of these acquisitions were not material to the Company’s results.

Note 4. Equity Investments

     As of June 30, 2005 and December 31, 2004, the carrying values of the Company’s minority equity investments in privately held companies were $4.8 million and $3.8 million, respectively. During the six months ended June 30, 2005, the Company made additional investments of $1.0 million in a privately held company. No additional investments were made in the three months ended June 30, 2005.

Note 5. Goodwill and Purchased Intangible Assets

     The following table presents details of the Company’s purchased intangibles assets with definite lives (in millions):

						Accumulated
		Gross				Amortization				Net
As of June 30, 2005
Technology		$	317.7			$	(116.2	)		$	201.5
Other			70.2				(19.1	)			51.1
Total		$	387.9			$	(135.3	)		$	252.6
As of December 31, 2004
Technology		$	286.6			$	(82.4	)		$	204.2
Other			52.1				(14.4	)			37.7
Total		$	338.7			$	(96.8	)		$	241.9

     During the six months ended June 30, 2005, intangible assets increased by $49.2 million, of which $37.2 million was related to the acquisitions of Kagoor and Redline. The remainder of the increase related to a portfolio of patents the Company purchased during the quarter ended March 31, 2005. These patents will be amortized over their useful lives, which average 12.1 years.

     Amortization expense of purchased intangible assets of $19.9 million and $16.2 million was included in operating expenses for the three months ended June 30, 2005 and 2004, respectively. Amortization expense of purchased intangible assets of $38.5 million and $19.9 million was included in operating expenses for the six months ended June 30, 2005 and 2004, respectively. The estimated future amortization expense of purchased intangible assets with definite lives for the next five years is as follows (in millions):

Year ending December 31,		Amount
2005 (remaining six months)		$	41.2
2006			81.8
2007			76.3
2008			31.4
2009			7.9
Thereafter			14.0
Total		$	252.6

     The Company tests its goodwill and any other intangibles with indefinite lives annually for impairment and assesses whether there are any indicators of impairment on an interim basis. The Company performed its annual impairment analysis during November 2004 and determined that there was no impairment of goodwill at that time. There were no impairment indicators during the three and six months ended June 30, 2005. The changes in the carrying amount of goodwill during 2005 are as follows (in millions):

Balance as of December 31, 2004		$	4,427.9
Goodwill acquired during the period			142.6
Net additions to existing goodwill			5.6
Balance as of June 30, 2005		$	4,576.1

     Goodwill acquired during the three months ended June 30, 2005 was related to the acquisitions of Kagoor and Redline. In addition, during the first three months of fiscal 2005, the Company recognized net additions to existing goodwill of $5.6 million in connection with a $6.0 million pre-acquisition contingency related to an earn-out payable to the shareholders of Neoteris, Inc., a company acquired by NetScreen during November 2003, as certain financial milestones were achieved. The $6.0 million was partially offset by $0.4 million of tax adjustments related to the period of October 1, 2003 to April 15, 2004, before the NetScreen acquisition was completed.

Note 6. Warranties

     Juniper Networks generally offers a one-year warranty on all of its hardware products and a 90-day warranty on the media that contains the software embedded in the products. The warranty generally includes parts and labor obtained through the Company’s 24-hour service center. On occasion, the specific terms and conditions of those warranties vary. The Company accrues for warranty costs based on estimates of the costs that may be incurred under its warranty obligations, including material costs, technical support labor costs and associated overhead. The warranty accrual is included in the Company’s cost of revenues and is recorded at the time revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, its estimates of anticipated rates of warranty claims, costs per claim and estimated support labor costs and the associated overhead. 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 six months ended June 30, 2005 and 2004 were as follows (in millions):

		As of June 30,
		2005				2004
Beginning balance		$	38.9			$	35.3
Provisions made during the six months			10.6				36.5
Changes in estimates			(1.2	)			—
Amount acquired from acquisitions			—				1.8
Actual costs incurred during the six months			(12.2	)			(32.5	)
Ending balance		$	36.1			$	41.1

Note 7. Restructuring Charges

     The Company has implemented several restructuring plans over the last four years as a result of the economic slowdown which began in 2001, including restructuring in connection with the discontinuation of CMTS products in September 2003, and implemented restructuring plans in connection with the acquisitions of Unisphere Networks in July 2002 and NetScreen in April 2004.

     In connection with the acquisition of NetScreen, the remaining restructuring charge as of June 30, 2005 consists primarily of facility charges of $4.2 million that will be paid through the end of the lease terms, which extend through 2008. Of the $4.2 million, $2.4 million is recorded in other long-term liabilities in the Condensed Consolidated Balance Sheet. In the three months ended June 30, 2005, the Company reversed $6.6 million of the restructuring accrual as a portion of a facility previously included in the restructuring reserve was occupied during the period by the employees of the acquired companies.

     During the three months ended September 30, 2003, the Company announced that it would no longer develop its G-series CMTS products and recorded a one-time charge that was comprised of workforce reduction costs, non-inventory asset impairment, costs associated with vacating facilities and terminating contracts and other related costs. As of June 30, 2005, $1.8 million remained to be paid primarily related to facility charges that will be paid through the end of the lease terms, which extend through 2008.

     In connection with the acquisition of Unisphere Networks, the Company initiated plans to eliminate certain duplicative activities, focus on strategic product and customer bases, reduce cost structure and better align product and operating expenses with existing general economic conditions. As of June 30, 2005, $2.3 million remained to be paid primarily related to facility charges that will be paid through the end of the lease terms, which extend through 2014.

     The activity in the accrued restructuring balances related to all the plans mentioned above was as follows during the six months ended June 30, 2005 (in millions):

		Balance
		as of												Balance
		December								Change in				as of June
		31, 2004				Cash Paid				Accrual				30, 2005
Facilities		$	16.5			$	(1.7	)		$	(6.6	)		$	8.2
Contractual commitments and other charges			1.2				(1.1	)			—				0.1
Total		$	17.7			$	(2.8	)		$	(6.6	)		$	8.3

Note 8. Other Comprehensive Income

     Other comprehensive income is as follows (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income (loss)		$	89.0			$	(12.6	)		$	164.4			$	21.0
Reclassification of net (gains) losses on investments realized and included in net income			0.2				(7.2	)			0.4				(6.5	)
Change in net unrealized gains on investments			2.5				—				(2.3	)			—
Change in foreign currency translation adjustment			(2.3	)			0.2				(2.5	)			0.5
Total comprehensive income (loss)		$	89.4			$	(19.6	)		$	160.0			$	15.0

Note 9. Net Income per Share

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Numerator:
Net income (loss)		$	89.0			$	(12.6	)		$	164.4			$	21.0
Denominator:
Weighted-average shares of common stock outstanding			546.8				506.8				544.8				450.6
Weighted-average shares subject to repurchase			(0.1	)			(0.6	)			(0.2	)			(0.3	)
Denominator for basic net income (loss) per share			546.7				506.2				544.6				450.3
Common stock equivalents			44.4				—				45.3				39.4
Denominator for diluted net income per share			591.1				506.2				589.9				489.7
Consolidated net income (loss) applicable to common stockholders per share:
Basic		$	0.16			$	(0.02	)		$	0.30			$	0.05
Diluted		$	0.15			$	(0.02	)		$	0.28			$	0.04

     Employee stock options to purchase approximately 25.6 million shares and 12.8 million shares in the three months ended June 30, 2005 and 2004, respectively, and 26.9 million shares and 11.9 million shares in the six months ended June 30, 2005 and 2004, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise prices of the stock options were greater than the average share price of the common shares and, therefore, the effect would have been antidilutive. For the three months ended June 30, 2004, the Company excluded 51.4 million common stock equivalents from the calculation of diluted loss per share because such securities were anti-dilutive in that period due to the net loss.

     Shares issuable upon conversion of the Zero Coupon Convertible Senior Notes due June 15, 2008 (the “Senior Notes”) were included in the calculation of the diluted earnings per share for the three and six months ended June 30, 2005 and 2004 in accordance with EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share (“EITF 04-8”). EITF 04-8 required retroactive application; therefore the diluted earnings per share for the three months ended March 31, 2004 have been restated. The application of EITF 04-08 did not have a significant effect on the diluted earnings per share for the six months ended June 30, 2004.

Note 10. Operating Segments

     An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses and about which separate financial information is available and is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.

     During the first three months of fiscal 2005, the Company’s CODM and senior management team (together “management”) began to allocate resources and assess performance based on financial information by categories of products and by service. Accordingly, in the first quarter of 2005 the Company reported three operating segments: Infrastructure, Security and Service. Following the acquisitions of Kagoor and Redline in the second quarter of 2005, the Company combined the products from these acquired companies with the Security segment to create the SLT operating segment. As a result, the Company currently has the following operating segments: Infrastructure, SLT, and Service. The Infrastructure segment includes products from the E-, M- and T-series product families. The SLT segment includes Security products and Application Acceleration products. Security products consist of firewall and virtual private network (“VPN”) systems and appliances, secure sockets layer VPN appliances, intrusion detection and prevention appliances, session border control products and the J-series product family. Application Acceleration products consist of application front end platforms. In the Company’s quarterly report for the period ending September 30, 2005, Application Acceleration products will also include wide area network (“WAN”) optimization platforms that were acquired in the Company’s acquisition of Peribit, which closed on July 1, 2005. The Service segment is managed as one organization and delivers services to customers of the Infrastructure and SLT segments.

     Prior to fiscal 2005, management evaluated the Company’s performance by geographic theater and by categories of products based only on revenues. Management did not assess the performance of its geographic theaters or categories of products on other measures of income or expenses; therefore, the Company only had one operating segment.

     The change in operating segments was due to a shift in management structure and responsibilities to measure the business based on product and service profitability. Direct costs, such as standard costs and research and development and product marketing expenses, are applied directly to each operating segment. Indirect costs, such as sales and general and administrative expenses are allocated to each operating segment based on revenue. Prior period information has been included for comparative purposes. Financial information for each operating segment used by management to make financial decisions and allocate resources is as follows (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net Revenues:
Infrastructure		$	330.5			$	219.8			$	634.6			$	414.0
Service Layer Technologies			93.2				43.9				181.4				43.9
Service			69.3				43.2				126.1				73.1
Total net revenues		$	493.0			$	306.9			$	942.1			$	531.0
Operating income (loss):
Infrastructure		$	95.6			$	42.6			$	180.1			$	83.8
Service Layer Technologies			4.2				(55.3	)			7.4				(55.3	)
Service			19.8				7.9				33.1				13.6
Total operating income (loss)		$	119.6			$	(4.8	)		$	220.6			$	42.1
Depreciation and amortization of purchased intangible assets and deferred stock compensation included in operating income (loss):
Infrastructure		$	12.1			$	11.2			$	23.5			$	22.8
Service Layer Technologies			22.9				32.5				43.7				32.5
Service			1.8				1.4				3.3				2.6
Total depreciation and amortization		$	36.8			$	45.1			$	70.5			$	57.9

     The Company attributes sales to geographic theater based on the customer’s ship-to location. The following table shows net revenue by geographic theater (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Americas:
United States		$	212.0			$	131.9			$	403.0			$	215.8
Other			16.9				18.7				19.9				31.3
Total Americas			228.9				150.6				422.9				247.1
Europe, Middle East and Africa			139.4				83.8				254.7				147.1
Asia Pacific:
Japan			64.8				27.4				117.4				62.8
Other			59.9				45.1				147.1				74.0
Total Asia Pacific			124.7				72.5				264.5				136.8
Total		$	493.0			$	306.9			$	942.1			$	531.0

     One customer accounted for 16% and 14% of the Company’s net revenues for the three and six months ended June 30, 2005, respectively. The revenue attributed to this significant customer was derived from the sale of products and services in all three operating segments. The same customer individually accounted for 16% and 16% of the Company’s net revenues for the three and six months ended June 30, 2004, respectively. Revenue attributed to this significant customer was derived from the sale of products and services in all three operating segments.

     The Company tracks assets by physical location. The majority of the Company’s assets, including property and equipment, as of June 30, 2005 and 2004 were attributable to its U.S. operations.

Note 11. Income Taxes

     The Company recorded tax provisions of $42.9 million and $7.5 million for the three months ended June 30, 2005 and 2004, or effective tax rates of 33% and -147%, respectively. The Company

recorded tax provisions of $78.7 million and $23.3 million for the six months ended June 30, 2005 and 2004, or effective tax rates of 32% and 53%, respectively. The 2004 rates for each period differ from the 2005 rates primarily due to the inability to benefit from an IPR&D charge and other charges and losses incurred in 2004. The Company’s income taxes currently payable for federal and state purposes have been reduced by the tax benefit from employee stock option transactions. These benefits totaled $35.7 million and $64.6 million for the three months and six months ended June 30, 2005, respectively, and were reflected as an increase to additional paid-in capital.

     The Internal Revenue Service (“IRS”) has concluded an audit of the Company’s federal income tax returns for fiscal years 1999 and 2000. During 2004, the Company received a Notice of Proposed Adjustment (“NOPA”) from the IRS. While the final resolution of the issues raised in the NOPA is uncertain, the Company believes it has made adequate provisions in the accompanying consolidated financial statements for any adjustments that the IRS has proposed with respect to these tax returns.

     In conjunction with the IRS income tax audit, certain of the Company’s US payroll tax returns are currently under examination for fiscal years 1999 — 2001, and the Company received a second NOPA in the amount of $11.7 million for employment tax assessments primarily related to the timing of tax deposits related to employee stock option exercises. The Company responded to this NOPA in February 2005, and intends to dispute this assessment with the IRS and resolve the issue at the Appeals level. The Company currently does not believe that it is probable that any final assessment will be sustained nor does it believe that a liability can be reasonably estimated at this time. In the event that this issue is resolved unfavorably to the Company, there exists the possibility of a material adverse impact on the Company’s results of operations for the period in which an unfavorable outcome becomes probable and reasonably estimable.

Note 12. Contingencies

     The Company is subject to legal claims and litigation arising in the ordinary course of business, such as employment or intellectual property claims, including the matters described below. The outcome of any such matters is currently not determinable. An adverse result in one or more matters could negatively affect our results in the period in which they occur.

     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.

     In June 2004, a stipulation for the settlement and release of claims against the issuers, including the Company, was submitted to the Court for approval. The terms of the settlement, if approved, would dismiss and release all claims against participating defendants (including the Company). In exchange for this dismissal, Directors and Officers insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. The settlement is subject to a number of conditions, including court approval. If the settlement does not occur, and litigation continues, the Company believes it has meritorious defenses and intends to defend the case vigorously.

     Federal Securities Class Action Suit

     During the quarter ended March 31, 2002, a number of essentially identical shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against the Company and certain of its officers and former officers purportedly on behalf of those stockholders who purchased the Company’s publicly traded securities between April 12, 2001 and June 7, 2001. In April 2002, the court 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 a consolidated complaint was filed in August 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 consolidated complaint. In March 2003, the court 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 in September 2003. In March 2004, the court granted defendants motion to dismiss, without leave to amend. In April 2004, the plaintiffs filed a notice of appeal. The appeal has been fully briefed by the parties. The Court of Appeals has not yet scheduled arguments on the appeal.

     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 Company is named solely as a nominal defendant against whom the plaintiffs seek no recovery. After having their previous complaints dismissed with leave to amend, Plaintiffs lodged a third amended complaint in August 2004. Defendants demurred to the third amended complaint. On November 18, 2004, the Court sustained defendants’ demurrer without leave to amend and entered an order of final judgment against plaintiffs. In January 2005, plaintiffs filed a notice of appeal from this ruling. There has not yet been any briefing or argument on appeal.

     Toshiba Patent Infringement Litigation

     On November 13, 2003, Toshiba Corporation filed suit in the United States District Court in Delaware against the Company, alleging that certain of the Company’s products infringe four Toshiba patents and seeking an injunction and unspecified damages. The Company filed an answer to the complaint in February, 2004. Toshiba amended its complaint to add two patents, and the Company answered the amended complaint in July 2004. The case is in the discovery phase, and trial is scheduled for August 2006.

Note 13. Subsequent Events

     Peribit Acquisition

     In April 2005, Juniper Networks announced that it had signed a definitive agreement to acquire Peribit in a transaction valued at approximately $337 million of stock and cash, plus options and certain other incentives and equity compensation. The acquisition closed on July 1, 2005 and will be included in the results of operations in the quarter ending September 30, 2005.

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

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

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

     Overview of the Results of Operations

     To aid in understanding our operating results for the three and six months ended June 30, 2005 and 2004, we believe an overview of the significant events that affected those periods and a discussion of the nature of our operating expenses is helpful.

     Significant Events

     In May 2005, we completed our acquisition of Kagoor Networks, Inc. (“Kagoor”) and Redline Networks, Inc. (“Redline”) . In April 2004, we completed our acquisition of NetScreen Technologies, Inc. (“NetScreen”). Beginning on May 2, 2005, we have included in our results of operations the results of Kagoor and Redline, which have a slight impact on the revenues, cost of revenues, and operating expenses for the three months and six months ended June 30, 2005 when compared to the three and six months ended June 30, 2004. We have included in our results of operations the results of NetScreen beginning on April 16, 2004; therefore, revenues, cost of revenues and operating expenses are significantly greater during the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004.

     Nature of Expenses

     During the three months ended March 31, 2005, our chief operating decision maker and senior management team (together “management”) began to allocate resources and assess performance based on financial information by categories of products and by services; therefore beginning on January 1, 2005 we had three operating segments: Infrastructure, Security and Service. Following the acquisitions of Kagoor and Redline in the second quarter of 2005, we combined the products from these acquired companies with the Security segment to create an operating segment known as Service Layer Technologies (“SLT”). As a result, we currently have the following operating segments:

Infrastructure, SLT, and Service. The Infrastructure segment includes products from the E-, M-, and T-series product families. The SLT segment includes Security products and Application Acceleration products. Security products consist of firewall and virtual private network (“VPN”) systems and appliances, secure sockets layer VPN appliances, intrusion detection and prevention appliances, session border control products and the J-series product family. Application Acceleration products consist of application front end appliances. In our quarterly report for the period ending September 30, 2005, Application Acceleration products will also include wide area network (“WAN”) optimization platforms that were acquired in connection with our acquisition of Peribit Networks, Inc. (“Peribit”), which closed on July 1, 2005. The Service segment is managed as one organization and delivers services to customers of the Infrastructure and SLT segments. The change in operating segments was due to a shift in management structure and responsibilities to measure the business on product and service profitability. Direct costs, such as standard costs and research and development and product marketing expenses, are applied directly to each operating segment. Indirect costs, such as sales and general and administrative expenses are allocated to each operating segment based on revenue.

     Most of our manufacturing, repair and supply chain operations are outsourced to independent contract manufacturers; accordingly, most of our cost of revenues consists of payments to our independent contract manufacturers for the standard product costs. The independent contract manufacturers produce our products using design specifications, 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 primary independent contract manufacturers have facilities primarily in Neenah, Wisconsin; Toronto, Canada and Kulim, Malaysia. 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.

     The contract manufacturers procure components based on our build forecasts and if actual component usage is lower than our forecasts, we may be, and have been in the past, liable for carrying or obsolete material charges. Carrying and obsolete charges have decreased in each of the past two years as the global economy and our product revenue improved.

     Employee related costs have historically been the primary driver of our operating expenses and we expect this trend to continue. Employee related costs include items such as wages, commissions, bonuses, vacation, benefits and travel. We increased our headcount from approximately 2,552 employees as of June 30, 2004 to approximately 3,425 employees as of June 30, 2005. Approximately 150 of this increase in headcount was a direct result of the Kagoor and Redline acquisitions.

     Facility and information technology departmental costs are allocated to other departments based on headcount. These departmental costs have increased each of the last two years due to increases in headcount and facility leases resulting from acquisitions, additional infrastructure systems and general expansion to support our growth.

     Research and development expenses include:

	•		the costs of developing our products,
	•		outside services, such as certifications of new products,
	•		equipment used for testing
	•		and patent related costs.

     Several components of our research and development effort require significant expenditures, such as the development of new components and the purchase of prototype equipment, the timing of which can cause quarterly variability in our expenses. We expense our research and development costs as they are incurred. We plan to increase our investment in research and development during 2005 compared to prior years to further advance our competitive advantage.

     Sales and marketing expenses include costs for promoting our products and services, demonstration equipment and advertisements. These costs vary quarter-to-quarter depending on revenues, product launches and marketing initiatives. We plan to further develop our distribution channel and increase our sales and marketing costs in an effort to expand and grow our presence in new markets, serving both private and public networks with a full portfolio of networking, security, and application acceleration products.

     General and administrative expenses include professional fees, bad debt provisions and other corporate expenses. Professional fees include legal, audit, tax, accounting and certain corporate strategic services.

     Critical Accounting Policies and Estimates

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

	•		revenue recognition;
	•		estimating future warranty costs and the valuation of exposures associated with the contract manufacturing operations, both of which impact cost of product revenues and gross margins;
	•		the provision for income taxes, which impacts our income tax expense, and tax related accruals;
	•		the allowance for doubtful accounts, which impacts general and administrative expenses; and
	•		the initial and continuing valuation of goodwill and other purchased intangible assets, the impairment of which would impact operating expenses.

     We have other 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 and not a judgment as to the policy itself. We base our estimates on our historical experience and also on assumptions that we believe are standard and reasonable. Despite our intention to establish accurate estimates and assumptions, actual results could differ from those estimates for various reasons including those described in “Factors That May Affect Future Results.”

     Management believes there have been no significant changes during the three and six months ended June 30, 2005 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2004.

     Results of Operations

     We have included in our results of operations the results of NetScreen beginning on April 16, 2004; therefore, revenues, cost of revenues and operating expenses are significantly greater during the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004.

     Net Revenues

     The following table shows product and service net revenues for the three and six months ended June 30, 2005 and 2004 (in millions):

		Three Months Ended June 30,																Six Months Ended June 30,
						% of Net								% of Net								% of Net								% of Net
		2005				Revenues				2004				Revenues				2005				Revenues				2004				Revenues
Net revenues:
Product		$	423.7				86	%		$	263.7				86	%		$	816.0				87	%		$	457.9				86	%
Service			69.3				14	%			43.2				14	%			126.1				13	%			73.1				14	%
Total net revenues		$	493.0				100	%		$	306.9				100	%		$	942.1				100	%		$	531.0				100	%

     Net product revenues increased $160 million and $358.1 million in the three and six months ended June 30, 2005 compared to the same periods in 2004 primarily as a result of the adoption and expansion of IP networks by our customers in order to reduce total operating costs and to be able to offer multiple services over a single network along with the expansion of our product portfolio through both acquisition and internal development. An analysis of the change in revenue by Infrastructure and SLT segments and the change in units, can be found below in the section titled “Segment Information.”

     Net service revenues increased $26.1 million and $53.0 million in the three and six months ended June 30, 2005 compared to the same periods in 2004 primarily due to the growth in support services and to a lesser degree the growth in professional services. The growth in the support services was largely due to improved attach and renewal rates, primarily across the SLT product lines, and to our growing installed base. We recognize revenue from service contracts as the services are completed or ratably over the period of the obligation. A majority of our service revenue is earned from customers who purchase our products and enter into service contracts and are typically for one-year renewable periods for services such as 24-hour customer support, non-specified updates and hardware repairs. In addition to service contracts and professional services, we also provide educational services.

     Siemens accounted for greater than 10% of our net revenues during the three and six months ended June 30, 2005 and 2004.

     The following table shows the percent of total net revenues by geographic theater:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Americas			46	%			49	%			45	%			46	%
Europe, Middle East, and Africa			28	%			27	%			27	%			28	%
Asia Pacific			26	%			24	%			28	%			26	%

     Net revenues attributable to the United States were $212.0 million and $403.0 million for the three and six months ended June 30, 2005, respectively, and $131.9 million and $215.8 million for the three and six months ended June 30, 2004, respectively. Japan accounted for $64.8 million and $117.4 million for the three and six months ended June 30, 2005, respectively, and $27.4 million and $62.8 million for the three and six months ended June 30, 2004, respectively. We continue to experience a relatively consistent distribution of revenue among our three geographic theaters, and we expect this trend to continue.

     Cost of Revenues

     The following table shows cost of product and service revenues and the related gross margin (“GM”) percentages for the three and six months ended June 30, 2005 and 2004 (in millions):

		Three Months Ended June 30,																Six Months Ended June 30,
		2005				GM %				2004				GM %				2005				GM %				2004				GM %
Cost of revenues:
Product		$	121.3				71	%		$	73.9				72	%		$	233.8				71	%		$	130.5				72	%
Service			33.9				51	%			22.9				47	%			64.6				49	%			40.3				45	%
Total cost of revenues		$	155.2				68	%		$	96.8				68	%		$	298.4				68	%		$	170.8				68	%

     Cost of product revenues increased $47.4 million and $103.3 million in the three and six months ended June 30, 2005 compared to the same periods in 2004, while the product gross margin decreased by 1% to 71%. The increase in absolute dollars was primarily due to standard costs related to the increase in revenue.

     As we have expanded our market share and entered more markets, we have begun to experience increased price competition and we expect to see continued price competition and pressure on our product gross margins in the future. Nevertheless, our revenues increased in absolute dollars and our product gross margins have not seen a significant decline compared to the year-ago period.

     Cost of service revenues increased $11.0 million and $24.3 million in the three and six months ended June 30, 2005 compared to the same periods in 2004, and the service gross margin increased four percentage points in the three and six months ended June 30, 2005 as compared to the same periods in 2004. The increase in service gross margin is primarily attributable to a larger revenue increase when compared to the increase in headcount and outside services fees, both of which were needed to support the growing install base. Employee related expenses increased $3.3 million and $8.8 million, respectively, for the three and six months ended June 30, 2005. Outside services increased $4.2 million and $9.4 million, respectively, for the three and six months ended June 30, 2005.

     Operating Expenses

     (in millions):

		Three Months Ended June 30,																Six Months Ended June 30,
						% of Net								% of Net								% of Net								% of Net
		2005				Revenues				2004				Revenues				2005				Revenues				2004				Revenues
Research and development		$	81.2				16	%		$	58.1				19	%		$	157.4				17	%		$	104.7				20	%
Sales and marketing		$	102.3				21	%		$	75.7				25	%		$	193.7				21	%		$	119.2				22	%
General and administrative		$	15.4				3	%		$	17.4				6	%		$	30.9				3	%		$	26.2				5	%

     Research and development expenses for the three months ended June 30, 2005 increased $23.1 million compared to the same period in 2004 due primarily to increases in personnel related expenses of $10.8 million, equipment and engineering expenses related to the development and testing of products of $4.7 million, and outside services of $1.4 million. Research and development expenses for the six months ended June 30, 2005 increased $52.7 million compared to the same period in 2004 due primarily to increases in personnel related expenses of $31.3 million, equipment related to the development and testing of products of $6.5 million, and outside services of $4.3 million. The increases in personnel related expenses for both the three and six month periods were primarily due to additional hires in the engineering organization to support product innovation for existing product lines and to support the development of newly acquired product lines.

     Sales and marketing expenses during the three months ended June 30, 2005 increased $26.6 million compared to the same period in 2004 due primarily to increases in personnel related expenses of $14.0 million, increases in marketing related activities of $1.3 million, and increases in outside services of $1.2 million. Sales and marketing expenses for the six months ended June 30, 2005 increased

$74.5 million compared to the same period in 2004 due to increases in personnel related expenses of $44.9 million, increases in marketing related activities of $4.3 million, and increases in outside services of $2.7 million. Personnel related expenses increased in both the three and six month periods primarily due to additional hires to support the expansion of our distribution channels and customer base, as well as to support the larger portfolio of products. Marketing related activities increased primarily as a result of specific activities designed to expand and improve our distribution channels, and increase awareness of our products to a broader range of customers.

     General and administrative expenses for the three months ended June 30, 2005 decreased $2.0 million compared to the same period in 2004 due primarily to a $5.0 million reduction in legal fees and a related settlement, partially offset by increases in personnel related expenses of $1.4 million. The total increase in general and administrative expenses of $4.7 million for the six months ended June 30, 2005 as compared to the same period in 2004 was due primarily to increases in personnel related expenses of $4.2 million.

     Other Operating Expenses

     The following table shows other operating expenses for the three and six months ended June 30, 2005 and 2004 (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
In-process research and development		$	1.9			$	27.5			$	1.9			$	27.5
Integration costs		$	—			$	5.1			$	—			$	5.1
Restructuring costs		$	(6.6	)		$	(3.8	)		$	(6.6	)		$	(3.8	)
Amortization of purchased intangibles and deferred stock compensation		$	23.9			$	35.0			$	45.9			$	39.2

     Of the total Kagoor purchase price, $1.9 million has been allocated to in-process research and development (“IPR&D”) and was expensed in the three months ended June 30, 2005, compared to the $27.5 million allocated IPR&D from the NetScreen acquisition in the three months ended June 30, 2004. None of the Redline purchase price was allocated to IPR&D. 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, Kagoor and NetScreen both had multiple IPR&D efforts under way for certain current and future product lines. For Kagoor, these efforts included a variety of signaling protocols and next generation products and operating systems. For NetScreen, these efforts included integrating secure routers with embedded encryption chips, as well as other functions and features such as next generation Internet Protocol (“IP”), wireless and digital subscriber line connectivity and voice over IP capability. We utilized the discounted cash flow (“DCF”) method to value the IPR&D, using rates ranging from 20% to 25%, depending on the estimated useful life of the technology. 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 the Kagoor acquisition, it was estimated that these development efforts would be completed over the next nine to twelve months at an estimated cost of approximately $0.8 million.

     We did not incur material integration expenses in the three and six months ended June 30, 2005. We incurred integration expenses of $5.1 million in the three and six months ended June 30, 2004 resulting from our acquisition of NetScreen. Integration expenses are incremental costs directly related to the integration of the two companies, which consisted principally of facility related expenses, workforce related expenses and professional fees. We estimate that the majority of the integration

costs related to NetScreen, Kagoor, and Redline have been incurred and that there will be a minimal amount of additional integration costs in the foreseeable future.

     During the three and six months ended June 30, 2005, we reduced our restructuring accruals by a total of $6.6 million when we re-occupied a portion of the former NetScreen facility previously included in the restructuring reserve as a result of the Kagoor and Redline acquisitions. During the three and six months ended June 30, 2004, we decreased our restructuring accruals by a total of $3.8 million, primarily due to changes in our facility estimates.

     Amortization of purchased intangibles and deferred stock compensation is made up of the following components:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Amortization of purchased intangibles		$	19.9			$	16.2			$	38.5			$	19.9
Amortization of deferred stock compensation			4.0				18.8				7.4				19.3
Amortization of purchased intangibles and deferred stock compensation		$	23.9			$	35.0			$	45.9			$	39.2

     Amortization of purchased intangibles increased $3.7 million and $18.6 million for the three and six months ended June 30, 2005 compared to the same periods in 2004. The increases were primarily due to amortization related to the $11.6 million and $25.6 million of purchased intangibles acquired in the Kagoor and Redline acquisitions, respectively. Purchased intangibles are being amortized on a straight-line basis over their estimated useful lives of between four and seven years.

     Amortization of deferred stock compensation decreased $14.8 million and $11.9 million for the three and six months ended June 30, 2005 compared to the same periods in 2004. The decreases were due to the use of the graded-vesting method and the termination of NetScreen employees, partially offset by increases in the deferred stock compensation resulting from the Kagoor and Redline acquisitions. The amortization of deferred stock compensation is adjusted quarterly to account for terminated employees.

     Other Income and Expenses

     The following table shows other income and expenses for the three and six months ended June 30, 2005 and 2004 (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Interest and other income		$	13.4			$	5.3			$	24.5			$	10.3
Interest and other expense		$	(1.1	)		$	(1.5	)		$	(1.9	)		$	(4.0	)
Loss on redemption of convertible subordinated notes		$	—			$	(4.1	)		$	—			$	(4.1	)

     For the three and six months ended June 30, 2005, interest and other income increased $8.1 million and $14.2 million as a result of higher cash, cash equivalents and investment balances quarter over quarter and an increase in interest rates.

     For the three and six months ended June 20, 2005, interest and other expenses decreased $0.4 million and $2.1 million as a result of the retirement of the subordinated notes during the second quarter of fiscal year 2004.

     Provision for Income Taxes

     We recorded tax provisions of $42.9 million and $7.5 million for the three months ended June 30, 2005 and 2004, or effective tax rates of 33% and -147%, respectively. We recorded tax provisions of $78.7 million and $23.3 million for the six months ended June 30, 2005 and 2004, or effective tax rates

of 32% and 53%, respectively. The 2004 rates for each period differ from the 2005 rates primarily due to the inability to benefit from an IPR&D charge and other charges and losses incurred in 2004. Our income taxes currently payable for federal and state purposes have been reduced by the tax benefit from employee stock option transactions. These benefits totaled $35.7 million and $64.6 million for the three months and six months ended June 30, 2005, respectively, and were reflected as an increase to additional paid-in capital.

     The Internal Revenue Service (“IRS”) has concluded an audit of our federal income tax returns for fiscal years 1999 and 2000. During 2004, we received a Notice of Proposed Adjustment (“NOPA”) from the IRS. While the final resolution of the issues raised in the NOPA is uncertain, we believe we have made adequate provisions in the accompanying consolidated financial statements for any adjustments that the IRS has proposed with respect to these tax returns.

     In conjunction with the IRS income tax audit, certain of our US payroll tax returns are currently under examination for fiscal years 1999 — 2001, and we received a second NOPA in the amount of $11.7 million for employment tax assessments primarily related to the timing of tax deposits related to employee stock option exercises. We responded to this NOPA in February 2005, and intend to dispute this assessment with the IRS and resolve the issue at the appeals level. We currently do not believe that it is probable that any final assessment will be sustained nor do we believe that a liability can be reasonably estimated at this time. In the event that this issue is resolved unfavorably to us, there exists the possibility of a material adverse impact on our results of operations for the period in which an unfavorable outcome becomes probable and reasonably estimable.

     Segment Information

     A description of the products and services for each segment can be found in Note 10 to the Condensed Consolidated Financial Statements. We began to track financial information by our three operating segments during 2005 as our management structure and responsibilities began to measure the business based on product and service profitability. We have included segment financial data for the three and six months ended June 30, 2004 for comparative purposes.

     Financial information for each operating segment used by management to make financial decisions and allocate resources is as follows (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net Revenues:
Infrastructure		$	330.5			$	219.8			$	634.6			$	414.0
Service Layer Technologies			93.2				43.9				181.4				43.9
Service			69.3				43.2				126.1				73.1
Total net revenues		$	493.0			$	306.9			$	942.1			$	531.0
Operating income (loss):
Infrastructure		$	95.6			$	42.6			$	180.1			$	83.8
Service Layer Technologies			4.2				(55.3	)			7.4				(55.3	)
Service			19.8				7.9				33.1				13.6
Total operating income (loss)		$	119.6			$	(4.8	)		$	220.6			$	42.1
Depreciation and amortization of purchased intangible assets and deferred stock compensation included in operating income (loss):
Infrastructure		$	12.1			$	11.2			$	23.5			$	22.8
Service Layer Technologies			22.9				32.5				43.7				32.5
Service			1.8				1.4				3.3				2.6
Total depreciation and amortization		$	36.8			$	45.1			$	70.5			$	57.9

     Infrastructure Operating Segment

     Infrastructure net revenues increased due to the adoption and expansion of IP networks by our customers in order to reduce total operating costs and to be able to offer multiple services over a single network. The following table shows infrastructure revenue units recognized and ports shipped for the three and six months ended June 30, 2005 and 2004:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
	Infrastructure chassis revenue units		2,390				1,551				4,808				2,869
	Infrastructure ports shipped		40,259				28,864				77,783				52,152

     We track infrastructure revenue units recognized and ports shipped to analyze customer trends and indicate areas of potential network growth. Our infrastructure product platforms are essentially modular, with the chassis serving as the base of the platform. Each chassis has a certain number of slots that are available to be populated with components we refer to as modules or interfaces. The modules are the components through which the router receives incoming packets of data from a variety of transmission media. The physical connection between a transmission medium and a module is referred to as a port. The number of ports on a module varies widely depending on the functionality and throughput offered by the module. Chassis revenue units represent the number of chassis on which revenue was recognized during the period.

     The higher operating income in the 2005 periods as compared to the 2004 periods is primarily due to increases in revenue, partially offset by higher personnel related costs primarily related to support product innovation and the expansion of our sales channels.

     Service Layer Technologies Operating Segment

     The SLT operating segment consists of Security and Application Acceleration products primarily acquired through the NetScreen, Kagoor and Redline acquisitions and the costs related to those products. Beginning on April 16, 2004, we included the revenue and operating income results of NetScreen; therefore, these amounts are significantly greater during the 2005 periods as compared to the 2004 periods. In addition, we included the revenue and operating results of Kagoor and Redline beginning on May 2, 2005; therefore that caused a slight increase in revenue during the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004. Net revenues attributable to the SLT products during the three and six months ended June 30, 2005 were based on approximately 36,000 units and 74,000 units, respectively. The higher net revenues and operating income in the 2005 periods as compared to the 2004 periods is primarily due to the 2004 periods containing purchase accounting adjustments, which negatively impacted the revenue and operating results in the 2004 periods. The higher depreciation and amortization expense attributable to the SLT segment compared to that of the Infrastructure segment is primarily due to the purchased intangible assets and deferred stock compensation that resulted from the NetScreen, Kagoor and Redline acquisitions.

     Service Operating Segment

     A discussion on the change in service revenue can be found above under the Net Revenues section. Service operating income increased as a result of the revenue growth experienced in the Infrastructure segment and the SLT segment, partially offset by increases in operating costs, primarily due to personnel related costs.

     Liquidity and Capital Resources

     Overview

     We have funded our business by issuing securities and through our operating activities. The following table shows our capital resources (in millions):

		June 30,				December 31,
		2005				2004
Cash and cash equivalents		$	857.1			$	713.2
Short-term investments			445.5				404.7
Long-term investments			580.1				595.2
Total cash and investments		$	1,882.7			$	1,713.1
Restricted cash		$	38.4			$	31.2
Working capital		$	1,060.4			$	910.9

     Working capital increased primarily due to cash provided by operations and the issuance of common stock through employee stock option exercises and stock purchase plans. The significant components of our working capital are cash and cash equivalents, short-term investments and accounts receivable, reduced by accounts payable, accrued liabilities and deferred revenue.

     Based on past performance and current expectations, we believe that our cash and cash equivalents, short-term and long-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.

     Cash Requirements and Contractual Obligations

     Our principal commitments as of June 30, 2005 consist of obligations outstanding under operating leases, the Zero Coupon Convertible Senior Notes due June 15, 2008 (“Senior Notes”) and our definitive agreement to acquire Peribit. The contractual obligations under operating leases are primarily for our facilities, which extend through May 2014.

     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. 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.

     In May 2005, we paid, net of cash acquired, $55.4 million and $99.8 million to acquire Kagoor and Redline, respectively.

     In July 2005, we paid $50.3 million in cash to acquire Peribit in a transaction valued at $337 million of stock and cash, plus options and certain other incentives and equity compensation.

     We do not have firm purchase commitments with our contract manufacturers. In order to reduce manufacturing lead times and ensure adequate material supply, the contract manufacturers place non-cancelable, non-returnable (“NCNR”) orders, which were valued at $149.5 million as of June 30, 2005, based on our build forecasts. We do not take ownership of the components and the NCNR orders do not represent firm purchase commitments pursuant to our agreements with the contract manufacturers. The components are used by the contract manufacturers to build products based on purchase orders we have received from our customers. We do not incur a liability for products built by the contract manufacturer until it fulfills our customer’s order and the order ships. However, if the components go

unused, we may be assessed carrying charges or obsolete charges. As of June 30, 2005, we had accrued $21.0 million based on our estimate of such charges.

     Operating Activities

     Net cash provided by operating activities was $300.5 million for the six months ended June 30, 2005, and $191.8 million for the six months ended June 30, 2004. The cash provided by operating activities for each period was due to our net income adjusted by:

	•		recurring non-cash charges of $137.8 million for the six months ended June 30, 2005, and $92.9 million for the six months ended June 30, 2004, for the tax benefit of employee stock option plans, depreciation expense and amortization expenses of purchased intangible assets, purchased in-process research and development charges, deferred stock compensation and debt issuance costs; and
	•		changes in operating assets and liabilities of $(1.8) million for the six months ended June 30, 2005, and $77.9 million for the six months ended June 30, 2004, were in the normal course of business.

     Investing Activities

     Net cash used in investing activities was $232.0 million for the six months ended June 30, 2005, and net cash provided by investing activities was $192.0 million for the six months ended June 30, 2004. Recurring investing activities included capital expenditures of $40.6 million for the six months ended June 30, 2005, and $19.7 million for the six months ended June 30, 2004. We have also made investments in securities classified as available-for-sale and sold investments to fund ongoing operations and the retirement of the Subordinated Notes during the second quarter of 2004. We also made minority equity investments in privately held companies of $1.0 million and $1.2 million during the six months ended June 30, 2005 and 2004, respectively.

     During the six months ended June 30, 2005, we had an increase in restricted cash due mainly to the establishment of an escrow account in connection with the acquisition of Kagoor.

     Financing Activities

     Net cash flow from financing activities was an inflow of $75.3 million for the six months ended June 30, 2005, and outflow of $73.5 million for the six months ended June 30, 2004. The cash provided during these periods was through the issuance of common stock related to employee option exercises and stock purchase plans. We retired our Subordinated Note in the second quarter of 2004.

     Recent Accounting Pronouncements

     In June 2005, the FASB issued FSP 143-1 (“FSP 143-1”), Accounting for Electronic Equipment Waste Obligations. FSP 143-1 was issued to address the accounting for obligations associated with Directive 2002/96/EC on Waste Electrical and Electronic Equipment (the “Directive”) adopted by the European Union. The Directive obligates a commercial user to incur costs associated with the retirement of a specified asset that qualifies as historical waste equipment effective August 13, 2005. FSP 143-1 requires the commercial user to apply the provisions of SFAS 143, Accounting for Conditional Asset Retirement Obligations, and the related FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, to the obligation associated with historical waste. It is effective the later of the first reporting period ending after June 8, 2005 or the date of the adoption of the law by the applicable European Union-member. We are in the process of evaluating the impact of this guidance will have on our financial statements.

     In June 2005, The FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in

accounting principle. Statement 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. It is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005. We do not expect the effect of SFAS 154 will have material impact on our financial statements.

     In December 2004, the FASB revised SFAS No. 123 (“SFAS 123(R)”), Share-Based Payment, which requires companies to expense the estimated fair value of employee stock options and similar awards. The accounting provisions of SFAS 123(R) will be effective for us beginning on January 1, 2006. We will adopt the provisions of SFAS 123(R) using a modified prospective application. Under modified prospective application, SFAS 123(R), which provides certain changes to the method for valuing stock-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123 (see Note 2 in the Notes to Consolidated Financial Statements). We are in the process of determining how the new method of valuing stock-based compensation as prescribed in SFAS 123(R) will be applied to valuing stock-based awards granted after the effective date and the impact the recognition of compensation expense related to such awards will have on our financial statements.

     In March 2005, the SEC staff issued guidance on SFAS 123(R). Staff Accounting Bulletin No. 107 (“SAB 107”) was issued to assist preparers by simplifying some of the implementation challenges of SFAS 123(R) while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be required by preparers to successfully implement SFAS 123(R), specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude differently on the fair value of employee stock options. Key topics covered by SAB 107 include: (a) valuation models – SAB 107 reinforces the flexibility allowed by SFAS 123(R) to choose an option-pricing model that meets the standard’s fair value measurement objective; (b) expected volatility – SAB 107 provides guidance on when it would be appropriate to rely exclusively on either historical or implied volatility in estimating expected volatility; and (c) expected term – the new guidance includes examples and some simplified approaches to determining the expected term under certain circumstances. We will apply the principles of SAB 107 in conjunction with our adoption of SFAS 123(R).

     Factors That May Affect Future Results

     Investments in equity securities of publicly traded companies involve significant risks. The market price of our stock reflects a higher multiple of expected future earnings than many other companies. Accordingly, even small changes in investor expectations for our future growth and earnings, whether as a result of actual or rumored financial or operating results, changes in the mix of the products and services sold, acquisitions, industry changes or other factors, could trigger significant fluctuations in the market price of our common stock. Investors in our securities should carefully consider all of the relevant factors, including but not limited to the following factors, that could affect our stock price.

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

     Our revenues depend significantly on general economic conditions and the demand for products in the markets in which we compete. Economic weakness, customer financial difficulties and constrained spending on network expansion has previously resulted (for example, in 2001 and 2002), and may in the future result, in decreased revenues and earnings and could also negatively impact our ability to forecast and manage our contract manufacturer relationships. Economic downturns may also lead to restructuring initiatives and associated expenses and impairment of investments. 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. Uncertainty about future economic

conditions makes it difficult to forecast operating results and to make decisions about future investments. Future economic weakness, customer financial difficulties and reductions in spending on network expansion could have a material adverse effect on demand for our products and consequently on our results of operations and stock price.

     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 and investors, which could adversely affect the trading price of our common stock.

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

     The factors that may affect the unpredictability of our quarterly results include, but are not limited to, limited visibility into customer spending plans, changes in the mix of products sold, changing market conditions, including some customer and potential customer bankruptcies, long sales and implementation cycles, regional economic and political conditions and seasonality. For example, many companies experience seasonal fluctuations in customer spending patterns, particularly in the 1^st and 3^rd quarters.

     As a result, we believe that quarter-to-quarter comparisons of operating results are not necessarily a good indication of what our future performance will be. It is likely that in some future quarters, our operating results may be below one or more of the expectations of securities analysts and investors in which case the price of our common stock may decline. Such a decline could occur, and has occurred in the past, even when we have met our publicly stated revenue and/or earnings guidance.

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

     A substantial majority of our net revenues depend on sales to a limited number of customers and distribution partners. Siemens accounted for greater than 10% of our net revenues during the three and six months ended June 30, 2005 and 2004, respectively. Any downturn in the business of these customers or potential new customers could significantly decrease sales to such customers, which could adversely affect our net revenues and results of operations. In addition, there has been and continues to be consolidation in the telecommunications industry (for example, the recently announced planned acquisitions of AT&T and MCI). This consolidation may cause our customers who are involved in these acquisitions to suspend or indefinitely reduce their purchases of our products or have other unforeseen consequences.

     We face intense competition that could reduce our revenues and adversely affect our financial results.

     Competition is intense in the markets that we address. The IP infrastructure market has historically been dominated by Cisco Systems, Inc., with other companies such as Alcatel S.A., Nortel Networks Corporation and Huawei Technologies providing products to a smaller segment of the market. In addition, a number of other small public or private companies have products or have announced plans for new products to address the same challenges that our products address.