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 March 31, 2007

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.

Delaware		77-0422528
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)
1194 North Mathilda Avenue
Sunnyvale, California 94089		(408) 745-2000
(Address of principal executive offices,		(Registrant’s telephone number,
including zip code)		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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ           Accelerated Filer o            Non-Accelerated Filer o

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

     There were approximately 566,300,000 shares of the Company’s Common Stock, par value $0.00001, outstanding as of April 30, 2007.

 

 

Table of Contents

PART I	—			FINANCIAL INFORMATION			3
Item 1.				Financial Statements			3
				Condensed Consolidated Statements of Operations			3
				Condensed Consolidated Balance Sheets			4
				Condensed Consolidated Statements of Cash Flows			5
				Notes to Condensed Consolidated Financial Statements			6
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			36
Item 4.				Controls and Procedures			37
PART II	—			OTHER INFORMATION			38
Item 1.				Legal Proceedings			38
Item 1A.				Risk Factors			40
Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 6.				Exhibits			50
SIGNATURES							51
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Juniper Networks, Inc.

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

		Three Months Ended March 31,
		2007				2006
Net revenues:
Product		$	509,773			$	474,125
Service			117,163				92,589
Total net revenues			626,936				566,714
Cost of revenues:
Product			154,942				140,995
Service			57,167				43,952
Total cost of revenues			212,109				184,947
Gross margin			414,827				381,767
Operating expenses:
Research and development			141,093				113,688
Sales and marketing			150,656				129,429
General and administrative			27,258				23,099
Amortization of purchased intangible assets			22,740				23,221
Other charges			12,584				1,404
Total operating expenses			354,331				290,841
Operating income			60,496				90,926
Interest and other income			33,977				20,767
Interest and other expense			(1,064	)			(1,089	)
Income before income taxes			93,409				110,604
Provision for income taxes			26,762				34,841
Net income		$	66,647			$	75,763
Net income per share:
Basic		$	0.12			$	0.13
Diluted		$	0.11			$	0.13
Shares used in computing net income per share:
Basic			569,400				565,927
Diluted			604,905				603,589

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)

		March 31,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	2,037,839			$	1,596,333
Short-term investments			426,725				443,910
Accounts receivable, net			257,838				249,445
Deferred tax assets, net			166,771				179,989
Prepaid expenses and other current assets			48,151				52,129
Total current assets			2,937,324				2,521,806
Property and equipment, net			360,665				349,930
Long-term investments			259,364				574,061
Restricted cash			33,630				45,610
Purchased intangible assets, net			145,093				169,202
Goodwill			3,649,574				3,624,652
Long-term deferred tax assets, net			54,922				51,499
Other long-term assets			33,763				31,635
Total assets		$	7,474,335			$	7,368,395
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	180,465			$	179,553
Accrued compensation			87,198				110,451
Deferred revenue			327,712				312,253
Other accrued liabilities			153,854				160,360
Total current liabilities			749,229				762,617
Long-term deferred revenue			82,477				73,326
Other long-term liabilities			45,000				17,424
Long-term debt			399,944				399,944
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.00001 par value; 10,000 shares authorized; none issued and outstanding			—				—
Common stock, $0.00001 par value; 1,000,000 shares authorized; 569,628 shares and 569,234 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively			6				6
Additional paid-in capital			7,711,827				7,646,047
Accumulated other comprehensive income			3,570				1,266
Accumulated deficit			(1,517,718	)			(1,532,235	)
Total stockholders’ equity			6,197,685				6,115,084
Total liabilities and stockholders’ equity		$	7,474,335			$	7,368,395

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

		Three Months Ended March 31,
		2007				2006
Operating Activities:
Net income		$	66,647			$	75,763
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			46,260				41,828
Stock-based compensation			25,942				23,065
Non-cash portion of debt issuance costs and disposal of property and equipment			472				363
Excess tax benefit from employee stock option plans			(739	)			(557	)
Changes in operating assets and liabilities:
Accounts receivable, net			(7,611	)			(35,437	)
Prepaid expenses, other current assets and other long-term assets			6,983				6,577
Accounts payable			349				(5,149	)
Accrued compensation			(23,253	)			(28,797	)
Other accrued liabilities			12,984				19,884
Deferred revenue			24,610				41,018
Net cash provided by operating activities			152,644				138,558
Investing Activities:
Purchases of property and equipment			(32,373	)			(18,228	)
Purchases of available-for-sale investments			(15,934	)			(132,949	)
Maturities and sales of available-for-sale investments			349,119				126,733
Other			2,218				6,090
Net cash provided by (used in) investing activities			303,030				(18,354	)
Financing Activities:
Proceeds from issuance of common stock			14,233				51,521
Purchases and subsequent retirement of common stock			(29,140	)			(186,388	)
Excess tax benefits from stock-based compensation			739				557
Net cash used in financing activities			(14,168	)			(134,310	)
Net increase (decrease) in cash and cash equivalents			441,506				(14,106	)
Cash and cash equivalents at beginning of period			1,596,333				918,401
Cash and cash equivalents at end of period		$	2,037,839			$	904,295

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Notes to the Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Description of Business

Juniper Networks, Inc. (“Juniper Networks” or the “Company”) designs and sells products and services that together provide its customers with Internet Protocol (“IP”) networking solutions. The Company is organized into the following three operating segments: Infrastructure, Service Layer Technologies (“SLT”) and Service. The Company’s Infrastructure segment primarily offers scalable router products that are used to control and direct network traffic. The Company’s SLT segment offers solutions that meet a broad array of its customers’ priorities, from securing the network and the data on the network, to maximizing existing bandwidth and acceleration of applications across a distributed network. Together, its secure networking solutions help enable its customers to convert networks that provide commoditized, best efforts services into more valuable assets that provide differentiation, value and increased reliability and security to end users. The Company’s Service segment delivers world-wide services, including technical support, professional services and a number of education and training programs, to customers of the Infrastructure and SLT segments.

Basis of Presentation

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, including normal recurring accruals, considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Revenue Recognition

Juniper Networks sells products and services through its direct sales force and through its strategic value-added resellers and distribution relationships. The Company’s products are integrated with software that is essential to the functionality of the equipment. Additionally, the Company provides unspecified upgrades and enhancements related to the integrated software through its maintenance contracts for most of its products. Accordingly, the Company accounts for revenue in accordance with Statement of Position No. 97-2, Software Revenue Recognition, and all related interpretations. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery or performance has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Evidence of an arrangement generally consists of customer purchase orders and, in certain instances, sales contracts or agreements. Shipping terms and related documents, or written evidence of customer acceptance, when applicable, are used to verify delivery or performance. In instances where final acceptance of the product, system or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. Collectibility is assessed based on the creditworthiness of the customer as determined by credit checks and the customer’s payment history to the Company. Accounts receivable are recorded net of allowance for doubtful accounts, estimated customer returns and pricing credits.

For arrangements with multiple elements, such as sales of products that include services, the Company allocates revenue to each element using the residual method based on vendor specific objective evidence of fair value of the undelivered items. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. Vendor specific objective evidence of fair value is based on the price charged when the element is sold separately. If vendor specific objective evidence of fair value of one or more undelivered item does not exist, revenue is deferred and recognized at the earlier of (i) delivery of those elements or (ii) when fair value can be established unless maintenance is the only undelivered element, in which case, the entire arrangement fee is recognized ratably over the contractual support period.

For sales to direct end-users and value-added resellers, the Company recognizes product revenue upon transfer of title and risk of loss, which is generally upon shipment. For end-users and value-added resellers, the Company has no significant obligations for future performance such as rights of return or pricing credits. A portion of the Company’s sales are made through distributors under agreements allowing for pricing credits and/or rights of return. Product revenue on sales made through these distributors is recognized upon sell-through as reported by the distributors to the Company. Deferred revenue on shipments to distributors reflects the effects of distributor pricing credits and the amount of gross margin expected to be realized upon sell–through.

The Company records reductions to revenue for estimated product returns and pricing adjustments, such as rebates and price protection, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns and price protection credits, specific criteria included in rebate agreements, and other factors known at the time.

Shipping charges billed to customers are included in product revenue and the related shipping costs are included in cost of product revenues. Costs associated with cooperative advertising programs are estimated and recorded as a reduction of revenue at the time the related sales are recognized.

Services include maintenance, training and professional services. In addition to providing unspecified upgrades and enhancements on a when and if available basis, the Company’s maintenance contracts include 24-hour technical support, and hardware repair and replacement parts. Maintenance is offered under renewable contracts. Revenue from maintenance contracts is deferred and is generally recognized ratably over the contractual support period, generally one year. Revenue from training and professional services is recognized as the services are completed or ratably over the contractual period.

Sales and transfers of financial instruments are accounted for under Statement of Financial Accounting Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”). The Company sells interests in accounts receivables as part of a distributor accounts receivable financing arrangement which was established by the Company with a major financing company. Receivables sold under such arrangements are removed from the balance sheet and the related transaction fees are recorded in the statement of operations at the time they are sold in accordance with SFAS 140. Specifically, the receivables are legally isolated from the Company, the purchasers have the right to pledge or exchange the receivables and the purchasers obtain effective control over the receivables.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options, restricted stock units (“RSUs”) and employee stock purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values. SFAS 123R requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option pricing model. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of stock based awards under SFAS 123R. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations.

Stock-based compensation expense recognized in the Company’s condensed consolidated statement of operations for the three months ended March 31, 2007 and March 31, 2006 included compensation expense for stock-based payment awards granted prior to, but not yet vested as of the adoption of SFAS 123R, based on the grant date fair value estimated in accordance with the provisions of SFAS 123 and compensation expense for the stock-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Compensation expense for expected-to-vest stock-based awards that were granted on or prior to December 31, 2005 was valued under the multiple-option approach and will continue to be amortized using the accelerated attribution method. Subsequent to December 31, 2005, compensation expense for expected-to-vest stock-based awards is valued under the single-option approach and amortized on a straight-line basis, net of estimated forfeitures.

Goodwill and Purchased Intangible Assets

Goodwill is not subject to amortization but is assessed annually, at a minimum, for impairment by applying a fair-value based test. Future goodwill impairment tests could result in a charge to earnings. Purchased intangible assets with finite lives are amortized on a straight-line basis over their respective estimated useful lives.

Impairment

The Company evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Juniper Networks conducted its annual impairment test as of November 1, 2006 and determined that the carrying value of its goodwill was not impaired. There were no events or circumstances from that date through March 31, 2007 that would impact this assessment. Future impairment indicators, including declines in the Company’s market capitalization or a decrease in revenue or profitability levels, could require impairment charges to be recorded.

The Company evaluates long-lived assets held-for-use for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairments for the three months ended March 31, 2007 and 2006.

Concentrations

Financial instruments that subject Juniper Networks to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Juniper Networks maintains its cash, cash equivalents and available-for-sale investments in fixed income securities with high-quality institutions and only invests in high quality credit instruments. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.

Generally, credit risk with respect to accounts receivable is diversified due to the number of entities comprising the Company’s customer base and their dispersion across different geographic locations throughout the world. Juniper Networks performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. Juniper Networks maintains reserves for potential credit losses and historically such losses have been within management’s expectations.

The Company relies on sole suppliers for certain of its components such as application-specific integrated circuits (“ASICs”) and custom sheet metal. Additionally, Juniper Networks relies primarily on a limited number of significant independent contract manufacturers for the production of all of its products. The inability of any supplier or manufacturer to fulfill supply requirements of Juniper Networks could negatively impact future operating results.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115, (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, an entity may elect to use fair value to measure accounts receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and other eligible items. The fair value option may be elected generally on an instrument-by-instrument basis as long as it is applied to the instrument in its entirety, even if an entity has similar instruments that it elects not to measure based on fair value. SFAS 159 is required to be adopted by the Company in the first quarter of fiscal 2008. The Company currently is determining whether fair value accounting is appropriate for any of its eligible items and cannot estimate the impact, if any, which SFAS 159 will have on its consolidated results of operations and financial condition.

The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) on January 1, 2007, the first day of fiscal 2007. FIN 48 is an interpretation of FASB Statement 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company reported the cumulative effect of applying FIN 48 was a $23.0 million increase to the opening balance of accumulated deficit and a $1.0 million increase to goodwill . See Footnote No. 8 “Income Taxes” for additional information.

Reclassifications

Certain reclassifications have been made to prior year balances in order to conform to the current year’s presentation.

Note 2. Investments

The following is a summary of the Company’s available-for-sale investments, at fair value (in millions):

		As of
		March 31,				December 31,
		2007				2006
Government securities		$	240.8			$	310.9
Corporate debt securities			381.0				620.9
Asset-backed securities and equity securities			63.6				85.4
Other			0.7				0.8
Total		$	686.1			$	1,018.0
Reported as:
Short-term investments		$	426.7			$	443.9
Long-term investments			259.4				574.1
Total		$	686.1			$	1,018.0

Note 3. Goodwill and Purchased Intangible Assets

Goodwill

Changes in the Company’s goodwill were as follows (in millions):

		Amount
Balance as of December 31, 2006		$	3,624.7
Cumulative effect adjustment from adoption of FIN 48 (see Note 8)			1.0
Escrow and other additions to existing goodwill			23.9
Balance as of March 31, 2007		$	3,649.6

During the three months ended March 31, 2007, the Company distributed approximately 0.8 million shares of common stock held in an escrow account, with an aggregate fair value of $14.1 million, in connection with the expiration of certain indemnity obligations related to a past acquisition. In addition, the Company paid $9.8 million upon settlement of its acquisition related indemnity obligations, of which $9.4 million was released from its escrow funds.

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 March 31, 2007:
Technologies and patents		$	379.6			$	(261.7	)		$	117.9
Other			68.9				(41.7	)			27.2
Total		$	448.5			$	(303.4	)		$	145.1
As of December 31, 2006:
Technologies and patents		$	379.6			$	(242.6	)		$	137.0
Other			68.9				(36.7	)			32.2
Total		$	448.5			$	(279.3	)		$	169.2

There were no additions to purchased intangible assets during the three months ended March 31, 2007 and 2006, respectively.

Amortization expense of purchased intangible assets of $24.1 million and $24.6 million were included in operating expenses and cost of product revenue for the three months ended March 31, 2007 and 2006, respectively. The estimated future amortization expense of purchased intangible assets with definite lives for future periods is as follows (in millions):

Year Ending December 31,		Amount
2007 (remaining nine months)		$	67.2
2008			46.2
2009			17.9
2010			4.2
2011			2.0
Thereafter			7.6
Total		$	145.1

Note 4. Other Financial Information

Cash, Cash Equivalent and Available-For-Sale Investments

Details of the Company’s cash, cash equivalent and available-for-sale investments are as follows (in millions):

		As of
		March 31,				December 31,
		2007				2006
Cash and cash equivalents		$	2,037.8			$	1,596.3
Short-term investments			426.7				443.9
Long-term investments			259.4				574.1
Total cash, cash equivalents and available-for-sale investments		$	2,723.9			$	2,614.3

Restricted Cash

As of March 31, 2007 and December 31, 2006, restricted cash of $33.6 million and $45.6 million, respectively, consisted of escrow accounts required by certain acquisitions completed in 2005 and the Directors & Officers (“D&O”) trust. Juniper Networks established the D&O trust to secure its indemnification obligations to certain directors and officers arising from their activities as such in the event that the Company does not provide or is financially incapable of providing indemnification. During the three months ended March 31, 2007, the Company released $9.4 million from restricted cash for escrow payments associated with past acquisitions. In addition, the Company reduced its restricted cash balance related to D&O and escrow requirements by $2.8 million for the three months ended March 31, 2007.

Minority Equity Investments

As of March 31, 2007 and December 31, 2006, the carrying values of the Company’s minority equity investments in privately held companies were $20.4 million.

Other Short-Term Accrued Liabilities

Details of the Company’s other short-term accrued liabilities are as follows (in millions):

		As of
		March 31,				December 31,
		2007				2006
Accrued warranty		$	35.3			$	34.8
Income taxes payable			28.8				38.5
Other accrued liabilities			89.8				87.1
Total		$	153.9			$	160.4

Other Long-Term Accrued Liabilities

Details of the Company’s other long-term accrued liabilities are as follows (in millions):

		As of
		March 31,				December 31,
		2007				2006
Income taxes payable		$	28.3			$	—
Other accrued liabilities			16.7				17.4
Total		$	45.0			$	17.4

Warranties

Changes in the Company’s warranty reserve were as follows (in millions):

		Three Months Ended March 31,
		2007				2006
Beginning balance		$	34.8			$	35.3
Provisions made during the period			11.7				7.6
Changes in estimates			—				(1.8	)
Actual costs incurred during the period			(11.2	)			(5.3	)
Ending balance		$	35.3			$	35.8
Reported as:
Short-term		$	35.3			$	28.4
Long-term			—				7.4
Ending balance		$	35.3			$	35.8

Deferred Revenue

Details of the Company’s deferred revenue are as follows (in millions):

		As of
		March 31,				December 31,
		2007				2006
Service		$	316.8			$	282.8
Product			93.4				102.8
Total		$	410.2			$	385.6
Reported as:
Short-term		$	327.7			$	312.3
Long-term			82.5				73.3
Total		$	410.2			$	385.6

Restructuring Charges

Restructuring Accrual

The following table summarizes changes in the Company’s restructuring liabilities (in millions):

		Remaining												Remaining
		liability as of												liability as of
		December 31,				Cash								March 31,
		2006				payments				Adjustment				2007
Restructuring reserves		$	1.5			$	(0.2	)		$	—			$	1.3
Reported as:
Short-term		$	0.9			$	(0.1	)		$	—			$	0.8
Long-term			0.6				(0.1	)			—				0.5
Total		$	1.5			$	(0.2	)		$	—			$	1.3

All restructuring reserves as of March 31, 2007 and December 31, 2006 were associated with future facility charges and will be paid over the remaining respective lease term through July 2008. The difference between the actual future rent payments and the restructuring reserves will be recorded as operating expenses when incurred.

Acquisition Related Restructuring Accrual

The following table summarizes changes in the Company’s acquisition related restructuring liabilities (in millions):

		Remaining												Remaining
		liability as of												liability as of
		December 31,				Cash								March 31,
		2006				payments				Adjustment				2007
Facilities		$	3.3			$	(0.5	)		$	—			$	2.8
Severance, contractual commitments and other charges			0.3				—				—				0.3
Total		$	3.6			$	(0.5	)		$	—			$	3.1
Reported as:
Short-term		$	2.1			$	(0.2	)		$	—			$	1.9
Long-term			1.5				(0.3	)			—				1.2
Total		$	3.6			$	(0.5	)		$	—			$	3.1

Accumulated Deficit

The following table summarizes the activity in the Company’s accumulated deficit account (in millions):

		Three Months
		Ended
		Month 31, 2007
Balance, December 31, 2006		$	(1,532.2	)
Cumulative effect of adoption of FIN 48 (see Note 8)			(23.0	)
Retirement of common stock (see Note 6)			(29.1	)
Net income			66.6
Balance, March 31, 2007		$	(1,517.7	)

Stock-Based Compensation Expense

Amortization of stock-based compensation was included in the following cost and expense categories (in millions):

		Three Months Ended March 31,
		2007				2006
Cost of revenues — Product		$	0.5			$	0.5
Cost of revenues — Service			3.1				1.4
Research and development			11.0				10.0
Sales and marketing			7.6				7.6
General and administrative			3.7				3.6
Total		$	25.9			$	23.1

Other Charges

Other charges recognized consisted of the following (in millions):

		Three Months Ended March 31,
		2007				2006
Acquisition related charges		$	0.3			$	1.4
Stock option investigation costs			4.7				—
Tax related charges			7.6				—
Total		$	12.6			$	1.4

In connection with an acquisition completed in 2005, the Company recorded bonus obligation of $0.3 million and $1.4 million for the three months ended March 31, 2007 and 2006, respectively.

In the first quarter of 2007, the Company incurred $4.7 million in professional fees for the costs of external service providers used in the completion of its internal stock option investigation.

On March 12, 2007, the Company commenced a tender offer to amend certain options granted under the Juniper Networks, Inc. Amended & Restated 1996 Stock Plan and the Juniper Networks, Inc. 2000 Nonstatutory Stock Option Plan that had original exercise prices per share that were less than the fair market value per share of the common stock underlying the option on the option’s grant date, as determined by the Company for financial accounting purposes. Under this tender offer, employees subject to taxation in the United States and Canada had the opportunity to increase their strike price on affected options to the appropriate fair market value per share on the date of grant so as to avoid unfavorable tax consequences under United States Internal Revenue Code Section 409A or applicable Canadian tax laws and regulations. In exchange for increasing the strike price of these options, the Company committed to make a cash payment to employees participating in the offer so as to make employees whole for the incremental strike price as compared to their original option exercise price. In connection with the offer, the Company amended options to purchase 4.3 million shares of the Company’s common stock and committed to make aggregate cash payments of $7.6 million to offer participants. The Company accrued this aggregate cash payment liability in the three months ended March 31, 2007.

Other Comprehensive Income

Other comprehensive income is as follows (in millions):

		Three Months Ended March 31,
		2007				2006
Net income		$	66.6			$	75.8
Change in net unrealized losses on investments			1.3				(1.0	)
Change in foreign currency translation adjustment			1.0				0.8
Total comprehensive income		$	68.9			$	75.6

Derivatives

Derivatives used to mitigate transaction gains and losses generated by certain foreign currency denominated monetary assets and liabilities 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.

Derivatives used to hedge certain forecasted foreign currency transactions relating to operation expenses are designated as cash flow hedges 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 condensed consolidated statements 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 months ended March 31, 2007 and 2006, respectively, in other income (expense) in its condensed consolidated statements of operations.

Note 5. 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 March 31,
		2007				2006
Numerator:
Net income		$	66.6			$	75.8
Denominator:
Denominator for basic net income per share			569.4				566.0
Common stock equivalents from convertible debt			19.9				19.9
Common stock equivalents from employee stock awards			15.6				17.7
Denominator for diluted net income per share			604.9				603.6
Net income per share:
Basic		$	0.12			$	0.13
Diluted		$	0.11			$	0.13

Employee stock awards to purchase approximately 50,953,956 and 46,226,139 shares of the Company’s common stock in the three months ended March 31, 2007 and 2006, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise prices of those stock awards were greater than the average share price of the common shares and, therefore, the effect would have been anti-dilutive.

Note 6. Stockholders’ Equity

Stock Repurchase Activities

In July 2006, the Company’s Board approved a new stock repurchase program (“2006 Stock Repurchase Program”) authorizing the Company to repurchase up to $1.0 billion of Juniper Networks’ common stock under this program. In February 2007, the Company’s Board approved an increase of $1.0 billion under this stock repurchase program. Coupled with the prior authorization of $1.0 billion announced in July 2006, the Company is now authorized to repurchase up to a total of $2.0 billion of its common stock under the 2006 Stock Repurchase Program. Purchases under the 2006 Stock Repurchase Program will be made from time to time as permitted by securities laws and other legal requirements and will be subject to a review of the circumstances in place at the time. This program may be discontinued at any time. During the three months ended March 31, 2007, the Company repurchased 1,520,900 shares of common stock via open market purchases at an average price of $19.16 per share. The total purchase price of $29.1 million was reflected as an increase to accumulated deficits. Common stock repurchases under the program were recorded for accounting purposes based upon the settlement date of the applicable trade. Subsequent to March 31, 2007, the Company repurchased an additional 14.9 million shares of common stock for total purchase price of $320.3 million at an average price of $21.43 per share. As of the filing of this report, the 2006 Stock Repurchase Program had remaining authorized funds of $1,650.6 million and a total of 16.5 million common shares had been repurchased and retired since the inception of this program, for approximately $349.4 million at an average price of $21.22 per share.

In the three months ended March 31, 2006, the Company repurchased 10.1 million common shares at an average price of $18.51 per share as part of the $250.0 million stock repurchase program approved in July 2004 (“2004 Stock Repurchase Program”). The Company has completed the 2004 Stock Repurchase Program and repurchased a total of 12.9 million common shares since the inception of the program, for approximately $250.0 million at an average price of $19.32 per share. All common shares repurchased under this program have been retired.

Stock Option Plans

Amended and Restated 1996 Stock Plan

The Company’s Amended and Restated 1996 Stock Plan (the “1996 Plan”) provided for the granting of incentive stock options to employees and non-statutory stock options to employees, directors and consultants. On November 3, 2005, the Board adopted an amendment to the 1996 Plan to add the ability to issue RSUs under the 1996 Plan. RSUs represent an obligation of the Company to issue unrestricted shares of common stock to the grantee only when and to the extent that the vesting criteria of the award are satisfied. In the case of RSUs, vesting criteria can be based on time or other conditions specified by the Board or an authorized committee of the Board. However, until vesting occurs, the grantee is not entitled to any stockholder rights with respect to the unvested shares. The Company had authorized 164,623,039 shares of common stock for issuance under the 1996 Plan. Effective May 18, 2006, additional equity awards under the 1996 Plan have been discontinued and new equity awards are being granted under the 2006 Equity Incentive Plan (the “2006 Plan”). Remaining authorized shares under the 1996 Plan that were not subject to outstanding awards as of May 18, 2006 were canceled on May 18, 2006. The 1996 Plan will remain in effect as to outstanding equity awards granted under the plan prior to May 18, 2006.

Under the 1996 Plan, incentive stock options may not be granted at an exercise price less than the fair market value per share of the common stock on the date of grant. The Company has not granted incentive stock options since June 1999. Non-statutory stock options may be granted under the terms of the plan at an exercise price determined by the Board of Directors or a committee authorized by the Board of Directors. Vesting and exercise provisions were permitted to be determined under the terms of the plan by the Board of Directors or a committee authorized by the Board. Options granted under the 1996 Plan generally become exercisable over a four-year period beginning on the date of grant and have a maximum term of ten years. Options granted to consultants were in consideration for the fair value of services previously rendered, are not contingent upon future events and were expensed in the period of grant.

The 1996 Plan also provided for the sale of restricted shares of common stock or RSUs to employees and consultants. Shares issued to consultants were for the fair value of services previously rendered and were not contingent upon future events. Shares sold to employees were made pursuant to restricted stock purchase agreements containing provisions established by the Board or a committee authorized by the Board. These provisions give Juniper Networks the right to repurchase the shares at the original sales price upon termination of the employee. This right expires at a rate determined by the Board, generally at the rate of 25% after one year and 2.0833% per month thereafter. As of March 31, 2007, there were no shares subject to repurchase under the 1996 Plan.

2000 Nonstatutory Stock Option Plan

In July 2000, the Board adopted the Juniper Networks 2000 Nonstatutory Stock Option Plan (the “2000 Plan”). The 2000 Plan provided for the granting of non-statutory stock options to employees, directors and consultants. Non-statutory stock options may be granted under the terms of the plan at an exercise price determined by the Board or a committee authorized by the Board. Vesting and exercise provisions were permitted to be determined under the terms of the plan by the Board or an authorized committee of the Board. Options granted under the 2000 Plan generally become exercisable over a four-year period beginning on the date of grant and have a maximum term of ten years. Options granted to consultants were in consideration for the fair value of services previously rendered, were not contingent upon future events and were expensed in the period of grant. The Company had authorized 90,901,437 shares of common stock for issuance under the 2000 Plan. Effective May 18, 2006, additional equity awards under the 2000 Plan have been discontinued and new equity awards are being granted under the 2006 Plan. Remaining authorized shares under the 2000 Plan that were not subject to outstanding awards as of May 18, 2006 were canceled on May 18, 2006. The 2000 Plan will remain in effect as to outstanding equity awards granted under the plan prior to May 18, 2006.

2006 Equity Incentive Plan

On May 18, 2006, the Company’s stockholders adopted the 2006 Plan to enable the granting of incentive stock options, nonstatutory stock options, RSUs, restricted stock, stock appreciation rights, performance shares, performance units, deferred stock units or dividend equivalents to the employees and consultants of the Company. The 2006 Plan also provides for the automatic, non-discretionary award of nonstatutory stock options to the Company’s non-employee member of the Board (“outside directors”).

The maximum aggregate number of shares authorized under the 2006 Plan is 64,500,000 shares of common stock, plus the addition of any shares subject to outstanding options under the 1996 Plan and 2000 Plan that subsequently expired unexercised after May 18, 2006 up to a maximum of 75,000,000 additional shares of the common stock. Restricted stock, performance share award, or RSUs with a per share or unit purchase price lower than 100% of the fair market value of the Company’s common stock on the day of the grant shall be counted as two and one-tenth shares for every one share subject to the award. In the case of a restricted stock award, the entire number of shares subject to such award would be issued at the time of grant. Such shares could be subject to vesting provisions based on time or other conditions specified by the Board or an authorized committee of the Board. The Company would have the right to repurchase unvested shares subject to a restricted stock award if the grantee’s service to the Company terminated prior to full vesting of the award. Until repurchased, such unvested shares would be considered outstanding for dividend, voting and other purposes.

To the extent a 2006 Plan award is settled in cash rather than stock, such cash payment shall not reduce the number of shares available for issuance under the 2006 Plan. No restricted stock, stock appreciation right, deferred stock unit or dividend equivalent had been issued as of March 31, 2007. The Company had issued stock options and RSUs covering 15.6 million and 2.7 million shares of common stock, respectively, under the 2006 Plan as of March 31, 2007. In the first quarter of 2007, the Board also granted performance share awards to eligible executives covering an aggregate of up to 0.7 million shares of common stock that vest in 2010 provided certain annual performance targets and other vesting criteria are met.

Incentive stock options may not be granted at an exercise price less than the fair market value of the Company’s common stock on the date such option is granted. The exercise price of an incentive stock option granted to a 10% or greater stockholder may not be less than 110% of the fair market value of the common stock on the grant date. Vesting and exercise provisions are determined by the Board, or an authorized committee of the Board. Stock options granted under the 2006 Plan generally vest and become exercisable over a four year period. Restricted stock, performance shares, RSUs or deferred stock units that vest solely based on continuing employment or provision of services will vest in full no earlier than the three year anniversary of the grant date. In the event vesting is based on factors other than continued future provision of services, such awards will vest in full no earlier than the one year anniversary of the grant date. Options granted under the 2006 Plan have a maximum term of seven years from the grant date while incentive stock options granted to a 10% or greater stockholder have a maximum term of five years from the grant date.

The 2006 Plan provides each outside director an automatic grant of an option to purchase 50,000 shares of common stock upon the date on which such individual first becomes an outside director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy (the “First Option”). In addition, at each of the Company’s annual stockholder meetings (i) each outside director who was an outside director on the date of the prior year’s annual stockholder meeting shall be automatically granted an option to purchase 20,000 shares of common stock, and (ii) each outside director who was not an outside director on the date of the prior year’s annual stockholder meeting shall receive an option to purchase a pro-rata portion of the 20,000 shares of the common stock determined by the time elapsed since the individual’s First Option grant (“the Annual Option”). The First Option vests monthly over approximately three years from the grant date subject to the outside director’s continuous service on the Board. The Annual Option shall vest monthly over approximately one year from the grant date subject to the outsider director’s continuous service on the Board. Under the 2006 Plan, options granted to outside directors have a maximum term of seven years.

Plans Assumed Upon Acquisition

In connection with past acquisitions, the Company assumed options and restricted stock under the stock plans of the acquired companies. The Company exchanged those options and restricted stock for Juniper Networks’ options and restricted stock and, in the case of the options, reserved the appropriate number of shares of common stock for issuance pursuant to those options. As of March 31, 2007, there were approximately 7,796,000 shares subject to options outstanding under plans assumed through past acquisitions. There were no restricted stock repurchases during the first quarter of 2007. No restricted shares were subject to repurchase as of March 31, 2007.

Stock Award Activities

In the first quarter of 2007, the Company granted RSUs covering 2.0 million shares of common stock to its employees under the 2006 Plan. Such awards generally vest over a period of three or four years from the date of grant. Until vested, RSUs do not have the voting rights of common stock and the shares underlying the RSUs are not considered issued and outstanding. The Company expenses the cost of the RSUs, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse. In addition to RSUs, the Company also granted employee stock options covering 9.0 million shares of common stock under the 2006 Plan in the first quarter of 2007. No restricted stock was issued in the three months ended March 31, 2007 and 2006.

Net income for the three months ended March 31, 2007 included pre-tax stock-based compensation expense of $25.9 million related to employee stock options, RSUs, and performance share awards reflecting the fair value recognition provisions under SFAS 123R. Net income for the three months ended March 31, 2006 included pre-tax stock-based compensation expense of $23.1 million related to employee stock options, RSUs and employee stock purchases under the Company’s Employee Stock Purchase Plan reflecting the fair value recognition provisions under SFAS 123R.

A summary of the Company’s stock award activity and related information for the three-months ended March 31, 2007 is set forth in the following table:

						Outstanding Options(4)
														Weighted
										Weighted-				Average
		Shares								Average				Remaining
		Available				Number of				Exercise				Contractual				Aggregate
		For Grant(1)				Shares				Price				Term				Intrinsic Value
		(In thousands)				(In thousands)				(In dollars)				(In years)				(In thousands)
Balance at January 1, 2007			60,542				82,092			$	18.66
RSUs and performance share awards granted(2)			(4,161	)			—				—
Options granted			(9,047	)			9,047				18.61
RSUs canceled			31				—				—
Options canceled(3)			810				(890	)			17.71
Options exercised			—				(1,915	)			10.51
Options expired(3)			1,051				(1,082	)			23.34
Balance at March 31, 2007			49,226				87,252			$	18.79				5.9			$	329,056

A summary of the Company’s vested or expected-to-vest options and exercisable options as of March 31, 2007 is set forth in the following table:

Weighted

Weighted-

Average

Average

Remaining

Number of

Exercise

Contractual

Aggregate

Shares

Price

Term

Intrinsic Value

(In thousands)

(In dollars)

(In years)

(In thousands)

Vested or expected-to-vest options

81,781

$

18.83

5.9

$

318,800

Exercisable options

62,981

19.06

5.6

280,588

As of March 31, 2007, options covering approximately 63 million shares of common stock were exercisable at a weighted average exercise price of $19.06 per option. As of March 31, 2006, options covering approximately 65 million shares of common stock were exercisable at a weighted average exercise price of $18.88 per option.

Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $19.68 as of March 31, 2007, and the exercise price multiplied by the number of related options. The pre-tax intrinsic value of options exercised, representing the difference between the fair market value of the Company’s common stock on the date of the exercise and the exercise price of each option, was $16.4 million for the three months ended March 31, 2007.

Total fair value of options that vested during the three months ended March 31, 2007 was $26.2 million. As of March 31, 2007, approximately $155 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 3 years. Approximately $39.5 million of the total unrecognized compensation cost is estimated to be forfeited prior to the vesting of such awards and has been excluded from the preceding cost.

Restricted Stock Units Activities

The following schedule summarizes information about the Company’s RSUs as of March 31, 2007:

Weighted-

Weighted-

Average

Average

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Shares

Price

Term

Value

(In thousands)

(In dollars)

(In years)

(In thousands)

Shares subject to outstanding RSUs

5,102

$

—

1.9

$

100,419

Vested and expected to vest RSUs

3,702

—

1.8

72,850

None of the outstanding RSUs were vested or exercisable as of March 31, 2007. The shares subject to these outstanding RSUs has been deducted from the shares available for grant under the Company’s stock option plans. RSUs and performance share awards with a per share or unit purchase price lower than 100% of the fair market value of the Company’s common stock on the day of the grant under the 2006 Plan are counted as two and one-tenth shares of common stock for each share subject to such award. The weighted average grant date fair value of restricted stock units granted during the first three months of 2007 and 2006 was $18.46 and $18.96, respectively. As of March 31, 2007, approximately $69 million of total unrecognized compensation cost related to RSUs is expected

to be recognized over a weighted-average period of 2.8 years. Approximately $20 million of the total unrecognized compensation cost is estimated to be forfeited prior to the vesting of such awards.

Employee Stock Purchase Plan

In April 1999, the Board of Directors approved the adoption of Juniper Networks 1999 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan permits eligible employees to acquire shares of the Company’s common stock through periodic payroll deductions of up to 10% of base compensation. Each employee may purchase no more than 6,000 shares in any twelve-month period, and in no event, may an employee purchase more than $25,000 worth of stock, determined at the fair market value of the shares at the time such option is granted, in one calendar year. The Purchase Plan is implemented in a series of offering periods, each six months in duration, or a shorter period as determined by the Board. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company’s common stock on the first day of the applicable offering period or on the last day of the applicable offering period. On December 16, 2005, the Board amended the Company’s ESPP to eliminate the ability of a participant under the ESPP to increase the rate of each employee’s payroll deductions during any offering period (as defined in the ESPP). This change was effective beginning with the offering period commencing on February 1, 2006. The Company had suspended its employee payroll withholdings for the purchase of its common stock under the ESPP offering period from August 2006 through January 31, 2007. In January 2007, the Board of Directors approved a delay of the start of next offering period from February 1, 2007 to April 1, 2007 (such offering period will end on July 31, 2007). No pre-tax compensation expense was recorded in the first three months of 2007 related to the stock issued under ESPP due to the temporary suspension of the plan. As of March 31, 2007, approximately 6,490,500 shares had been issued and 11,509,510 shares remained available for future issuance under the ESPP.

Valuation of Stock-Based Compensation

SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes-Merton option-pricing model, which incorporates various assumptions including volatility, expected life, and risk-free interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, adjusted for other relevant factors including implied volatility of market traded options on the Company’s common stock. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees, as well as the potential effect from options that had not been exercised at the time.

Since 2006, the Company has granted stock option awards that have a contractual life of seven years from the date of grant. Prior to 2006, stock option awards generally had a ten year contractual life from the date of grant. As a result, the expected term assumption used in the first three months of 2007 and 2006 reflected the shorter contractual life of the new option awards granted during the period.

The assumptions used and the resulting estimates of weighted-average fair value per share of awards granted and employee stock purchases under the ESPP during those periods were:

		Three Months Ended March 31,
		2007				2006
Employee Stock Options:
Volatility factor			40	%			39	%
Risk-free interest rate			4.6	%			4.6	%
Expected life (years)			3.7				3.5
Dividend yield			—				—
Weighted-average fair value per share		$	6.6			$	6.4
Employee Stock Purchase Plan:
Volatility factor			—				33	%
Risk-free interest rate			—				3.7	%
Expected life (years)			—				0.5
Dividend yield			—				—
Weighted-average fair value per share		$	—			$	5.9

Extension of Stock Option Exercise Periods for Former Employees

The Company could not issue any securities under its registration statements on Form S-8 during the period in which it was not current in its SEC reporting obligations to file periodic reports under the Securities Exchange Act of 1934. As a result, during parts of 2006 and 2007, options vested and held by certain former employees of the Company could not be exercised until the completion of the Company’s stock option investigation and the Company’s public filings obligations had been met (the “trading black-out period”). During the three months ended March 31, 2007, options covering approximately 660,000 shares of common stock were scheduled to expire and could not be exercised as a result of the trading black-out period restriction. The Company extended the expiration date of these stock options to April 9, 2007, the end of a 30–day period subsequent to the Company’s filing of its required regulatory reports. As a result of the modification, the fair value of such stock options have been reclassified to current liabilities subsequent to the modification and are subject to mark-to-market provisions at the end of each reporting period until the earlier of final settlement or April 9, 2007. The Company measured the fair value of these stock options using the Black-Scholes-Merton option valuation model and recorded approximately $4.3 million during the three months ended March 31, 2007. In addition, the Company also recorded $4.4 million associated with the approximately 1,446,000 shares covered by such options which had exercise periods extended in 2006 as a result of the trading black-out period restriction. As of March 31, 2007, the Company had an aggregate fair value of approximately $2.8 million within current liabilities in connection with all of such extended options. Any changes to the fair values of these options between April 1, 2007 and final settlement or expiration on April 9, 2007 will be expensed in the Company’s condensed consolidated statements of operations in the second quarter of 2007.

Note 7. Operating Segments

The Company’s chief operating decision maker (“CODM”) and senior management team (together “management”) allocate resources and assess performance based on financial information by categories of products and by service.

The Infrastructure segment includes products from the E-, M- and T-series router product families as well as the circuit-to-packet products and SBC products. The SLT segment consists primarily of firewall and virtual private network (“VPN”) systems and appliances, secure sockets layer (“SSL”) VPN appliances, intrusion detection and prevention appliances (“IDP”), application front end platforms, the J-series router product family, Odyssey products and wide area network (“WAN”) optimization platforms. Prior to 2007, the SLT segment included security products and application acceleration reporting units. Beginning in 2007, the Company no longer segregates the two reporting units within the SLT segment. The Service segment delivers world-wide services to customers of the Infrastructure and the SLT segments.

The primary financial measure used by the management in assessing performance and allocating resources to the segments is management operating income, which includes certain cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses. Direct costs, such as standard costs, research and development and product marketing expenses, are generally applied directly to each operating segment. Indirect costs, such as manufacturing overhead and other cost of sales, are allocated based on standard costs. Indirect operating expenses, such as sales, marketing, business development, and general and administrative expenses are generally allocated to each operating segment based on factors including headcount and revenue.

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

		Three Months Ended March 31,
		2007				2006*
Net revenues:
Infrastructure		$	385.2			$	363.0
Service Layer Technologies			124.5				111.1
Service			117.2				92.6
Total net revenues			626.9				566.7
Operating income:
Management operating income:
Infrastructure			101.5				119.1
Service Layer Technologies			(8.3	)			(3.8	)
Service			29.9				24.7
Total management operating income			123.1				140.0
Amortization of purchased intangible assets			(24.1	)			(24.6	)
Stock-based compensation expense			(25.9	)			(23.1	)
Other charges			(12.6	)			(1.4	)
Total operating income			60.5				90.9
Interest and other income			34.0				20.8
Interest and other expense			(1.1	)			(1.1	)
Income before income taxes		$	93.4			$	110.6

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

		Three Months Ended March 31,
		2007				2006
Americas:
United States		$	279.5			$	241.1
Other			15.9				19.0
Total Americas			295.4				260.1
Europe, Middle East and Africa			209.4				201.8
Asia Pacific			122.1				104.8
Total		$	626.9			$	566.7

Siemens and Verizon individually accounted for 12% and 16% of the Company’s net revenues for the three months ended March 31, 2007, respectively. Siemens and Lucent individually accounted for 15% and 10% of the Company’s net revenues for the three months ended March 31, 2006, respectively. The revenue attributed to each 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, were attributable to its U.S. operations as of March 31, 2007 and December 31, 2006.

Note 8. Income Taxes

The Company recorded tax provisions of $26.8 million and $34.8 million for the three months ended March 31, 2007 and 2006, respectively. The Company’s effective tax rate was approximately 29% and 32% for the three months ended March 31, 2007 and 2006, respectively. The 2007 rate differs from the federal statutory rate primarily due to income earned in foreign jurisdictions which are subject to lower rates and research and development credits in the United States. The 2007 rate differs from the 2006 rate primarily due to the extension of the federal research and development credit, which did not occur until the fourth quarter of 2006. The Company’s income taxes currently payable for federal and state purposes have been reduced by the tax benefit from employee stock option transactions. This benefit totaled $2.3 million for the three months ended March 31, 2007 and was reflected as an increase to additional paid-in capital.

The Company adopted the provisions of FIN 48, on January 1, 2007, the first day of fiscal 2007. The cumulative effect of applying FIN 48 was a $23.0 million increase to the opening balance of accumulated deficit and a $1.0 million increase to goodwill. The total amount of gross unrecognized tax benefits as of March 31, 2007 was $90.0 million. Included in the balance as of March 31, 2007 were approximately $75 million of unrecognized tax benefits that, if recognized, would affect the effective tax rate. The recognition of the remaining unrecognized tax benefits would affect goodwill for resolution of uncertain tax positions related to pre-acquisition periods. With the exception of the Internal Revenue Service’s (“IRS”) audit of our 1999 — 2000 federal income tax returns referenced below, the Company currently is not under examination by any major jurisdictions in which the Company files its income tax returns. It is possible that the amount of the liability for unrecognized tax benefits, including the unrecognized tax benefit position related to the IRS audit referenced below may change within the next 12 months. However, an estimate of the range of possible change cannot be made at this time.

In accordance with the Company’s accounting policy, it recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48. The Company had accrued interest expense and penalties of $4.1 million as of the date of adoption of FIN 48.

The change in total gross unrecognized tax benefits for the three months ended March 31, 2007 and the interest and penalties incurred for the same period were immaterial.

The Company conducts business globally and, as a result, Juniper Networks or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Ireland, Hong Kong, U.K. France, Germany, The Netherlands, Japan, China, Australia, and the U.S. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2003, although carryforward attributes that were generated prior to 2003 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period.

The 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 Condensed 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 were examined 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 agreed to settle this issue with the IRS through the appeals process for approximately $2.7 million, and the Company had fully accrued for this liability in its condensed consolidated balance sheet as of March 31, 2007. The Company expects to make the payment in the second quarter of 2007.

Note 9. Commitments and Contingencies

Commitments

The following table summarizes the Company’s principal contractual obligations as of March 31, 2007 (in millions):

		Total				2007				2008				2009				2010				2011				Thereafter
Operating leases, net of committed subleases		$	175.4			$	31.4			$	35.0			$	28.1			$	25.5			$	21.9			$	33.5
Senior Notes			399.9				—				399.9				—				—				—				—
Purchase Commitments			112.2				112.2				—				—				—				—				—
Other Contractual Obligations			22.0				12.0				5.0				5.0				—				—				—
Total		$	709.5			$	155.6			$	439.9			$	33.1			$	25.5			$	21.9			$	33.5

Operating Leases

Juniper Networks leases its facilities under operating leases that expire at various times, the longest of which expires in 2016. Future minimum payments under the non-cancelable operating leases, net of committed subleases, totaled $175.4 million as of March 31, 2007. Rent and related expenses paid to a related party was $1.0 million and $1.1 million for the three months ended March 31, 2007 and 2006, respectively.

Senior Notes

As of March 31, 2007, the Company’s Zero Coupon Convertible Senior Notes (“Senior Notes”) had a carrying value of $399.9 million. The Senior Notes are due on June 15, 2008.

Purchase Commitments

The Company does not have firm purchase commitments with its contract manufacturers. In order to reduce manufacturing lead times and ensure adequate component supply, the contract manufacturers place non-cancelable, non-returnable (“NCNR”) orders, which were valued at $112.2 million as of March 31, 2007, based on the Company’s build forecasts. The Company does not take ownership of the components and the NCNR orders do not represent firm purchase commitments pursuant to Juniper Networks’ agreements with the contract manufacturers. The components are used by the contract manufacturers to build products based on purchase orders the Company has received from its customers or its forecast. The Company may incur a liability for products built by the contract manufacturer if the components go unused for specified periods of time and, in the meantime, the Company may be assessed carrying charges. As of March 31, 2007, the Company had accrued $21.7 million based on its estimate of such charges.

Other Contractual Obligations

As of March 31, 2007, other contractual obligations consisted primarily of the escrow amount of $10.4 million in connection with past acquisitions for indemnity obligations expiring in 2007. Earn-out and bonus obligations of $1.6 million may be payable to certain former employees of acquired companies through the fourth quarter of 2007 and, to the extent paid, will be recorded as compensation expense ratably over the periods in which the payouts are measured. The Company had accrued $0.8 million for its earn-out and bonus obligations as of March 31, 2007.

In the three months ended March 31, 2007, the Company entered into an agreement to purchase time-based technology subscription licenses of certain software products. In connection with this licensing agreement, the Company will pay $5.0 million in January 2008 and another $5.0 million in January 2009 in addition to the prepaid amount as of March 31, 2007. The total cost of this licensing agreement will be amortized ratably over the subscription period.

As of March 31, 2007, the Company had $28.3 million of long-term liabilities in its condensed consolidated balance sheet for unrecognized tax positions. However, the periods of cash settlement with the respective tax authority cannot be reasonably estimated.

Guarantees

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 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 guarantee and indemnification 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.

Legal Proceedings

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. Although the Company does not expect that any such legal claims or litigation will ultimately have a material adverse effect on its consolidated financial position or results of operations, an adverse result in one or more matters could negatively affect the Company’s results in the period in which they occur.

Stock Option Lawsuits

Federal Derivative Lawsuits

Between May 24, 2006 and August 17, 2006, seven purported shareholder derivative actions were filed in the United States District Court for the Northern District of California against the Company and certain of its current and former officers and directors. The lawsuits allege that the Company’s officers and directors either participated in illegal back-dating of stock option grants or allowed it to happen. On October 19, 2006, the Court ordered the consolidation of these actions as In Re Juniper Derivative Actions, No. 06-03396, and appointed as the lead plaintiffs Timothy Hill, Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund, and Indiana State District Council of Laborers and HOD Carriers Pension Fund. Lead plaintiffs filed a consolidated complaint on April 11, 2007. The consolidated complaint asserts causes of action for violations of federal securities laws, violations of California securities laws, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, abuse of control, corporate waste, breach of contract, unjust enrichment, gross mismanagement, and insider selling and misappropriation of information. The consolidated complaint also demands an accounting and rescission of allegedly improper stock option grants. Defendants’ response to the consolidated complaint is due on May 29, 2007.

State Derivative Lawsuits — California

On May 24 and June 2, 2006, two purported shareholder derivative actions were filed in the Santa Clara County Superior Court in the State of California against the Company and certain of its current and former officers and directors. These two actions were consolidated as In re Juniper Networks Derivative Litigation, No. 1:06CV064294, by order dated June 20, 2006. An amended consolidated complaint was filed on April 9, 2007. The amended consolidated complaint alleges that certain of the Company’s current

and former officers and directors either participated in illegal back-dating of stock options or allowed it to happen. The complaint asserts causes of action for unjust enrichment, breach of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, insider selling and misappropriation of information, and violations of California securities laws. Plaintiffs also demand an accounting and rescission of allegedly improper stock options grants, and a constructive trust of proceeds derived from illicit stock options. Pursuant to a stipulation between the parties dated April 9, 2007, which is subject to court approval, Defendants’ response to the amended consolidated complaint is due on May 24, 2007.

Federal Securities Class Action

On July 14, 2006 and August 29, 2006, two purported class actions were filed in the Northern District of California against the Company and certain of its current and former officers and directors. On November 20, 2006, the Court consolidated the two actions as In re Juniper Networks, Inc. Securities Litigation, No. C06-04327-JW, and appointed the New York City Pension Funds as lead plaintiffs. The lead plaintiffs filed a Consolidated Class Action Complaint on January 12, 2007, and filed an Amended Consolidated Class Action Complaint on April 9, 2007. The Amended Consolidated Complaint alleges that the defendants violated federal securities laws by manipulating stock option grant dates to coincide with low stock prices and issuing false and misleading statements including, among others, incorrect financial statements due to the improper accounting of stock option grants. The Amended Consolidated Complaint asserts claims for violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 on behalf of all persons who purchased or otherwise acquired Juniper Networks’ publicly traded securities from July 12, 2001 through and including August 10, 2006.

Calamore Proxy Statement Action

On March 28, 2007 an action titled Jeanne M. Calamore v. Juniper Networks, Inc., et al., No. C-07-1772-JW, was filed by Jeanne M. Calamore in the Northern District of California against the Company and certain of its current and former officers and directors. The complaint alleges that the proxy statement for the Company’s 2006 Annual Meeting of Stockholders contained various false and misleading statements in that it failed to disclose stock option backdating information. As a result, plaintiff seeks preliminary and permanent injunctive relief with respect to the Company’s 2006 Equity Incentive Plan, including seeking to invalidate the plan and all equity awards granted and grantable thereunder.

Other Matters

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”), Juniper Networks and certain of Juniper Networks’ officers. This action was brought on behalf of purchasers of the Company’s common stock in its 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 the Company’s 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 issuer defendants, 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 $1.0 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. On August 31, 2005, the Court confirmed preliminary approval of the settlement. On April 24, 2006, the Court held a fairness hearing in connection with the motion for final approval of the settlement. The Court did not issue a ruling on the motion for final approval at the fairness hearing. The settlement remains subject to a number of conditions, including final court approval. On December 5, 2006, the Court of Appeals for the Second Circuit reversed the Court’s October 2004 order certifying a class in the case against the Company, which along with five other issuers, was selected as a test case by the underwriter defendants and plaintiffs in the coordinated proceeding. It is unclear what impact this will have on the settlement and the case against the Company.

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 infringed several Toshiba patents, and seeking an injunction and unspecified damages. A Markman hearing was held in April 2006, and a ruling favorable to the Company was issued on June 28, 2006. Toshiba stipulated to non-infringement of the asserted patents and filed a notice of appeal with the Court of Appeals for the Federal Circuit. The Delaware court has removed the trial, previously scheduled for August 2006, from its calendar, pending resolution of the appeal. The Company expects the appeal will not be heard before July 2007. The trial is no longer on the Delaware court’s calendar.

IRS Notices of Proposed Adjustments

The 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 does not believe that the outcome of this matter will have a material adverse effect on the Company’s consolidated financial position or results of operations. The Company is also under routine examination by certain state and non-US tax authorities. The Company believes that it has adequately provided for any reasonably foreseeable outcome related to these audits.

In conjunction with the IRS income tax audit, certain of the Company’s US payroll tax returns were examined 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 agreed to settle this issue with the IRS through the appeals process for approximately $2.7 million, and had fully accrued for this liability in its financial statements as of March 31, 2007. The Company expects to make the payment in the second quarter of 2007.

Note 10. Related Party Transactions

The Company reimburses its CEO, Mr. Scott Kriens, for ordinary operating costs relating to his use of a personal aircraft for business purposes up to a maximum amount per year. The Company incurred $0.1 million in related expenses in each of the three months ended March 31, 2007, and 2006.

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 “Risk Factors” in Item 1A of Part II 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 included elsewhere in this report, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the manufacturing and shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory and spare parts, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. On an on-going basis, we evaluate our estimates, including those related to sales returns, pricing credits, 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, assumptions used in the valuation of stock-based compensation, 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

Executive Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to aid readers of our financial statements in understanding our operating results for the three months ended March 31, 2007 and 2006. We have provided below an overview of the significant events and an analysis of the nature of our revenues and operating expenses in the current quarter and comparable period in the prior year.

	•		Our net revenues for the three months ended March 31, 2007 were $626.9 million an increase of 11% from the same period in 2006. Our Infrastructure products revenue increased 6%, Service Layer Technologies (“SLT”) product revenue increased 12% and service revenue increased 27%, in each case compared to the comparable three month period in 2006. Our increases in revenues were attributable to the growing acceptance of our router and security products and services, and the timing of product revenue recognition on certain arrangements. We see continued acceptance of our newer products, particularly our E320, M120, SSG and ISG products. We had our first shipment of MX routers in the first quarter of 2007. Deferred product revenues decreased $9.4 million in the three months ended March 31, 2007 primarily due to the recognition of revenues related to product shipments to one customer that were deferred in 2006, partially offset by product revenue deferrals in the first quarter of 2007. Our deferred service revenue increased $34.0 million in the three months ended March 31, 2007 primarily due to the renewal of annual maintenance arrangements.
	•		Our gross margin rate decreased 1% to 66% in the three months ended March 31, 2007 compared to 67% in the comparable period in 2006. This change is, in large part, due to the mix of products sold in the current period compared to the same period in the prior year.
	•		Operating income decreased $30.4 million while net income decreased $9.1 million in the first quarter of 2007 compared to the first quarter of 2006 primarily because we invested heavily in research and development efforts and expanded our existing service provider and enterprise sale force. The increased research and development expense was a direct result of our desire to accelerate feature development on existing products and continued expansion of our product portfolio. Additionally, we completed our stock option investigation. In the three months ended March 31, 2007, we recorded stock option investigation costs of $4.7 million and recognized related tax expenses of $7.6 million in additional expenses.

•

Additionally, we expanded our share repurchase program as the Board of Directors approved an additional $1.0 billion of share repurchases in February 2007, bringing the total authorized amount under this program to $2.0 billion. We repurchased approximately 1.5 million shares in the first quarter of 2007 at an average purchase price of $19.16 for an aggregate purchase price of $29.1 million. We will seek to make additional purchases in the future as permitted by securities laws and other legal requirements. This program may be discontinued at any time.

Business Overview

We design and sell hardware and software products and services that together provide our customers with secure and assured Internet Protocol (“IP”) networking solutions. Our purpose-built, high performance IP platforms enable customers to support many different networking and security services and applications at scale. Service providers, enterprises, governments and research and education institutions worldwide rely on us to deliver products for building networks that are tailored to the specific needs of their users, services and applications. Our portfolio of networking and security solutions supports the complex scale, security and performance requirements of many of the world’s most demanding networks. We sell our products and services through our direct sales organization, value-added resellers and distributors to end-users in the service provider and enterprise markets. Our operations are organized into the following three operating segments:

	•		Infrastructure: Our Infrastructure segment primarily offers scalable router products that are used to control and direct network traffic. This control is made more important due to the increasing size and complexity of IP networks at a time when service providers are looking to differentiate their organizations through value-added service offerings. In addition we announced a portfolio of Session and Resource Control (“SRC”) solutions for setting and controlling network policy. These products provide the intelligence service providers need to help ensure a high quality user experience for multi-play and mobile services. Customers continued to demand scalable and reliable policy control solutions which we provide through our IP infrastructure solutions.
	•		SLT: Our SLT segment offers solutions that meet a broad array of our customer’s critical information management needs. Our products help to enable customers in protecting their information network, protecting data on the network, maximizing existing bandwidth and accelerating applications across a distributed network. Our secure networking solutions empower customers to convert commoditized, best effort networks, into market differentiated, value-added services with increased reliability and security to end users.
	•		Service: Our Service segment delivers world-wide technical support, professional and educational services to customers of the Infrastructure and SLT segments. During the first quarter of 2007, we focused on continued product innovation in the core and edge router markets and expanded our product offerings. We emphasized our focus on customer services to better meet our customers’ needs.

Of the total net revenue for the first quarter of 2007, Infrastructure represented 61% of revenue, SLT represented 20% of revenue and Services comprised the remaining 19% of revenue. From a geographic perspective, the Americas region represented 47% of the total revenue Europe, Middle East and Africa (EMEA) contributed 33% and the remaining 20% of revenue was generated in the Asia Pacific (APAC) region.

Stock Repurchase Activity

In the three months ended March 31, 2007, we repurchased and retired 1.5 million common shares at an average price of $19.16 per share for a total of $29.1 million as part of our common stock repurchase program. We have continued to purchase shares under this program subsequent to March 31, 2007. As of the filing of this report, our 2006 Stock Repurchase Program had remaining authorized funds of $1,650.6 million and a total of 16.5 million common shares had been repurchased and retired since the inception of this program, for approximately $349.4 million at an average price of $21.22 per share.

Stock Option Investigation and Tender Offer

In the first quarter of 2007, we completed the restatement of our historical financial statements as a result of our independent stock option investigation and review of historical stock compensation practices. In addition, we regained compliance with listing standards of the NASDAQ Global Select Market. We recorded $4.7 million in expense during the three months ended March 31, 2007 in connection with this stock option investigation.

On March 12, 2007, we commenced a tender offer to amend certain options granted under the Juniper Networks, Inc. Amended & Restated 1996 Stock Plan and the Juniper Networks, Inc. 2000 Nonstatutory Stock Option Plan that had original exercise prices per share that were less than the fair market value per share of the common stock underlying the option on the option’s grant date, as determined by us for financial accounting purposes. Under this tender offer, employees subject to taxation in the United States and Canada had the opportunity to increase their strike price on affected options to the appropriate fair market value per share on the date of grant so as to avoid unfavorable tax consequences under United States Internal Revenue Code Section 409A or Canadian tax laws and regulations. In exchange for increasing the strike price of these options, we committed to make a cash payment to employees participating in the offer so as to make employees whole for the incremental strike price as compared to their original option exercise price. In connection with the offer, we amended options to purchase 4.3 million shares of our common stock and committed to make aggregate cash payments of $7.6 million to offer participants. We accrued this aggregate payment liability in the first quarter of 2007.

Adoption of FIN 48

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) on January 1, 2007, the first day of fiscal 2007. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The cumulative effect of applying FIN 48 was a $23.0 million increase to the opening balance of accumulated deficit and a $1.0 million increase to goodwill.

Backlog

Our sales are made primarily pursuant to standard purchase orders for delivery of products or services or purchase orders under framework agreements with our customers. At any given time, we have orders for products that have not been shipped and for services that have not yet been performed for various reasons. Because of industry practice that allows customers to cancel or change orders with limited advance notice prior to shipment or performance, as well as our own history of allowing such changes and cancellations, we do not consider this backlog to be firm.

Nature of Expenses

We have continued to expand our extensive distribution channel in an effort to target new customers and increase sales. We have made substantial investments in our distribution channel and customer service offerings.

Most of our manufacturing, repair and supply chain operations are outsourced to independent contract manufacturers. Accordingly, most of our costs of revenues consist 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. Key controls around manufacturing, engineering and documentation are conducted at our facilities in Sunnyvale, California and Westford, Massachusetts. Our independent contract manufacturers have facilities primarily in Canada, China, Malaysia, and the United States. We generally do not own the components and title to products transfers from the contract manufacturers to us and immediately to our customers upon shipment.

The contract manufacturers procure components based on our build forecasts. 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.

Employee related costs have historically been the primary driver of our operating expenses and we expect this trend to continue. These costs include items such as wages, stock-based compensation, commissions, bonuses, vacation, benefits, travel and the related facility and information technology department costs. We increased our headcount to 5,099 employees as of March 31, 2007 from 4,164 employees as of March 31, 2006 due primarily to increases in research and development, sales and customer service activities.

Facility and information technology departmental costs are allocated to other departments based on factors including headcount and revenue. These departmental costs have increased in each of the last two years due to increases in headcount and facility leases resulting from acquisitions and additional internal systems to support our growth. Our capital spending increased by $14.1 million in the three months ended March 31, 2007 compared to the same period in 2006 due to the continued building of our domestic and international development and test centers and applications to support our internal operations. We expect our capital spending to increase in the future.

Research and development expenses include costs of developing our products from components to prototypes to finished products, outside services for services such as certifications of new products and expenditures associated with equipment used for testing. 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 efforts throughout 2007 in order to further advance our competitive advantage and broaden our product offering.

Sales and marketing expenses include costs for building customer relationships, 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 continue to develop our distribution channel in 2007 in an effort to expand and grow our presence in new markets, serving both private and public networks with a full portfolio of networking products.

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

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity at the date of the financial statements and the reported amounts of net revenue, costs and expenses in the reporting period. We regularly evaluate our estimates and assumptions. We base our estimates and assumptions on current facts, historical experience and various other factors 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. Our actual results may differ materially and adversely from management’s estimates. To the extent there are material differences between our estimates and the actual results, our future operating results will be affected.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements:

	•		Revenue Recognition;
	•		Allowance for Doubtful Accounts;
	•		Purchase Commitments;
	•		Warranty Reserve;
	•		Goodwill and Purchased Intangible Assets;
	•		Stock-Based Compensation;
	•		Income Taxes;
	•		Litigation and Settlement Costs; and
	•		Loss Contingencies.

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

Management believes that there have been no other significant changes during the three months ended March 31, 2007 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, 2006.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Condensed Financial Statements in Item 1 for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.

Results of Operations

Net Revenues

The following table shows product and service net revenues (dollars in millions):

		Three Months Ended March 31,
						% of Net								% of Net								%
		2007				Revenues				2006				Revenues				$ Change				Change
Net revenues:
Product		$	509.8				81	%		$	474.1				84	%		$	35.7				8	%
Service			117.1				19	%			92.6				16	%			24.5				27	%
Total net revenues		$	626.9				100	%		$	566.7				100	%		$	60.2				11	%

Net Product Revenues

Net product revenues increased $35.7 million or 8% in the three months ended March 31, 2007 compared to the same period in 2006 primarily as a result of continued acceptance of our product portfolio by both enterprise and service provider customers. We continued to support service provider customers as they transition to next generation network (“NGN”) infrastructures. In addition, we were able to provide scalable solutions for our customers that are providing services to support increasing demands for bandwidth. We also continued to enable enterprise customers to redesign their networks and increase performance, security and meet government mandates. The increases were also due to the recognition of revenues related to product shipments to one customer that were deferred in 2006, partially offset by product revenues deferred in the first quarter of 2007.

Infrastructure product revenues were $385.2 million for the three months ended March 31, 2007, a $22.2 million increase compared to the same period in 2006. SLT product revenues were $124.5 million for the three months ended March 31, 2007, a $13.4 million increase compared to the same period in 2006. An analysis of the change in revenue by Infrastructure and SLT segments and the change in product units, can be found below in the section titled “Segment Information.”

Net Service Revenues

Net service revenues were $117.1 million in the three months ended March 31, 2007, an increase of $24.6 million compared to the same period in 2006, which was primarily due to an increase in our installed base of customers. A majority of our service revenue is earned from customers who purchase our products and enter into service contracts for support service. In addition to service contracts, we also provide educational services and other professional services.

Total Net Revenues

The following table shows the total net revenues by geographic region (dollars in millions):

		Three Months Ended March 31,
						% of Net								% of Net								%
		2007				Revenues				2006				Revenues				$ Change				Change
Americas:
United States		$	279.5				45	%		$	241.1				43	%		$	38.4				16	%
Other			15.9				2	%			19.0				3	%			(3.1	)			(16	%)
Total Americas			295.4				47	%			260.1				46	%			35.3				14	%
Europe, Middle East, and Africa (EMEA)			209.4				33	%			201.8				36	%			7.6				4	%
Asia Pacific			122.1				20	%			104.8				18	%			17.3				17	%
Total		$	626.9				100	%		$	566.7				100	%		$	60.2				—

Net revenue in the Americas region as a percentage of total net revenue increased in the first three months of 2007 compared to the same period in 2006 primarily due to increased sales of our core routers to the service provider market in the United States as our customers continued to focus on increasing network performance, reliability and scale. Net revenue in EMEA increased in the first three months of 2007 compared to the same period in 2006 primarily due to strength across the region driven by the IPTV demands and NGN build-outs. Net revenue in EMEA as a percentage of total net revenue decreased in the 2007 period compared to the 2006 period due to the relative strength in the Americas and Asia Pacific regions. Net revenue in Asia Pacific countries increased, in absolute dollars and as a percentage of net revenue, in the first three months of 2007 compared to the same period in 2006 primarily due to growth in India and Korea with additional strength in Australia, Singapore and Vietnam.

Siemens and Verizon each accounted for greater than 10% of our net revenues during the three months ended March 31, 2007. Siemens and Lucent each accounted for greater than 10% of our net revenues during the same period in 2006.

Cost of Revenues

The following table shows cost of product and service revenues and the related gross margin (“GM”) percentages (dollars in millions):

		Three Months Ended March 31,
																						% GM
		2007				GM %				2006				GM %				$ Change				Change
Cost of revenues:
Product		$	154.9				70	%		$	140.9				70	%		$	14.0				—
Service			57.2				51	%			44.0				53	%			13.2				(2	%)
Total cost of revenues		$	212.1				66	%		$	184.9				67	%		$	27.2				(1	%)

Cost of product revenues increased $14.0 million in the three months ended March 31, 2007 compared to the same period in 2006, while product gross margin remained at 70%. The increase in absolute dollars was primarily due to higher standard costs corresponding to our increases in product revenues. As we have expanded our market share and entered more markets, we have continued to experience increased competition. However, our product revenues and product gross margin increased in absolute dollars and our product gross margins percentage have remained relatively steady compared to the year-ago period. Product gross margin remained unchanged primarily due to product mix and our focusing on reducing manufacturing costs. Despite the increased complexity of our products and the administrative costs associated with additional contract manufacturers, our product gross margin remained steady as we benefited from reduced costs by moving a substantial portion of our contract manufacturing from North America to China. As of March 31, 2007 and 2006, we employed 161 and 140 people, respectively, in our manufacturing and operations organization that primarily manage relationships with our contract manufacturers, manage our supply chain, and monitor and manage product testing and quality.

Cost of service revenues increased $13.2 million in the three months ended March 31, 2007 from the comparable period in 2006 while service gross margin declined by two percentage point in the 2007 period. The increase in cost of service revenues was due to our effort to grow the customer service business and add infrastructure in order to create a world-class customer service operation and match the services offered by our competitors. Expense allocated to cost of service increased in the connection with the growth of service business as a portion of our overall operations.

Operating Expenses

The following table shows operating expenses (dollars in millions):

		Three Months Ended March 31,
						% of Net								% of Net
		2007				Revenues				2006				Revenues				$ Change				% Change
Research and development		$	141.1				23	%		$	113.7				20	%		$	27.4				24	%
Sales and marketing			150.7				24	%			129.4				23	%			21.3				16	%
General and administrative			27.3				4	%			23.1				4	%			4.2				18	%
Amortization of purchased intangible assets			22.7				4	%			23.2				4	%			(0.5	)			(2	%)
Other charges			12.6				2	%			1.4				—				11.2				800	%

Research and development expenses increased $27.4 million in the three months ended March 31, 2007 compared to the same period in 2006. The increase was primarily due to strategic initiatives to expand our product portfolio and maintain our technological advantage over competitors. Research and development expenses primarily consist of personnel related expenses, support costs, equipment costs and stock-based compensation expense. Personnel related charges, consisting of salaries, bonus, and fringe benefits expenses, increased $17.5 million due to an increase in headcount, from 1,707 to 2,210 people in the engineering organization to support product innovation intended to capture anticipated future network infrastructure growth and opportunities in the enterprise market. Additionally, facilities, information technology, depreciation and equipment expenses increased $9.6 million to support these engineering efforts.

Sales and marketing expenses increased $21.3 million in the three months ended March 31, 2007 compared to the same period in 2006. The increase was primarily due to increases in personnel related expenses and marketing expenses. Personnel related charges, consisting of salaries, commissions, bonus, and fringe benefits expenses, increased $19.2 million due to an increase in headcount, from 1,452 to 1,633 people in our worldwide sales and marketing organizations. Included in the personnel changes was an increase in commission expense of $8.1 million for the three months ended March 31, 2007 compared to the same period in 2006 due to our investments in enterprise and service provider sales forces. We also increased our investment in corporate and channel marketing efforts from prior year. As our sales force grew, we also increased our allocation of IT and facilities to the sales and marketing groups which accounted for $1.9 million of the increase in the three months ended March 31, 2007 compared to the same 2006 period.

General and administrative expenses increased $4.2 million in the three months ended March 31, 2007 compared to the same period in 2006. The increase was primarily due to an increase in personnel related expenses and outside professional services. Personnel related charges, consisting of salaries, bonus, and fringe benefits expenses, increased $1.9 million in the three months ended March 31, 2007 compared to same 2006 period due to an increase in headcount in our worldwide general and administrative functions, from 214 to 253 people to support the overall growth in the business. Outside professional service fees increased $2.3 million in the 2007 period compared to the 2006 period as a result of increased management consulting fees, increased costs related to settlement of litigation, and increased executive search fees.

Other charges include the costs of external service providers used in the completion of our internal stock option investigation, which totaled $4.7 million, and related tax costs associated with our tender offer to amend the exercise price of certain options, which totaled $7.6 million, in the three months ended March 31, 2007. The remaining charges primarily consist of compensation expense related to acquisitions. We recognized $0.3 million and $1.4 million in the three months ended March 31, 2007 and 2006, respectively, pertaining to the accrual of acquisition related bonus and earn-out payments.

Interest and Other Income, Interest and Other Expense and Income Tax Provisions

The following table shows other income, other expenses and income tax expense (dollars in millions):

		Three Months Ended March 31,
						% of Net								% of Net
		2007				Revenues				2006				Revenues				$ Change				% Change
Interest and other income		$	34.0				5	%		$	20.8				4	%		$	13.2				64	%
Interest and other expenses			(1.1	)			—				(1.1	)			—				—				—
Income tax provisions			26.8				4	%			34.8				6	%			(8.0	)			(23	%)

Interest and other income increased by $13.2 million in the three months ended March 31, 2007 compared to the same period in 2006 as a result of higher cash, cash equivalents and investment balances, as well as slightly higher interest rates, compared to a year ago.

Interest and other expenses were consistent during the three months ended March 31, 2007 compared to the same period in 2006. Other interest and expenses include debt issuance cost amortization, foreign exchange losses and other expenses such as bank fees.

We recorded tax expense of $26.8 million and $34.8 million for the three months ended March 31, 2007 and 2006, respectively. Our effective tax rate was 29% in the current period compared to 32% in the comparable period in 2006. The decrease is primarily due to the use of R&D tax credits and recognition of the benefit of other charges in the current period.

Segment Information

A description of the products and services for each segment can be found in Note 7 to the accompanying Condensed Consolidated Financial Statements.

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

		Three Months Ended March 31,
						% of Net								% of Net								% Point
		2007				Revenues				2006*				Revenues				$ Change				Change
Net Revenues:
Infrastructure		$	385.2				61	%		$	363.0				64	%		$	22.2				(3	%)
Service Layer Technologies			124.5				20	%			111.1				20	%			13.4				—
Service			117.2				19	%			92.6				16	%			24.6				3	%
Total net revenues			626.9				100	%			566.7				100	%			60.2				—
Operating income:
Management operating income:
Infrastructure			101.5				16	%			119.1				21	%			(17.6	)			(5	%)
Service Layer Technologies			(8.3	)			(1	%)			(3.8	)			(1	%)			(4.5	)			—
Service			29.9				5	%			24.7				4	%			5.2				1	%
Total management operating income			123.1				20	%			140.0				24	%			(16.9	)			(4	%)
Amortization of purchased intangible assets			(24.1	)			(4	%)			(24.6	)			(4	%)			0.5				—
Stock-based compensation expense			(25.9	)			(4	%)			(23.1	)			(4	%)			(2.8	)			—
Other charges			(12.6	)			(2	%)			(1.4	)			—				(11.2	)			(2	%)
Total operating income			60.5				10	%			90.9				16	%			(30.4	)			(6	%)
Interest and other income			34.0				5	%			20.8				4	%			13.2				1	%
Interest and other expense			(1.1	)			—				(1.1	)			—				—				—
Income before income taxes		$	93.4				15	%		$	110.6				20	%		$	(17.2	)			(5	%)