UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 0-26339

JUNIPER NETWORKS, INC.

     Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes [X] No [  ]

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

     There were approximately 533,986,000 shares of the Company’s Common Stock, par value $0.00001, outstanding as of July 30, 2004.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Juniper Networks, Inc.
Condensed Consolidated Balance Sheets
(in thousands)

(A) The balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to the Condensed Consolidated Financial Statements

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

(unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements

2

Juniper Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements

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

Note 1. Description of Business

     Juniper Networks, Inc. (“Juniper Networks” or “the Company”) was founded in 1996 to develop and sell products that would be able to meet the stringent demands of service providers. Today, the Company provides its customers with superior networking and security solutions. Juniper Networks is dedicated to customers who derive strategic value from their networks, including global network operators, enterprises, government agencies and research and educational institutions. The Company sells and markets its products through its direct sales organization, value-added resellers and distributors.

     In April 2004, Juniper Networks completed its acquisition of NetScreen Technologies, Inc. (“NetScreen”). NetScreen developed, marketed and sold a broad array of integrated network security solutions for enterprises, carriers and government entities. The acquisition enabled the Company to expand its customer base and portfolio of products, which resulted in two groups of networking products: infrastructure products, which consist largely of the original Juniper Networks products, and security products, which consist largely of the former NetScreen products. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations, the Company has included in its results of operations, for the three and six months ended June 30, 2004, the results of NetScreen beginning on April 16, 2004.

Note 2. Summary of Significant Accounting Policies

     Interim Financial Statements

     The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

     Revenue Recognition

     Juniper Networks recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured, unless the Company has future obligations for such things as customer acceptance, in which case revenue and related costs are deferred until those obligations are met. In most cases, the Company recognizes product revenue upon shipment to its customers, including value-added resellers (“VAR”), as it is the Company’s practice to identify an end user prior to shipment to a VAR. The Company defers revenues on sales to its distributors until the Company has information indicating that the distributor has sold the products to its customers.

     Juniper Networks also recognizes revenue from service contracts. A vast majority of the Company’s service revenue is earned from customers who have purchased its products. Service revenue contracts are typically for one-year renewable periods and are for services such as 24-hour customer support, non-specified updates and hardware repairs. In addition to service contracts, the Company also provides professional and educational services. Service revenue is deferred until the services commence, at which point the service revenue is recognized as the services are completed, or ratably over the period of the obligation.

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     On arrangements where products and services are bundled, the Company determines whether the deliverables are separable into multiple units of accounting. The Company allocates the total fee on such arrangements to the individual deliverables either based on their relative fair values or using the residual method, as circumstances dictate. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition.

     The Company accrues for sales returns and other allowances based on its best estimate of future returns and other allowances. In addition, the Company’s agreements with distributors provide for stock rotation and price protection rights subject to contractual limitations. Stock rotation rights provide distributors with the right to exchange unsold inventory for alternate products of equal or greater value. Price protection rights grant distributors the right to a credit on certain purchases in the event of decreases in the prices of the Company’s products. The Company accrues for these credits based on its estimates of the value of the stock rotations and price protection.

     Amounts billed in excess of revenue recognized are included as deferred revenue in the accompanying consolidated balance sheets.

     Stock-Based Compensation

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

     Guarantees

     Financial Accounting Standards Board Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), requires that the Company recognize the fair value for guarantee and indemnification arrangements issued or modified by the Company after December 31, 2002 if these arrangements are within the scope of FIN 45. In addition, the Company must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under previously existing generally accepted accounting principles, in order to identify if a loss has occurred. If the Company determines it is probable that a loss has occurred then any such estimable loss would be recognized under those guarantees and

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indemnifications. The Company has entered into agreements with some of its customers that contain indemnification provisions relating to potential situations where claims could be alleged that the Company’s products infringe the intellectual property rights of a third party. Other examples of the Company’s guarantees or indemnification arrangements include guarantees of product performance and standby letters of credits for certain leased facilities. The Company has not recorded a liability related to these indemnification and guarantee provisions. The Company implemented the provisions of FIN 45 as of January 1, 2003 and it has not had any significant impact on the Company’s financial position, results of operations or cash flows.

     Derivatives

     It is the Company’s policy to use derivatives to partially offset its market exposure to fluctuations in foreign currencies. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), the Company recognizes these derivatives on the balance sheet at fair value. The Company does not enter into derivatives for speculative or trading purposes.

     The Company uses foreign exchange forward contracts to hedge foreign currency forecasted transactions related to certain operating expenses, denominated primarily in the Euro, Japanese Yen, and British Pound. These derivatives are designated as cash flow hedges under SFAS No. 133, and have maturities between one and two months.

     For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income, and upon occurrence of the forecasted transaction, is subsequently reclassified into the consolidated statement of operations line item to which the hedged transaction relates. The Company records any ineffectiveness of the hedging instruments, which was immaterial during the three months ended June 30, 2004, in other income/(expense) on our condensed consolidated statement of operations.

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

     Additionally, the Company uses derivatives to mitigate transaction gains and losses generated by certain monetary assets and liabilities denominated primarily in the Euro, Japanese Yen and British Pound. These derivatives are carried at fair value with changes recorded in other income/(expense). Changes in the fair value of these derivatives are largely offset by remeasurement of the underlying assets and liabilities. These foreign exchange contracts have maturities between one and two months.

Note 3. NetScreen Business Combination

     In April 2004, Juniper Networks completed its acquisition of NetScreen. The acquisition enabled the Company to expand its customer base and portfolio of products, which resulted in two groups of networking products: infrastructure products, which consist largely of the original Juniper Networks products, and security products, which consist largely of the former NetScreen products. As a result of the acquisition, the Company modified its engineering organizational structure to design, develop and support these two product groups, however the cost structure remained unchanged. The acquisition resulted in the issuance of 132 million shares of the Company’s common stock with a fair value of approximately $3,651.2 million to the former stockholders of NetScreen. The common stock issued in the acquisition was valued using the average closing price of the Company’s common stock over a five-day trading period beginning two days before and ending two days after the date the transaction was announced. Juniper Networks also assumed all of the outstanding NetScreen stock options with a fair value of approximately $520.5 million. The options were valued using the Black-Scholes option pricing model with the inputs of 0.8 for volatility, 3 years for expected life, 2.5% for the risk-free interest rate and a market value of Juniper Networks common stock of $27.64 per share, which was determined as

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described above. The Company also incurred direct costs associated with the acquisition of approximately $13.4 million. Below is a summary of the total preliminary purchase price (in millions):

     In accordance with SFAS No. 141, Juniper Networks allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed, including in-process research and development, based on their estimated fair values, and deferred stock compensation. The excess purchase price over those fair values is recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions provided by management, and other information compiled by management, including valuations that utilize established valuation techniques appropriate for the high technology industry. Goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and purchased intangibles with indefinite lives are not amortized but will be reviewed at least annually for impairment. Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective estimated useful lives. The total preliminary purchase price has been preliminarily allocated as follows (in millions):

     The purchase price allocation is preliminary and subject to change if the Company obtains additional information concerning the fair values of certain tangible assets and liabilities of NetScreen.

Net Tangible Assets

     NetScreen’s assets and liabilities as of April 16, 2004 were reviewed and adjusted, if necessary, to their fair value. Fixed asset listings were reviewed for impairment and will be depreciated over their useful lives. The Company wrote down NetScreen’s fixed assets by approximately $0.4 million, primarily for leasehold improvements in buildings to be vacated. Reserves and allowances were reviewed for appropriateness and approved by management. Management also reviewed the liabilities to ensure the proper value was recorded. The Company reduced NetScreen’s deferred revenue by approximately $50.0 million to eliminate historical amounts of NetScreen’s deferred revenue that does not represent a legal performance obligation of the combined company or for which the Company did not incur the costs of the revenues.

     The Company also accrued for restructuring charges of $21.3 million primarily related to severance and facility charges. The Company recognized these costs in accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with Purchase Business Combinations (“EITF 95-3”). Ninety-four former NetScreen employees were identified for termination at the time of the acquisition and the related

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severance will be paid out by the end of the year. The facility charges will be paid through the end of the lease terms, which extend through 2008. As of June 30, 2004, $15.9 million remained to be paid primarily for facilities.

Amortizable Intangible Assets

     Existing technology consists of products that have reached technological feasibility and includes products in NetScreen’s product line, principally the VPN and firewall appliances. Existing technology was valued using the discounted cash flow (“DCF”) method. This method calculates the value of the intangible asset as being the present value of the after tax cash flows potentially attributable to it, net of the return on fair value attributable to tangible and other intangible assets. Juniper Networks is amortizing the fair value of the existing technology on a straight-line basis over the remaining estimated useful life of four years.

     Maintenance agreements represent the revenue generated by contracts with customers who pay for annual maintenance and support. The income approach was used to estimate the fair value of the maintenance agreements, which includes estimating the ongoing, after-tax income expected from maintenance agreements in place at the time of the NetScreen acquisition, including expected renewals. Juniper Networks is amortizing the fair value of the maintenance agreements on a straight-line basis over the remaining estimated useful life of five years.

     Patents and core technology represent a combination of processes, patents, and trade secrets that were used for existing and in-process technology. The value of the trade name and trademarks is represented by the benefit of owning these intangible assets rather than paying royalties for their use. Both of these intangible assets were valued using the royalty savings method. This method estimates the value of these intangible assets by capitalizing the royalties saved because the Company owns the assets. Juniper Networks is amortizing the fair value of these assets over the remaining estimated useful life of four years on a straight-line basis.

     Relationships with VARs and distributors represent the rights granted to the VAR or distributor to resell certain NetScreen products. NetScreen had distributors located in North America, Latin America, the Asia Pacific region and the Europe, Middle East and Africa region. The VAR and distributor relationships were valued using the avoided cost method, which takes into account the cost of establishing each relationship. Juniper Networks is amortizing the VAR relationships over five years on a straight-line basis and the distributor relationships over seven years on a straight-line basis. The difference in the estimated useful lives between VARs and distributors is attributed to the longer historical lives of the distributor relationships.

     Order backlog represents the value of the standing orders for both products and services. The order backlog was valued using the avoided cost method, which estimates the avoided selling expenses due to the fact that NetScreen had firm purchase orders in place at the time of acquisition. Juniper Networks amortized the fair value of these assets over the three-month period ended June 30, 2004 to cost of revenues.

In-process Research and Development

     Of the total purchase price, $27.5 million has been allocated to in-process research and development (“IPR&D”) and was expensed in the three months ended June 30, 2004. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility and which have no alternative future use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development. At the time of acquisition, NetScreen had multiple IPR&D efforts under way for certain current and future product lines. These efforts included developing and integrating secure routers with embedded encryption chips, as well as other functions and features such as next generation Internet Protocol (“IP”), wireless and digital subscriber line connectivity and voice over IP capability. The Company utilized the DCF method to value the IPR&D, using rates ranging from 20% to 25%, depending on the estimated useful life of the technology. In applying the DCF method, the value of the acquired technology was estimated by discounting to present value the free cash flows

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expected to be generated by the products with which the technology is associated, over the remaining economic life of the technology. To distinguish between the cash flows attributable to the underlying technology and the cash flows attributable to other assets available for generating product revenues, adjustments were made to provide for a fair return to fixed assets, working capital, and other assets that provide value to the product lines. At the time of the NetScreen acquisition, it was estimated that these development efforts would be completed over the next eighteen months at an estimated cost of approximately $25 million.

Deferred Compensation

     Unvested stock options and restricted stock valued at $93.5 million at the time of the NetScreen acquisition have been allocated to deferred compensation in the purchase price allocation and are being amortized to expense using the graded-vesting method. The intrinsic value of the unvested stock options and restricted stock was adjusted by the percent assumed to have been expensed from the grant date to the acquisition date using the graded-vesting method. Options assumed in conjunction with the acquisition had exercise prices ranging from $0.09 to $27.11 per share, with a weighted average exercise price of $12.48 per share and a weighted average remaining contractual life of approximately 8 years. Juniper Networks assumed approximately 5.9 million vested options and approximately 20.5 million unvested options and restricted stock.

Pro Forma Results

     The following pro forma financial information presents the combined results of operations of Juniper Networks and NetScreen as if the acquisition had occurred as of the beginning of the periods presented. Adjustments, which reflect the amortization of purchased intangibles and deferred stock compensation, charges to cost of revenues for inventory write-ups and the valuation of the order backlog, IPR&D, restructuring and the related net tax impact of $3.4 million, $10.7 million, $46.9 million and $64.7 million have been made to the combined results of operations for the three and six months ended June 30, 2004 and 2003, respectively. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of Juniper Networks that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.

     The pro forma financial information above includes the following material, non-recurring charges for all periods presented (in millions):

Note 4. Restructuring Expenses

     The following restructuring charges are based on Juniper Networks’ restructuring plans that have been committed to by management. Any changes to the estimates of the approved plans will be reflected in Juniper Networks’ results of operations.

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     Restructuring In Connection With The NetScreen Acquisition

     In the second quarter of 2004, in connection with the NetScreen acquisition, the Company recorded a restructuring charge of $0.4 million related to the termination of 13 employees from Juniper Networks to eliminate certain duplicative activities. These employees were from all functions and all geographic theaters and were in addition to the 94 former NetScreen employees that were also terminated. We expect to pay the remaining severance fees by the end of the year. These charges were accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). As of June 30, 2004, there was $0.1 million remaining to be paid.

     Restructuring In Connection With The Discontinuance Of The CMTS Products

     In the third quarter of 2003, the Company announced that it would no longer develop its G-series CMTS products and recorded a one-time charge that was comprised of workforce reduction costs, non-inventory asset impairment, costs associated with vacating facilities, costs associated with termination of contracts and other related costs. These charges are accounted for in accordance with SFAS 146. The following table shows the breakdown of the restructuring charge and the liability remaining as of June 30, 2004 (in thousands):

     The workforce reduction related primarily to the termination of 76 employees that were mainly located in the Americas and Europe regions. The Company expects to pay the remaining balance of the severance accrual by the end of 2004. Non-inventory asset impairment was primarily for long-lived assets that were no longer needed as a result of the Company’s decision to cease further development of the G-series CMTS product line. Facility charges consisted primarily of the cost of vacating facilities that were dedicated to the development of the G-series CMTS products and the impairment cost of certain