Overview of the Results of Operations
Executive Overview
To aid readers of our financial statements in understanding our operating
results, we have provided below an executive overview of the significant events
that affected the three and nine months ended September 30, 2008, and a
discussion of the nature of our operating expenses.
The following table provides an overview of our key financial metrics for the
three and nine months ended September 30, 2008 and 2007:

(In millions, except per share             Three Months Ended September 30,                          Nine Months Ended September 30,
amounts and percentages)           2008            2007        $ Change       %Change        2008          2007         $ Change       %Change
Net revenues                     $   947.0       $  735.0     $    212.0            29 %   $ 2,648.9     $ 2,026.9     $    622.0            31 %

Operating income                 $   202.0       $  112.8           89.2            79 %   $   505.1     $   259.5     $    245.6            95 %
Percentage of net revenues            21.3 %         15.3 %                                     19.1 %        12.8 %
Net income                       $   148.5       $   85.1           63.4            75 %   $   379.3     $   237.9     $    141.4            59 %
Percentage of net revenues            15.7 %         11.6 %                                     14.3 %        11.7 %
Net income per share
Basic                            $    0.27       $   0.17     $     0.10            59 %   $    0.71     $    0.44     $     0.27            61 %

Diluted                          $    0.27       $   0.15     $     0.12            80 %   $    0.67     $    0.41     $     0.26            63 %

• Net revenues: Our net revenues increased in the three and nine months ended September 30, 2008, compared to the same periods in 2007, primarily due to the growing acceptance of our router and firewall products and services in the service provider and enterprise markets as well as the timing of revenue recognition for previously shipped products from certain arrangements. Net revenues increased in each of our three geographic regions, specifically in the Americas and the Asia Pacific region, in the three and nine months ended September 30, 2008, compared to the same periods in 2007.

• Operating Margin: Our operating income increased in the three and nine months ended September 30, 2008, compared to the same periods in 2007. In addition, our operating margins as a percentage of net revenues increased in the three and nine months ended September 30, 2008, compared to the same periods in 2007. This change was, in large part, due to the growth in revenue and a decrease in operating expense as a percentage of net revenues, which was attributable to our efforts to better manage expenses and improve efficiencies in the three and nine months ended September 30, 2008, compared to the same periods in 2007.

• Net Income and Net Income Per Share: The increase in net income in the three and nine months ended September 30, 2008, compared to the same periods in 2007, is primarily due to the growth in revenue and the reduction in operating expenses. These increases in operating margin were partially offset by lower net interest and other income along with higher income tax expense in the 2008 periods.

• Other Financial Highlights: Total deferred revenue increased $49.3 million in the nine months ended September 30, 2008, primarily due to the renewal of annual maintenance arrangements. During the nine months ended September 30, 2008, we generated a net increase of $62.4 million in cash and cash equivalents, primarily resulting from $660.1 million in cash provided by our operating activities, which was offset by cash used in investing activities and financing activities, including the repurchase of $562.2 million of our common stock.

Significant Events
Business and Market Environment
We design, develop and sell products and services that together provide our customers with high-performance network infrastructure that creates responsive and trusted environments for accelerating the deployment of services and applications over a single Internet Protocol ("IP")-based network. We serve the high-performance networking requirements of global service providers, enterprises, governments and research and education institutions that view the network as critical to their success. High-performance networking is designed to provide fast, reliable and secure access to applications and services at scale. We offer a high-performance network infrastructure that includes IP

routing, Ethernet switching, security and application acceleration solutions, as well as partnerships designed to extend the value of the network and worldwide services and support designed to optimize customer investments.
In the first nine months of our 2008 fiscal year, we continued to deliver new and innovative, high-performance network infrastructure solutions. We entered the enterprise switching market, through the introduction of the EX-series, a family of Ethernet switches that leverage the operational simplicity and carrier-class reliability of our JUNOS® software. We also introduced a new category of extensible networking and security products with our SRX series dynamic services gateways. In addition, we introduced a new family of intrusion detection and prevention ("IDP") appliances that deliver up to 10 Gbps real-world throughput and performance to enable deployments in the network core, the integration of services, including Firewall and chassis clustering, into JUNOS software for implementation on the J-series services router and the Security Threat Response Manager ("STRM"), a platform capable of providing businesses with a centralized scalable and effective way to log and manage a rapidly evolving threat landscape. We also announced an advanced mobile IP/Multi Protocol Label Switching ("MPLS") solution portfolio with the new BX 7000 multi-access gateway router for the cell site, M-series circuit emulation physical interface cards for the aggregation site and a suite of software features designed to simplify deployment, provisioning and management of mobile backhaul networks. In addition, we introduced the JCS 1200, the industry's first high-performance control plane scaling platform.
In the first nine months of our 2008 fiscal year, we also delivered new enhancements to existing solutions to help customers maximize their network infrastructure investments and lower their overall total cost of ownership. We expanded our Network and Security Manager ("NSM") to deliver a centralized management solution for routing, security and switching, enabling customers to consolidate and simplify the management of their network infrastructure. We announced enhancements to our Access Control Solution, to deliver enhanced scalability and performance, with centralized access policy management via NSM, helping customers cost-effectively achieve comprehensive network visibility with broad enforcement capabilities. We introduced the next generation of our WXC application acceleration platforms to deliver a more scalable, modular and cost-effective approach to delivering fast and consistent application response across the wide area network ("WAN"). In addition, we announced three new line card families for the MX-series Ethernet Services Routers. Changes to Segments
Beginning in January 2008, we realigned our reporting structure which resulted in two segments: Infrastructure and SLT. The previously reported Service segment has been combined into the following two segments:
• Infrastructure: Our Infrastructure segment includes products and services related to the E-, M-, MX- and T-series router product families, EX-series switching products, as well as the circuit-to-packet products.

• SLT: Our SLT segment consists primarily of products and services related to our integrated collection of security measures designed to prevent unauthorized access to computer networks ("Firewall") systems and appliances, secure sockets layer virtual private network ("SSL") appliances, IDP appliances, the J-series router product family and WAN optimization platforms.

Stock Repurchase Activity
During the three and nine months ended September 30, 2008, we repurchased $440.9 million and $562.2 million or 18.0 million and 22.7 million shares of our common stock, respectively, under two stock repurchase programs that were authorized by our Board of Directors.
Under the $2.0 billion stock repurchase program approved in 2006 and 2007 (the "2006 Stock Repurchase Program"), we repurchased approximately 13.2 million shares of our common stock at an average price of $24.52 per share for a total purchase price of $323.7 million during the three months ended September 30, 2008, and approximately 15.4 million shares of our common stock at an average price of $24.53 per share for a total purchase price of $376.8 million during the nine months ended September 30, 2008. As of September 30, 2008, we have repurchased and retired approximately 84.8 million shares of our common stock under the 2006 Stock Repurchase

Program at an average price of $23.58 per share, and the program had no remaining authorized funds available for future stock repurchases.
The Board of Directors approved another $1.0 billion stock repurchase program in March 2008 (the "2008 Stock Repurchase Program"). Under this program, we repurchased approximately 4.8 million shares of our common stock at an average price of $24.66 per share for a total purchase price of $117.2 million during the three months ended September 30, 2008, and approximately 7.3 million shares of our common stock at an average price of $25.42 per share for a total purchase price of $185.4 million during the nine months ended September 30, 2008. As of September 30, 2008, the 2008 Stock Repurchase Program had remaining authorized funds of $814.6 million.
Subsequent to September 30, 2008, through the filing of this report, we have repurchased and retired approximately 1.1 million shares of our common stock for approximately $21.0 million under the 2008 Stock Repurchase Program at an average price of $18.73 per share. The 2008 Stock Repurchase Program had remaining authorized funds of $793.6 million as of the report filing date. All shares of common stock purchased under the 2006 and 2008 Stock Repurchase Programs have been retired. Future share repurchases under our 2008 Stock Repurchase Program will be subject to a review of the circumstances in place at the time and will be made from time to time in private transactions or open market purchases as permitted by securities laws and other legal requirements. This program may be discontinued at any time. Backlog
Our sales are made primarily pursuant to 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 we believe industry practice would allow 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 and do not believe our backlog information is necessarily indicative of future revenue. Manufacturing
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 product costs. The independent contract manufacturers produce our products using design specifications, quality assurance programs and standards that we establish. Our independent contract manufacturers manufacture our products primarily in Canada, China, Malaysia, and the United States. We have employees in our manufacturing and operations organization who manage relationships with our contract manufacturers, manage our supply chain, and monitor product testing and quality. 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.
In recent years, an increasing amount of our product has been manufactured in Asia, and we anticipate that a larger percentage of our products will be produced outside the United States and Canada in the future. Our contracts generally provide for passage of title and risk of loss at the designated point of shipment to the customer. The manufacturing of products in Asia for shipment to customers in Europe, Middle East and Africa ("EMEA") and the Americas resulted in additional shipment logistics, freight and timing issues for us and those customers. In an ongoing effort to balance our and the customers' needs, we have made changes on occasion to the payment of freight and the point of shipment with respect to products shipped from Asia. These changes impact shipping costs and the timing of revenue recognition of the affected shipments.

Nature of Expenses
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, commissions, bonuses, vacation, benefits, stock-based compensation, and travel. We increased our headcount by 21% to 6,830 employees as of September 30, 2008, from 5,661 employees as of September 30, 2007, primarily in the research and development, sales, and customer service organizations. The headcount growth has increased primarily in regions with lower operating costs per employee.
Stock-based compensation and related payroll tax expense was $29.1 million and $81.5 million in the three and nine months ended September 30, 2008, respectively, and $25.6 million and $75.1 million in the three and nine months ended September 30, 2007, respectively. As of September 30, 2008, approximately $153.6 million of unrecognized stock-based compensation cost, adjusted for estimated forfeitures, related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 2.9 years. In addition, approximately $72.2 million of unrecognized stock-based compensation cost, adjusted for estimated forfeitures, related to non-vested RSUs and non-vested performance share awards is expected to be recognized over a weighted-average period of approximately 2.6 years.
Facility and information technology departmental costs are allocated to other departments based on usage and headcount, respectively. Facility and information technology related costs increased by $5.2 million and $42.4 million in the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007 due to an increase in headcount and the continued build-out of our domestic and international development and test centers as well as applications to support our internal operations. Facility and information technology related headcount was 263 employees as of September 30, 2008, compared to 223 employees as of September 30, 2007. We expect to further invest in our company-wide information technology infrastructure as we implement our operational excellence initiatives.
Although our revenue transactions are primarily denominated in U.S. dollars, operating expenses are denominated in U.S. dollars, the British Pound, the Euro, Indian Rupee, and Japanese Yen as well as other foreign currencies. Changes in related currency exchange rates may affect our operating results. We use foreign currency forward and/or option contracts to hedge certain forecasted foreign currency transactions relating to operating expenses. These derivatives are designated as cash flow hedges 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 operating expense line item to which the hedged transaction relates. Any ineffectiveness of the hedging instruments is reported in interest and other income, net on our condensed consolidated statements of operations. The increase in expenses including cost of revenues, research and development, sales and marketing, and general and administrative expenses, due to foreign currency fluctuation, was approximately 2% in the three and nine months ended September 30, 2008, compared with the same periods in 2007.
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 revenues, 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 condensed consolidated financial statements:
• Revenue Recognition;

• Contract Manufacturer Liabilities;

• Warranty Reserve;

• Goodwill and Purchased Intangible Assets;

• Stock-Based Compensation;

• Income Taxes; and

• Loss Contingencies.

Fair Value Accounting
In February 2007, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards 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 to eligible financial assets and liabilities. SFAS 159 is effective beginning on January 1, 2008. We evaluated our existing financial instruments and elected not to adopt the fair value option on our financial instruments. As a result, SFAS 159 did not have any impact on our consolidated financial condition or results of operations as of and for the three and nine months ended September 30, 2008. However, because the SFAS 159 election is based on an instrument-by-instrument election at the time we first recognize an eligible item or enter into an eligible firm commitment, we may decide to exercise the option on new items when business reasons support doing so in the future which may have a significant impact on our operating results.
Management believes that there have been no significant changes during the three and nine months ended September 30, 2008, 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, 2007. Recent Accounting Pronouncements
See Note 1 - Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1, Part I of this Form 10-Q, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.

Results of Operations
The following table shows product and service net revenues (in millions, except
percentages):

                                 Three Months Ended September 30,                              Nine Months Ended September 30,
                        2008            2007         $ Change        %Change         2008           2007          $ Change        %Change
Net revenues:
Product               $   767.0       $  606.8      $    160.2             26 %    $ 2,165.1      $ 1,658.2      $    506.9             31 %
Percentage of net
revenues                   81.0 %         82.6 %                                        81.7 %         81.8 %
Service                   180.0          128.2            51.8             40 %        483.8          368.7           115.1             31 %
Percentage of net
revenues                   19.0 %         17.4 %                                        18.3 %         18.2 %

Total net revenues    $   947.0       $  735.0      $    212.0             29 %    $ 2,648.9      $ 2,026.9      $    622.0             31 %

Our net product revenues increased in the three and nine months ended September 30, 2008, compared to the same periods in 2007, primarily as a result of increased sales of both Infrastructure and SLT solutions to the service provider and enterprise markets. In particular, we had success in selling our Infrastructure products to service providers who are adopting next generation networking ("NGN") IP networks, which are designed for higher capacity and efficiency to help reduce total operating costs and to be able to offer multiple services over a single network. During the three and nine months ended September 30, 2008, our new product releases and further expansion into emerging markets contributed to the increase in total net product revenues for those periods. In the third quarter of 2008, we also experienced increased revenue from the enterprise market primarily due to the sales of Infrastructure solutions. Our net service revenues increased in the three and nine months ended September 30, 2008, compared to the same periods in 2007, primarily due to the increase in maintenance revenue from our expanding installed base. Infrastructure Segment Revenues
The following table shows net Infrastructure segment revenues and net Infrastructure segment revenues as a percentage of total net revenues by product and service categories (in millions, except percentages):

                                   Three Months Ended September 30,                              Nine Months Ended September 30,
                         2008          2007 (1)        $ Change        %Change         2008         2007 (1)        $ Change        %Change
Net Infrastructure
segment revenues:
Infrastructure
product revenue        $   610.3       $   464.7      $    145.6             31 %    $ 1,714.9      $ 1,252.8      $    462.1             37 %
Percentage of net
revenues                    64.4 %          63.3 %                                        64.7 %         61.8 %
Infrastructure
service revenue            119.0            79.5            39.5             50 %        308.7          233.1            75.6             32 %
Percentage of net
revenues                    12.6 %          10.8 %                                        11.7 %         11.5 %

Total
Infrastructure
segment revenues
(1)                    $   729.3       $   544.2      $    185.1             34 %    $ 2,023.6      $ 1,485.9      $    537.7             36 %

Percentage of net
revenues                    77.0 %          74.1 %                                        76.4 %         73.3 %

(1) Prior period amounts have been reclassified to reflect the 2008 segment structure, which now includes service revenue in the Infrastructure and SLT segments.

Infrastructure - Product
For the three months ended September 30, 2008, the increase in Infrastructure product revenue was primarily attributable to revenue growth from our MX- and . . .