Forward-Looking Statements
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 Juniper Networks, Inc. (the "Company") that are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. 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 we file with the Securities and Exchange Commission ("SEC"), specifically our most recent Annual Report on Form 10-K. While forward-looking statements are based on reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
The following discussion is based upon our unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report, which have been prepared in accordance with U.S. GAAP. 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. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingencies. 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.
To aid in understanding our operating results for the periods covered by this Quarterly Report, we have provided an executive overview and a summary of the significant events that affected the most recent fiscal quarter and a discussion of the nature of our operating expenses. These sections should be read in conjunction with the more detailed discussion and analysis of our consolidated financial condition and results of operations in this Item 2, our "Risk Factors" section included in Item 1A of Part II, and our unaudited Condensed Consolidated Financial Statements and notes included in Item 1 of Part I of this Quarterly Report.

Executive Overview
Compared to the same periods in 2008, our performance for the second quarter and first half of 2009 reflects continued weakness in market demand for networking and security products, primarily due to our customers' reaction to the weakened global economy. The decrease in revenues was primarily due to the slowdown in the U.S., Europe, Middle East, and Africa ("EMEA") and Asia Pacific ("APAC") service provider market, partially offset by modest revenue growth in the U.S. enterprise market. In the second quarter of 2009, we continue to control operating costs as we navigate this challenging economic period.
The following table provides an overview of our key financial metrics for the three and six months ended June 30, 2009, and 2008:

(In millions, except per share             Three Months Ended June 30,                             Six Months Ended June 30,
amounts and percentages)          2009        2008       $ Change       %Change         2009          2008        $ Change       %Change
Net revenues                     $ 786.4     $ 879.0     $   (92.6 )         (11 %)   $ 1,550.5     $ 1,701.9     $  (151.4 )          (9 %)

Operating income                 $  95.7     $ 160.5         (64.8 )         (40 %)   $   176.9     $   303.1     $  (126.2 )         (42 %)
Percentage of net revenues          12.2 %      18.3 %                                     11.4 %        17.8 %
Net income                       $  14.8     $ 120.4        (105.6 )         (88 %)   $    10.3     $   230.8     $  (220.5 )         (96 %)
Percentage of net revenues           1.9 %      13.7 %                                      0.7 %        13.6 %
Net income per share
Basic                            $  0.03     $  0.23     $   (0.20 )         (87 %)   $    0.02     $    0.44     $   (0.42 )         (95 %)

Diluted                          $  0.03     $  0.22     $   (0.19 )         (86 %)   $    0.02     $    0.41     $   (0.39 )         (95 %)

• Net revenues: Our net revenues decreased in the three and six months ended June 30, 2009, compared to the same periods in 2008, primarily due to reduced demand for our products particularly in the Infrastructure segment, which is consistent with the macroeconomic environment. Net revenues decreased in the EMEA and APAC regions, partially offset by an increase in the Americas region, in the three months ended June 30, 2009, compared to the same period in 2008. Net revenues decreased in all regions in the six months ended June 30, 2009, compared to the same period in 2008. Net revenues from enterprise customers increased 13% while net revenues from service providers decreased 20% in the three months ended June 30, 2009, compared to the same period in 2008. In the six months ended June 30, 2009, net revenues from enterprise customers increased 13% while net revenues from service providers decreased 17%, compared to the same period in 2008.

• Operating Income: Our operating income as well as operating margin as a percentage of net revenues decreased in the three and six months ended June 30, 2009, compared to the same periods in 2008. These decreases were, in large part, due to the decrease in revenues, partially offset by our efforts to control expenses and improve efficiencies in the three and six months ended June 30, 2009, compared to the same periods in 2008.

• Net Income and Net Income Per Share: The decrease in net income in the three months ended June 30, 2009, compared to the same period in 2008, is primarily due to a decrease in revenue and a non-recurring income tax charge of $52.1 million related to the treatment of stock-based compensation expense in transfer pricing arrangements for certain U.S. multinational companies due to a federal appellate court ruling in a matter to which we were not a named party in the second quarter of 2009. The decrease in net income in the six months ended June 30, 2009, compared to the same period in 2008, is primarily due to a decrease in revenue and a non-recurring income tax charge of $52.1 million in the second quarter of 2009, and a $61.8 million non-cash charge related to the impairment of certain net deferred tax assets resulting from a change in California income tax law enacted during the first quarter of 2009.

• Other Financial Highlights: Total deferred revenue increased $55.8 million in the six months ended June 30, 2009, compared to the same period in 2008, primarily due to the growth in our installed equipment base for maintenance and customer support contracts. During the six months ended June 30, 2009, cash and cash equivalents decreased $464.9 million, primarily resulting from purchases, net of sales and maturities, of $564.6 million of available-for-sale investments and the repurchase of $169.2 million of our common stock as part of our 2008 Stock Repurchase Program, partially offset by cash provided by our operations of $312.5 million.

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 three months ended June 30, 2009, we continued to deliver new and innovative, high-performance network infrastructure solutions. We announced a significant technological advance with 100 Gigabit Ethernet interface cards for our T1600 core router and also announced expansion of our Intelligent Services Edge offerings to enhance our customers' ability to deliver voice, video and other multimedia services. We also announced our next-generation network ("NGN") infrastructure for the distributed enterprise that includes four new models of our SRX family of dynamic services gateways as well as the new EX 2200 switching platform. Our Ethernet switching portfolio also added the EX8216, a high-capacity modular switching platform designed for deployment in large enterprise data centers.
The recent weakness in the global economy has affected the purchasing behavior of our customers, particularly among service providers, and caused delays or reductions in purchase decisions, which led to lower revenues in our second quarter of 2009 compared to the same period of 2008, as well as limited visibility regarding future business. If economic growth in the U.S. and other countries' economies continues to decline and/or fails to recover, our customers may further delay or reduce their purchases, which could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies, and increased price competition. We continue to plan to both invest in key research and development projects that we believe will lead to future growth and remain focused on continuing our efforts to contain other costs and allocate resources effectively.
Stock Repurchase Activity
Our Board approved a stock repurchase program in March 2008 (the "2008 Stock Repurchase Program"), which authorized us to purchase up to $1.0 billion of our common stock. Under this program, we repurchased approximately 2.2 million shares of our common stock at an average price of $22.73 per share for a total purchase price of $49.5 million in the three months ended June 30, 2009, and approximately 9.7 million shares of our common stock at an average price of $17.52 per share for a total purchase price of $169.2 million in the six months ended June 30, 2009. As of June 30, 2009, we have repurchased and retired approximately 19.4 million shares of common stock under the 2008 Stock Repurchase Program and the program had remaining authorized funds of $602.9 million.
All shares of common stock purchased under the 2008 Stock Repurchase Program 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
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 cost of revenues consists of payments to our independent contract manufacturers for standard 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 China, Malaysia, Mexico, and the U.S. 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 and if actual component usage is lower than our forecasts, we may be, and have been in the past, liable for carrying or obsolete material charges.
In recent years, an increasing amount of our products has been manufactured in Asia, and we anticipate that a larger percentage of our products will be produced outside the U.S. in the future. Our contracts generally provide for passage of title and risk of loss at the designated point of shipment to our customer. The manufacturing of products in Asia for shipment to customers in 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 our 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 affect 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. Employee-related costs include items such as wages, commissions, bonuses, vacation, benefits, stock-based compensation, and travel. We increased our headcount by 7% to 7,020 employees as of June 30, 2009, from 6,531 employees as of June 30, 2008, primarily in the research and development organization. The headcount growth has increased primarily in regions with lower operating costs per employee. Our headcount increased slightly by 6 employees in the first six months of 2009, primarily due to our continued effort to manage operating expenses. Stock-based compensation, including related payroll tax expense, was $34.0 million and $67.8 million in the three and six months ended June 30, 2009, respectively, and $28.6 million and $52.4 million in the three and six months ended June 30, 2008, respectively. As of June 30, 2009, approximately $151.3 million of unrecognized stock-based compensation cost, adjusted for estimated forfeitures, related to non-vested stock options will be recognized over a weighted average period of approximately 2.8 years. In addition, as of June 30, 2009, approximately $66.2 million of unrecognized stock-based compensation cost, adjusted for estimated forfeitures, related to non-vested RSUs and non-vested performance share awards will 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 decreased by $1.2 million and $0.8 million in the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008, due to a decrease in headcount and our continued efforts to control costs in our internal operations. Facility and information technology related headcount was 245 employees as of June 30, 2009, compared to 256 employees as of June 30, 2008.
Although our revenue transactions are primarily denominated in U.S. dollars, cost of service revenues and 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 cost of service revenues and 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 (loss), and upon occurrence of the forecasted transaction, is subsequently reclassified into the appropriate expense line item of the condensed consolidated statements of operations 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 decrease in expenses including cost of service revenues, research and development, sales and marketing, and general and administrative expenses, due to foreign currency fluctuation, was approximately 4% in each of the three- and six-month periods ended June 30, 2009, compared with the same periods in 2008. Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. We base our estimates and assumptions on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The critical accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the condensed consolidated financial statements and actual results could differ materially from the amounts reported based on these policies. To the extent there are material differences between our estimates and the actual results, our future consolidated results of operations may be affected.
Revenue Recognition
Our products are generally integrated with software that is essential to the functionality of our equipment. Additionally, we provide unspecified upgrades and enhancements related to our integrated software through our maintenance contracts for most of our products. Accordingly, we account for revenue in accordance with Statement of Position No. 97-2, Software Revenue Recognition, and all related interpretations.
Revenue is recognized when all of the following criteria have been met:
• Persuasive evidence of an arrangement exists. We generally rely upon sales contracts, or agreements and customer purchase orders, to determine the existence of an arrangement.

• Delivery has occurred. We use shipping terms and related documents or written evidence of customer acceptance, when applicable, to verify delivery or performance. In instances where we have outstanding obligations related to product delivery or the final acceptance of the product, revenue is deferred until all the delivery and acceptance criteria have been met.

• Sales price is fixed or determinable. We assess whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.

• Collectability is reasonably assured. We assess collectability based on the creditworthiness of the customer as determined by our credit checks and the customer's payment history. We record accounts receivable 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, we allocate revenue to each element using the residual method based on the vendor-specific objective evidence ("VSOE") 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. VSOE of fair value is based on the price charged when the element is sold separately. We then recognize revenue on each deliverable in accordance with our policies for product and service revenue recognition. If VSOE of fair value of one or more undelivered items 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. We account for multiple agreements with

a single customer as one arrangement if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single arrangement. Our ability to recognize revenue in the future may be affected if actual selling prices are significantly less than fair value. In addition, our ability to recognize revenue in the future could be impacted by conditions imposed by our customers.
For sales to direct end-users and value-added resellers, we recognize product revenue upon transfer of title and risk of loss, which is generally upon shipment. It is our practice to identify an end-user prior to shipment to a value-added reseller. For our end-users and value-added resellers, there are no significant obligations for future performance such as rights of return or pricing credits. A portion of our sales is made through distributors under agreements allowing for pricing credits or rights of return. We recognize product revenue on sales made through these distributors upon sell-through as reported to us by the distributors. 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. Deferred revenue is recorded net of the related product costs of revenue.
We record 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. Should actual product returns or pricing adjustments differ from our estimates, additional reductions to revenue may be required. In addition, we report revenue net of sales taxes.
Service revenues includes revenue from maintenance, training, and professional services. Maintenance is offered under renewable contracts. Revenue from maintenance service contracts is deferred and is recognized ratably over the contractual support period, which is generally one to three years. Revenue from training and professional services is recognized as the services are completed or ratably over the contractual period, which is generally one year or less. We sell certain interests in accounts receivable on a non-recourse basis as part of a customer financing arrangement primarily with one major financing company. We record cash received under this arrangement in advance of revenue recognition as short-term debt.
Contract Manufacturer Liabilities
We outsource most of our manufacturing, repair, and supply chain management operations to our independent contract manufacturers and a significant portion of our cost of revenues consists of payments to them. Our independent contract manufacturers procure components and manufacture our products based on our demand forecasts. These forecasts are based on our estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and marketing organizations, adjusted for overall market conditions. We establish a provision for inventory, carrying costs, and obsolete material exposures for excess components purchased based on historical trends. If the actual component usage and product demand are significantly lower than forecasted, which may be caused by factors outside of our control, it could have an adverse impact on our gross margins and profitability. Supply chain management remains an area of focus as we balance the risk of material obsolescence and supply chain flexibility in order to reduce lead times. Warranty Costs
We generally offer a one-year warranty on all of our hardware products and a 90-day warranty on the media that contains the software embedded in the products. We accrue for warranty costs as part of our cost of sales based on associated material costs, labor costs for customer support, and overhead at the time revenue is recognized. Material cost is estimated primarily based upon the historical costs to repair or replace product returns within the warranty period. Technical support labor and overhead cost are estimated primarily based upon historical trends in the cost to support the customer cases within the warranty period. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials, technical labor costs, and associated overhead incurred. Should actual product failure rates, use of materials, or service delivery costs differ from our estimates, we may incur additional warranty costs, which could reduce gross margin.

Goodwill and Purchased Intangible Assets We make significant estimates and assumptions when evaluating impairment of goodwill and other intangible assets on an ongoing basis, as well as when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity. The amounts and useful lives assigned to identified intangible assets impacts the amount and timing of future amortization expense. The value of our intangible assets, including goodwill, . . .