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 September 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission file number 0-26339

JUNIPER NETWORKS, INC.

Delaware (State or other jurisdiction of incorporation or organization)		77-0422528 (IRS Employer Identification No.)
1194 North Mathilda Avenue		(408) 745-2000
Sunnyvale, California 94089 (Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant is 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 569,234,000 shares of the Company’s Common Stock, par value $0.00001, outstanding as of February 28, 2007.

 

 

Table of Contents

EXPLANATORY NOTE			3
PART I — FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Balance Sheets			5
Condensed Consolidated Statements of Cash Flows			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			54
Item 4. Controls and Procedures			55
PART II — OTHER INFORMATION			57
Item 1. Legal Proceedings			57
Item 1A. Risk Factors			59
Item 6. Exhibits			68
SIGNATURES			69
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

EXPLANATORY NOTE

     In this Form 10-Q, we are restating our condensed consolidated balance sheet as of December 31, 2005, the related consolidated statements of operations for the three and nine months ended September 30, 2005, and the related consolidated statement of cash flows for the nine months ended September 30, 2005 as a result of an independent stock option investigation commenced by our Board of Directors and Audit Committee. This restatement is more fully described in Note 2, “Restatement of Condensed Consolidated Financial Statements,” to Condensed Consolidated Financial Statements and in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In our Form 10-K for the year ended December 31, 2006 to be filed with the SEC (the “2006 Form 10-K”), we are restating our audited consolidated financial statements and related disclosures for the years ended December 31, 2005 and 2004, and our consolidated statement of operations and consolidated balance sheet data for the years ended December 31, 2005, 2004, 2003 and 2002. In addition, we are restating the unaudited quarterly financial information and financial statements for interim periods of 2005 and unaudited condensed financial statements for the three months ended March 31, 2006.

     Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K filed by Juniper Networks prior to August 10, 2006, and the related opinions of its independent registered public accounting firm, and all earnings press releases and similar communications issued by the Company prior to August 10, 2006 should not be relied upon and are superseded in their entirety by this Report and other reports on Form 10-Q and Form 8-K filed by the Company with the Securities and Exchange Commission on or after August 10, 2006.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Juniper Networks, Inc.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
						As Restated (1)								As Restated (1)
Net revenues:
Product		$	467,237			$	466,427			$	1,410,152			$	1,282,439
Service			106,330				79,926				297,598				206,054
Total net revenues			573,567				546,353				1,707,750				1,488,493
Cost of revenues:
Product(2)			140,787				132,239				421,221				366,410
Service(2)			49,398				39,522				142,834				104,992
Total cost of revenues			190,185				171,761				564,055				471,402
Gross margin			383,382				374,592				1,143,695				1,017,091
Operating expenses:
Research and development(2)			123,389				94,689				353,299				257,639
Sales and marketing(2)			139,370				118,169				404,800				314,865
General and administrative(2)			24,542				27,177				71,807				58,646
Amortization of purchased intangibles			23,028				22,991				69,436				61,441
Impairment of goodwill and intangible assets			—				—				1,283,421				—
In-process research and development			—				3,800				—				5,700
Other charges, net			15,310				(192	)			21,064				(6,752	)
Total operating expenses			325,639				266,634				2,203,827				691,539
Operating income (loss)			57,743				107,958				(1,060,132	)			325,552
Interest and other income			28,610				15,567				73,366				40,062
Interest and other expense			(808	)			(851	)			(2,710	)			(2,725	)
Gain on investments			—				1,698				—				1,698
Income (loss) before income taxes			85,545				124,372				(989,476	)			364,587
Provision for income taxes			27,271				40,876				82,943				118,743
Net income (loss)		$	58,274			$	83,496			$	(1,072,419	)		$	245,844
Net income (loss) per share:
Basic		$	0.10			$	0.15			$	(1.89	)		$	0.45
Diluted		$	0.10			$	0.14			$	(1.89	)		$	0.41
Shares used in computing net income (loss) per share:
Basic			568,561				561,775				566,862				550,340
Diluted			599,626				606,327				566,862				597,341

Cost of revenues – Product		$	484			$	324			$	1,481			$	691
Cost of revenues – Service			1,617				350				4,471				1,208
Research and development			9,364				4,185				28,784				9,769
Sales and marketing			8,071				1,947				24,184				4,935
General and administrative			3,319				376				10,176				983
Total		$	22,855			$	7,182			$	69,096			$	17,586

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

		September 30,				December 31,
		2006				2005(1)
						As Restated (1)
ASSETS
Current assets:
Cash and cash equivalents(2)		$	1,333,355			$	918,401
Short-term investments(2)			514,218				510,364
Accounts receivable, net			285,459				268,907
Deferred tax assets, net			123,972				144,439
Prepaid expenses and other current assets			37,937				46,676
Total current assets			2,294,941				1,888,787
Property and equipment, net			335,830				319,885
Long-term investments(2)			566,475				618,342
Restricted cash			45,348				66,074
Goodwill			3,625,038				4,879,701
Purchased intangible assets, net			192,957				269,920
Long-term deferred tax assets, net			116,878				111,236
Other long-term assets			28,381				29,666
Total assets		$	7,205,848			$	8,183,611
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	159,512			$	165,172
Accrued compensation			81,735				97,738
Accrued warranty			27,454				28,187
Deferred revenue			282,481				213,482
Income taxes payable			61,375				56,360
Other accrued liabilities			78,106				66,462
Total current liabilities			690,663				627,401
Long-term deferred revenue			63,477				39,330
Other long-term liabilities			24,861				28,687
Long-term debt			399,944				399,959
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; 569,234 and 568,243 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively			6				6
Additional paid-in capital			7,631,581				7,458,662
Deferred stock compensation			—				(17,700	)
Accumulated other comprehensive loss			(1,467	)			(8,324	)
Accumulated deficit			(1,603,217	)			(344,410	)
Total stockholders’ equity			6,026,903				7,088,234
Total liabilities and stockholders’ equity		$	7,205,848			$	8,183,611

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

		Nine Months Ended September 30,
		2006				2005
						As Restated (1)
Operating Activities:
Net (loss) income		$	(1,072,419	)		$	245,844
Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation and amortization			129,074				99,717
Stock-based compensation			69,096				17,586
In-process research and development			—				5,700
Impairment of goodwill and intangible assets			1,283,421				—
Tax benefits from stock-based compensation			—				94,287
Excess tax benefits from stock-based compensation			(7,800	)			—
Gain on investments			—				(1,698	)
Other non-cash charges			1,122				1,366
Changes in operating assets and liabilities:
Accounts receivable, net			(15,609	)			(43,481	)
Prepaid expenses and other assets			27,066				(37,271	)
Accounts payable			(6,206	)			35,452
Accrued compensation			(16,004	)			(12,090	)
Accrued warranty			(1,264	)			(1,347	)
Other accrued liabilities			37,754				(16,179	)
Deferred revenue			93,145				57,547
Net cash provided by operating activities			521,376				445,433
Investing Activities:
Purchases of property and equipment			(69,819	)			(58,873	)
Purchases of available-for-sale investments			(398,327	)			(639,350	)
Maturities and sales of available-for-sale investments			450,640				540,938
Changes in restricted cash			20,726				(7,100	)
Minority equity investments			(3,090	)			(9,823	)
Payments for business acquisitions, net of cash and cash equivalents			(15,102	)			(199,060	)
Net cash used in investing activities			(14,972	)			(373,268	)
Financing Activities:
Proceeds from issuance of common stock			87,138				103,057
Purchases and subsequent retirement of common stock			(186,388	)			—
Excess tax benefits from stock-based compensation			7,800				—
Net cash (used in) provided by financing activities			(91,450	)			103,057
Net increase in cash and cash equivalents			414,954				175,222
Cash and cash equivalents at beginning of period			918,401				713,182
Cash and cash equivalents at end of period		$	1,333,355			$	888,404
Supplemental Disclosure of Non-Cash Investing Activities:
Common stock issued in connection with acquisitions		$	10,343			$	221,221
Stock options assumed in connection with acquisitions		$	—			$	65,185
Deferred stock compensation assumed in connection with acquisitions		$	—			$	19,035

See accompanying Notes to the Condensed Consolidated Financial Statements

Juniper Networks, Inc.

Note 1. Summary of Significant Accounting Policies

     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, as well as a number of education and training programs, to customers of the Infrastructure and SLT segments.

     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 notes required by U.S. generally accepted accounting principles for complete financial statements. The preparation of the Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. 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 and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. 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 Notes thereto included in the Company’s 2006 Annual Report on Form 10-K (the “2006 Form 10-K”) to be filed with the Securities and Exchange Commission (the “SEC”).

     On January 1, 2006, the Company adopted 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 awards made to employees and directors including employee stock options, restricted stock units (“RSUs”) and purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values. SFAS 123R supersedes the previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), as allowed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), for periods beginning in 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in conjunction with its adoption of SFAS 123R.

     The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Condensed Consolidated Financial Statements as of and for the three and nine months ended September 30, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Company’s condensed consolidated financial statements for periods prior to 2006 have not been restated to reflect, and do not include, the impact of SFAS 123R.

     SFAS 123R requires companies to estimate the fair value of stock-based 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 options under SFAS 123R, consistent with that used for pro forma disclosures under SFAS 123. The fair value of a RSU is equivalent to the market price of the Company’s common stock on the grant date. The value of the portion of the stock-based award that is ultimately expected to vest is

recognized as expense over the requisite service periods, or in the period of grant if the requisite service period has been provided, in the Company’s Consolidated Statement of Operations.

     Stock-based compensation expense recognized is based on the fair value of the actual awards vested or expected to vest. Stock-based compensation expense recognized in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2006 included (i) compensation expense for stock-based awards granted prior to, but not yet vested as of, December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123 and (ii) compensation expense for the stock-based awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In conjunction with the adoption of SFAS 123R, the Company changed its accounting policy of attributing the fair value of stock-based compensation to expense from the accelerated multiple-option approach provided by APB 25, as allowed under SFAS 123, to the straight-line single-option approach, as allowed under SFAS 123R. Compensation expense for all expected-to-vest stock-based awards that were granted on or prior to December 31, 2005 will continue to be recognized using the accelerated attribution method. Compensation expense for all expected-to-vest stock-based awards that were granted or modified subsequent to December 31, 2005 is recognized on a straight-line basis provided that the amount of compensation cost recognized at any date is no less than the portion of the grant-date value of the award that is vested at that date. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s stock-based compensation expense required under APB 25 and the pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.

     Prior to the adoption of SFAS 123R, stock-based compensation expense was recognized for employee stock awards and past acquisitions in the Company’s consolidated statement of operations under the provisions of APB 25. In accordance with APB 25, no compensation expense was required for the employee stock purchases under the Company’s Employee Stock Purchase Plan under APB 25. Stock-based compensation expense recorded for the three and nine months ended September 30, 2005 was $7.2 million and $17.6 million, respectively, was related to employee stock-based awards and stock options, RSUs, employee stock purchases under the Company’s Employee Stock Purchase Plan, as well as the incremental fair value assumed from acquisitions. As a result of adopting SFAS 123R, stock-based compensation recorded for the three and nine months ended September 30, 2006 was $22.9 million and $69.1 million, respectively, or $20.2 million and $58.0 million higher than which would have been reported had the Company continued to account for stock-based compensation under APB 25. Net income for the three and nine months ended September 30, 2006 was approximately $13.9 million and $40.0 million, respectively, lower than that which would have been reported had the Company continued to account for stock-based compensation under APB 25. Unamortized deferred compensation associated with stock options assumed from past acquisitions and employee stock-based awards of $17.7 million has been reclassified to additional paid-in capital in the Company’s condensed consolidated balance sheet upon the adoption of SFAS 123R on January 1, 2006. Additional information is discussed in Note 2, “Restatement of Condensed Consolidated Financial Statements,” and Note 6, “Stockholders’ Equity.”

     In accordance with SFAS 123R, the Company has presented as financing cash flows the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options beginning in 2006. Tax benefits from employee stock plans of $7.8 million, which related to tax deductions in excess of the compensation cost recognized, were presented as financing cash flows for the nine months ended September 30, 2006. Prior to the adoption of SFAS 123R, tax benefits from employee stock plans were presented as operating cash flows.

     The following table summarizes the pro forma net income and earnings per share, net of related tax effect, had the Company applied the fair value recognition provisions of SFAS 123 to employee stock benefits (in millions, except per share amounts):

		Three Months Ended				Nine Months Ended
		September 30, 2005				September 30, 2005
		As Restated (1)				As Restated (1)
Net income as reported		$	83.5			$	245.8
Add: amortization of deferred stock compensation included in reported net income, net of tax			4.6				11.3
Deduct: total stock-based employee compensation expense determined under fair value based method, net of tax			(35.6	)			(100.7	)
Pro forma net income		$	52.5			$	156.4
Basic net income per share:
As reported		$	0.15			$	0.45
Pro forma		$	0.09			$	0.28
Diluted net income per share:
As reported		$	0.14			$	0.41
Pro forma		$	0.09			$	0.26

     Juniper Networks sells products and services through its direct sales force and through its strategic distribution relationships and value-added resellers. 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, 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.

     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 the 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.

     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.

     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 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.

     Goodwill is the excess of the purchase price over the fair value of identified net assets acquired in a business combination accounted for under the purchase method. Goodwill is not subject to amortization but is assessed annually, or as impairment indicators exist, for impairment by applying a fair-value based test. Goodwill impairment tests could result in further charges to earnings.

     Purchased intangibles with finite lives are amortized on a straight-line basis over their respective estimated useful lives.

     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. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying value, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data, if any. If the carrying value of the reporting unit exceeds the fair value, goodwill is considered impaired and a second step is performed to measure the amount of the impairment loss, if any.

     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. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The Company assesses the recoverability of its long-lived and intangible assets by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows.

     There was no impairment of goodwill or intangibles during the three months ended September 30, 2006. During the nine months ended September 30, 2006, the Company recognized non-cash impairment charges of $1,280.0 million relating to goodwill and $3.4 million relating to intangible assets.

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48 applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes, including uncertain tax positions. Under FIN 48 a company will recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the de-recognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet. Differences between the amounts recognized in the statements of financial position prior to and after the adoption of FIN 48 would be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. Upon adoption, there is a possibility that the cumulative effect would result in an adjustment to the beginning balance of retained earnings. In addition, the application of FIN 48 may increase the Company’s future effective tax rates and its future intra-period effective tax rate volatility. The Company is required to adopt FIN 48 as of January 1, 2007. The Company is currently evaluating the effect of the adoption of FIN 48 on its consolidated financial statements and is not yet in a position to determine such effects.

     In September 2006, the SEC Staff published Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (“SAB 108”). SAB 108 addresses quantifying the financial statement effects of misstatements and considering the effects of prior year uncorrected errors’ on the income statements as well as the balance sheets. SAB 108 does not change the requirements under SAB 99 regarding qualitative considerations in assessing the materiality of misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect any material impact on its financial statements from the adoption of this guidance.

     In September 2006, the FASB issued FASB Statement (“SFAS”) No. 157, Fair Value Measurement, (“SFAS 157”). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. The guidance clarifies the principle for assessing fair

value based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data such as companies’ own data. Under this guidance, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating SFAS 157 and expects to adopt this guidance beginning on January 1, 2008.

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

Note 2. Restatement of Condensed Consolidated Financial Statements

     Restatement of Previously Issued Financial Statements

     In this Form 10-Q, Juniper Networks is restating its condensed consolidated balance sheet as of December 31, 2005, the related consolidated statements of operations for the three and nine months ended September 30, 2005, and the related consolidated statement of cash flows for the nine months ended September 30, 2005 as a result of an independent stock option investigation commenced by the Company’s Board of Directors and Audit Committee. In the Company’s 2006 Form 10-K for the year ended December 31, 2006 to be filed with the SEC (the “2006 Form 10-K”), the Company is restating its consolidated balance sheet as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the fiscal years ended December 31, 2005 and 2004. The 2006 Form 10-K will also reflect the restatement of “Selected Consolidated Financial Data” in Item 6 for the fiscal years ended December 31, 2005, 2004, 2003, and 2002. In addition, the Company is restating its unaudited quarterly financial information and financial statements for interim periods of 2005, and unaudited condensed financial statements for the three months ended March 31, 2006.

     Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K filed by Juniper Networks prior to August 10, 2006, and the related opinions of its independent registered public accounting firm, and all earnings press releases and similar communications issued by the Company, prior to August 10, 2006 should not be relied upon and are superseded in their entirety by this Report and other reports on Form 10-Q and Form 8-K filed by the Company with the SEC on or after August 10, 2006.

     Stock Option Investigation

     On May 22, 2006, the Company issued a press release and Form 8-K announcing that it had received a request for information relating to the Company’s stock option granting practices from the U.S. Attorney’s Office for the Eastern District of New York. In the same press release and Form 8-K, the Company announced that its Board of Directors (the “Board”) had directed the Board’s Audit Committee, comprised of outside directors, to conduct a review of the Company’s stock option granting practices. On May 24, 2006, Company counsel received a letter from the SEC indicating that the SEC was conducting an inquiry regarding Juniper Networks.

     The investigation was conducted with the assistance of independent counsel and forensic accountants (collectively the “Investigative Team”). The investigation focused on all stock option grants made to all employees, officers, directors and consultants during the period following the Company’s initial public offering (“IPO”) on June 24, 1999 to May 23, 2006 (the “relevant period”). In addition, the Audit Committee investigation involved testing and analyses of the Company’s hiring, termination, leave of absence, grant notification and exercise practices regarding stock options and certain issues regarding grants made before the IPO. The scope of the investigation did not include a review of options granted by companies acquired by Juniper Networks. All of the companies acquired by Juniper Networks, with one exception, were privately held companies. None of the acquisitions was accounted for as a pooling of interests. All of the acquisitions were accounted for under the purchase method as provided by Statement of Financial Standards No. 141, Business Combinations and its predecessor Accounting Principles Board Opinion No. 16, Business Combinations.

     Consistent with the accounting literature and recent guidance from the SEC, the Company organized the grants during the relevant period into categories based on grant type and the process by which the grant was finalized. The Company analyzed the evidence from the Audit Committee’s investigation related to each category including, but not limited to, physical documents, electronic documents, underlying electronic data about documents, and witness interviews. Based on the relevant facts and circumstances, the Company applied the then appropriate accounting standards to determine, for every grant within each category, the proper measurement date. If

the measurement date was not the originally assigned grant date, accounting adjustments were made as required, resulting in stock-based compensation expense and related tax effects.

     The Company has concluded that the measurement dates of several grants to executive officers who were “reporting persons” as that term is defined under Section 16 of the Securities Exchange Act of 1934, as amended, (“Officers”) and members of the Board of Directors made between June 1999 and June 2003 were incorrect. In general, during the relevant period, the Board or the Compensation Committee of the Board made grants to Officers and directors. Grants were sometimes approved at meetings of these bodies or by action by unanimous written consent. There were several instances in which grants to Officers or directors were given grant dates (and corresponding exercise prices) prior to the date on which formal corporate action making the grant was taken. In general, this appears to have been done to make the grant date coincide with either a specific event, such as the appointment or re-election of a director or with the purported date options were granted to non-Officers. In these cases, the Company has determined that the correct measurement date is the date on which the Board or Compensation Committee took the action to approve the grant. The Company also identified instances in which grants to Officers were granted effective upon a future event, such as the commencement of employment or closing of an acquisition. In these cases, the Company has determined that the date of the future event is the correct measurement date for such grants. In connection with the application of these measurement principles, and after accounting for forfeitures, the Company has adjusted the measurement of compensation cost for options covering 5.6 million shares of common stock resulting in an incremental stock-based compensation expense of $80.3 million on a pre-tax basis over the respective awards’ vesting terms. Juniper Networks’ CEO, Scott Kriens, received two stock option awards whose measurement dates for financial accounting purposes differ from the recorded grant dates for such awards. However, both options were exchanged and cancelled unexercised in 2001 as part of a company-wide option re-pricing program. Mr. Kriens has not exercised any stock options since 1998, approximately nine months before the Company’s IPO.

     In addition, there was one other grant to an Officer where approval of such grant was not reflected in minutes of a meeting or an action by unanimous written consent of the Board of Directors or the Compensation Committee. For this grant, the measurement date was determined based on the terms of the Officer’s offer letter and the date his employment commenced. With respect to that grant, the Company has adjusted the measurement of compensation cost for options covering 1.5 million shares of common stock resulting in an incremental stock-based compensation expense of $6.5 million on a pre-tax basis over the award’s vesting terms after accounting for forfeitures.

     The Company has concluded that the measurement dates of a large number of grants to non-Officers during the period between June 1999 and December 2004 were incorrect. The Company’s practice has been to grant stock options, except where prohibited, to nearly all full-time employees in connection with joining the Company. To facilitate the granting of options to Juniper Networks’ rapidly growing workforce, the Board of Directors established a Stock Option Committee to grant options to non-Officer employees. Between June 1999 and June 2003, the dates for a large number of grants made by the Stock Option Committee were chosen with the benefit of hindsight as to the price of the Company’s stock, so as to give favorable exercise prices. Moreover, the Stock Option Committee’s process for finalizing and documenting these grants was often completed after the originally assigned grant date. Beginning with grants dated June 20, 2003, the Company implemented a number of new procedures and policies regarding the granting of options to non-Officer employees. After that, the pattern of consciously looking back for the most favorable dates for the employees ceased. However, the documentation and written approvals of grant dates still generally trailed the recorded grant dates. Based on all available facts and circumstances, the originally recorded measurement dates for the grants made by the Stock Option Committee during the period from July 1999 through December 2004 can not be relied upon in isolation as the correct measurement dates. In 2005, the Company made additional changes to its procedures. No grants in 2005 and 2006 required new measurement dates.

     APB 25 defines the measurement date for determining stock-based compensation expense as the first date on which both (1) the number of shares that an individual employee is entitled to receive and (2) the option or purchase price, are known. Throughout the relevant period, the Company’s stock administration department entered the option grant information for grants made by the Stock Option Committee into its Equity Edge stock administration system. This system was used to monitor and administer the Company’s stock option program. The data in Equity Edge were sent on a regular basis to designated brokers, allowing grantees to view their options information in their accounts via the Internet.

     For grants made by the Stock Option Committee between June 1999 and December 2004, where there is no other reliable objective evidence pointing to an earlier single specific date that the number of shares and the individuals entitled to receive them and the price

had become final, the Company has determined the Equity Edge entry date to be the most reliable measurement date for calculating additional stock-based compensation expense under APB 25. Using this measurement date, and after accounting for forfeitures, the Company has adjusted the measurement of compensation cost for options covering 74.2 million shares of common stock resulting in an incremental stock-based compensation expense of $636.7 million on a pre-tax basis over the respective awards’ vesting terms.

     In many of the cases where the Equity Edge entry date was used as the measurement date, the formal Stock Option Committee granting documentation (consisting of unanimous written consents or minutes and related lists of recipients, amounts and types of awards) was not created or completed until a later date. Because the awards listed in the formal granting documentation did not differ from the grants entered into Equity Edge, the notice of the awards was made available to employees prior to the creation or completion of the granting documents, and because the completion of the documentation was treated as perfunctory, the Company determined that the Equity Edge entry date was the proper measurement date under APB 25 rather than the date the Stock Option Committee granting documentation was completed.

     In a number of cases, there was reliable objective evidence pointing to a single specific date that the number of shares and the individuals entitled to receive them and the price had become final. Such evidence primarily consisted of electronic data indicating that the granting instrument and schedule were created prior to the Equity Edge entry date. The Company also relied on other evidence such as emails or written agreements to determine the date certain options became final. Such evidence was used to determine the measurement dates for options for which the Company has adjusted the measurement of compensation cost for options covering 27.9 million shares of common stock resulting in an incremental stock-based compensation expense of $141.2 million on a pre-tax basis over the respective awards’ vesting terms.

     The Company also concluded that there were instances in which clerical errors or omissions regarding the persons to receive an award or the number of options to be granted were corrected after the date of award. In the case of most additions made to correct omissions and other corrections that were not reflected on the grant documentation at the time of the applicable grant date or in documentation existing at the time of grant, the Company has determined that a new measurement date should be established. The Company considered whether certain of such changes or additions should give rise to variable accounting treatment and concluded that such treatment was not appropriate because the grants represented independent decisions or events rather than a continuation or modification of the other grants. The Company believes that the correct measurement date for these grants is the date Stock Administration entered the correction or addition into Equity Edge, except where objective evidence identifies an earlier date on which the correction was approved. After accounting for forfeitures, the Company has adjusted the measurement of compensation cost for options covering 1.3 million shares of common stock resulting in an incremental stock-based compensation of $11.9 million on a pre-tax basis over the respective awards’ vesting terms.

     Compensation expense was also recognized as a result of modifications that were made to certain employee option grant awards in connection with certain employees’ terminations or leaves of absence. Typically such modifications related to extensions of the time employees could exercise options following their termination of employment or that enabled the employee to vest in additional shares in relation to a leave of absence. For example, in connection with reductions in work force in 2001 and 2002, the Company increased the period for affected employees to exercise their options from 30 days to 90 days. The Company has incremental stock-based compensation expense associated with such terminations or leaves of absence of $20.0 million on a pre-tax basis in the period of modification.

     Compensation expense of $0.2 million on a pre-tax basis was also recognized as a result of non-employee grants to consultants in exchange for services and other matters.

     In light of the significant judgment used in establishing revised measurement dates, alternate approaches to those used by the Company could have resulted in different compensation expense charges than those recorded in the restatement. The Company considered various alternative approaches. For example, in those cases where the formal documentation of a grant was completed after the date the grant was entered in Equity Edge, an alternative measurement date to using the Equity Edge entry date could be the creation date of the documentation. The Company believes that the approaches used by it were the most appropriate under the circumstances.

     The Company adjusted the measurement dates for options covering a total of 110.5 million, or 76%, of the 146.0 million shares of common stock covered by options granted during the relevant period.

     The incremental impact on the condensed consolidated statement of operations from recognizing stock-based compensation expense through December 31, 2005 resulting from the investigation is summarized as follows (in millions):

Fiscal Year		Pre-Tax Expense				After Tax Expense
1998		$	—			$	—
1999			15.3				15.3
2000			283.3				201.6
2001			513.1				488.1
2002			48.0				48.0
2003			19.4				8.6
2004			10.9				7.5
2005			4.7				3.3
Total		$	894.7			$	772.4

     In addition to the $894.7 million recognized through fiscal 2005, $2.1 million of unamortized deferred compensation remained as of December 31, 2005, bringing the total incremental impact from the investigation to approximately $896.8 million. As required by SFAS 123R which was adopted on January 1, 2006, the unamortized deferred compensation of $2.1 million has been reclassified to additional paid-in capital, along with the unamortized deferred compensation for stock options assumed from past acquisitions, in the Company’s consolidated balance sheet. Beginning in 2006, the incremental amortization resulting from the investigation is included in stock-based compensation expense under the provisions of SFAS 123R. The incremental expense from the restatement of employee stock options is insignificant for the three and nine months ended September 30, 2006.

     Additionally, the Company has restated the pro forma amortization of deferred stock compensation included in reported net income, net of tax, and total stock-based employee compensation expenses determined under fair value based method, net of tax, under SFAS 123 in Note 1 to reflect the impact of the stock-based compensation expense resulting from the correction of these past stock options grants. The Company also determined that the previously reported pro forma compensation expense for options assumed in a 2004 acquisition was inadvertently based on an incorrect fair value. The amount of pro forma stock-based compensation expense reported in the table below has been revised to reflect the proper fair value for options assumed from the 2004 acquisition. Such adjustment was previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     The following table presents the effect of the related adjustments on the pro forma calculation of the net income and net income per share for the three and nine months ended September 30, 2005, respectively (in millions, except per share amounts):

		Three Months Ended September 30, 2005												Nine Months Ended September 30, 2005
		As previously												As previously
		reported				Adjustments				As restated				reported				Adjustments				As restated
Net income		$	84.1			$	(0.6	)		$	83.5			$	248.5			$	(2.7	)		$	245.8
Add: Stock-based employee compensation expense included in reported net income			4.0				0.6				4.6				8.6				2.7				11.3
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards			(26.4	)			(9.2	)			(35.6	)			(78.4	)			(22.3	)			(100.7	)
Pro forma net income (loss)		$	61.7			$	(9.2	)		$	52.5			$	178.7			$	(22.3	)		$	156.4
Net income per share — basic, as reported		$	0.15			$	—			$	0.15			$	0.45			$	—			$	0.45
Net income (loss) per share — basic, pro forma		$	0.11			$	(0.02	)		$	0.09			$	0.32			$	(0.04	)		$	0.28
Net income per share — diluted, as reported		$	0.14			$	—			$	0.14			$	0.42			$	(0.01	)		$	0.41
Net income (loss) per share — diluted, pro forma		$	0.10			$	(0.01	)		$	0.09			$	0.29			$	(0.03	)		$	0.26

     Other Matters

     After considering all available evidence, primarily the then current 2005 operating projections of future income, which remain appropriate, management has concluded that the previously recorded valuation allowance related to the tax benefit of stock options deductions should have been reversed in the fourth quarter of 2005. Accordingly, the Company decreased the valuation allowance as of December 31, 2005 by $158.0 million with a corresponding credit to additional paid-in capital. The remaining valuation allowance balance of $40.6 million relates to capital losses that will carry forward to offset future capital gains.

     Additionally, the Company misclassified the tax benefit from deductions from stock options assumed in acquisitions. Accordingly, the Company has reduced additional paid-in capital for the years ended December 31, 2005 and 2004 by $6.0 million and $18.5 million, respectively, with a corresponding decrease to goodwill. The total reduction to both additional paid-in capital and goodwill as of December 31, 2005 was $24.5 million.

     Because virtually all holders of options issued by the Company were not involved in or aware of the incorrect pricing, the Company intends to take actions to deal with certain adverse tax consequences that may be incurred by the holders of certain incorrectly priced options. The primary adverse tax consequences are that incorrectly priced stock options vesting after December 31, 2004 may subject the option holder to a penalty tax under IRC Section 409A (and, as applicable, similar penalty taxes under California and other state tax laws). The Company expects to incur future charges to resolve the adverse tax consequences of incorrectly priced options.

     The Company misclassified the losses from the retirement of its treasury shares in fiscal 2004. Accordingly, the Company reduced its retained earnings (accumulated deficit) as of December 31, 2005 and 2004 by $63.6 million with a corresponding increase to additional paid-in capital.

     Effects of the Restatement Adjustments

     The following table presents the effect of the stock-based compensation and related tax adjustments upon the Company’s previously reported condensed consolidated statements of operations (in millions):

		Three months ended September 30, 2005												Nine months ended September 30, 2005
		As previously												As previously
		Reported (1)				Adjustments				As restated				Reported (1)				Adjustments				As restated
Net revenues:
Product		$	466.4			$	—			$	466.4			$	1,282.4			$	—			$	1,282.4
Service			80.0				—				80.0				206.1				—				206.1
Total net revenues			546.4				—				546.4				1,488.5				—				1,488.5
Cost of revenues:
Product(2)			132.4				(0.1	)			132.3				366.2				0.2				366.4
Service(2)			39.4				0.1				39.5				104.7				0.3				105.0
Total cost of revenues			171.8				—				171.8				470.9				0.5				471.4
Gross margin			374.6				—				374.6				1,017.6				(0.5	)			1,017.1
Operating expenses:
Research and development(2)			94.4				0.3				94.7				256.1				1.5				257.6
Sales and marketing(2)			117.8				0.4				118.2				313.3				1.6				314.9
General and administrative(2)			27.1				0.1				27.2				58.5				0.1				58.6
Amortization of purchased intangibles			23.0				—				23.0				61.4				—				61.4
In-process research and development			3.8				—				3.8				5.7				—				5.7
Other charges, net			(0.2	)			—				(0.2	)			(6.7	)			—				(6.7	)
Total operating expenses			265.9				0.8				266.7				688.3				3.2				691.5
Operating income			108.7				(0.8	)			107.9				329.3				(3.7	)			325.6
Interest and other income			15.6				—				15.6				40.0				—				40.0
Gain on investments			1.7				—				1.7				1.7				—				1.7
Interest and other expense			(0.8	)			—				(0.8	)			(2.7	)			—				(2.7	)

		Three months ended September 30, 2005												Nine months ended September 30, 2005
		As previously												As previously
		Reported (1)				Adjustments				As restated				Reported (1)				Adjustments				As restated
Income before income taxes			125.2				(0.8	)			124.4				368.3				(3.7	)			364.6
Provision (benefit) for income taxes			41.1				(0.2	)			40.9				119.8				(1.0	)			118.8
Net income		$	84.1			$	(0.6	)		$	83.5			$	248.5			$	(2.7	)		$	245.8
Net income per share:
Basic		$	0.15			$	—			$	0.15			$	0.45			$	—			$	0.45
Diluted		$	0.14			$	—			$	0.14			$	0.42			$	(0.1	)			0.41
Shares used in computing net income per share:
Basic		$	561.8			$	—			$	561.8			$	550.3			$	—			$	550.3
Diluted		$	605.4			$	0.9			$	606.3			$	596.0			$	1.3			$	597.3

Cost of revenues — Product		$	0.4			$	(0.1	)		$	0.3			$	0.5			$	0.2			$	0.7
Cost of revenues — Service			0.3				0.1				0.4				0.9				0.3				1.2
Research and development			3.8				0.4				4.2				8.3				1.5				9.8
Sales and marketing			1.6				0.3				1.9				3.3				1.6				4.9
General and administrative			0.3				0.1				0.4				0.8				0.1				0.9
Total		$	6.4			$	0.8			$	7.2			$	13.8			$	3.7			$	17.5

     The following table presents the effect of the stock-based compensation, related tax impact and other adjustments upon the Company’s previously reported condensed consolidated balance sheet as of December 31, 2005 (in millions):

		December 31, 2005
		As previously
		reported				Adjustments				As restated
ASSETS
Current assets:
Cash and cash equivalents		$	918.4			$	—			$	918.4
Short-term investments			510.4				—				510.4
Accounts receivable, net			268.9				—				268.9
Deferred tax assets, net			74.1				70.3	(E)			144.4
Prepaid expenses and other current assets			46.7				—				46.7
Total current assets			1,818.5				70.3				1,888.8
Property and equipment, net			319.9				—				319.9
Long-term investments			618.3				—				618.3
Restricted cash			66.1				—				66.1
Goodwill			4,904.2				(24.5	) (D)			4,879.7
Purchased intangible assets, net			269.9				—				269.9
Long-term deferred tax assets, net			—				111.2	(E)			111.2
Other assets			29.7				—				29.7
Total assets		$	8,026.6			$	157.0			$	8,183.6
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	165.2			$	—			$	165.2
Accrued compensation			97.7				—				97.7
Accrued warranty			28.2				—				28.2
Deferred revenue			213.5				—				213.5
Income taxes payable			56.4				—				56.4
Other accrued liabilities			66.4				—				66.4
Total current liabilities			627.4				—				627.4
Long-term deferred revenue			39.3				—				39.3
Other long-term liabilities			60.2				(31.5	) (E)			28.7
Long-term debt			400.0				—				400.0
Commitments and contingencies
Stockholders’ equity:
Common stock			—				—				—

		December 31, 2005
		As previously
		reported				Adjustments				As restated
Additional paid-in capital			6,432.0				1,026.6	(A)(B)(C)(D)(E)			7,458.6
Deferred stock compensation			(15.6	)			(2.1	) (C)			(17.7	)
Accumulated other comprehensive (loss) gain			(8.3	)			—				(8.3	)
Retained earnings (accumulated deficit)			491.6				(836.0	) (A)(B)			(344.4	)
Total stockholders’ equity			6,899.7				188.5				7,088.2
Total liabilities and stockholders’ equity		$	8,026.6			$	157.0			$	8,183.6

     The effect of restatement adjustments on each component of stockholders’ equity at the end of each year is summarized as follows (in millions):

		Common Stock &
		Additional Paid-In				Deferred Stock								Net Impact to
Fiscal Year		Capital				Compensation				Accumulated Deficit				Stockholders’ Equity
1998		$	—			$	—			$	—			$	—
1999			215.3				(200.0	)			(15.3	)			—
2000			479.6				(278.0	)			(201.6	)			—
2001			74.9				413.2				(488.1	)			—
2002			21.5				26.5				(48.0	)			—
2003			(10.6	)			19.2				(8.6	)			—
2004			41.3				11.3				(71.1	)			(18.5	)
2005			204.6				5.7				(3.3	)			207.0
Total		$	1,026.6			$	(2.1	)		$	(836.0	)		$	188.5

     The following table presents the effects of the restatement adjustments on the Company’s previously reported condensed consolidated statements of cash flows (in millions):

		Nine months ended September 30, 2005
		As previously
		reported				Adjustments				As restated
Operating Activities
Net Income		$	248.5			$	(2.7	)		$	245.8
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			99.7				—				99.7
Stock-based compensation			13.9				3.7				17.6
In-process research and development			5.7				—				5.7
Non-cash portion of debt issuance costs and disposal of property and equipments			1.4				—				1.4
Gains on investments			(1.7	)			—				(1.7	)
Tax benefits from stock-based compensation			95.3				(1.0	)			94.3
Changes in operation assets and liabilities:
Accounts receivable, net			(43.5	)			—				(43.5	)
Prepaid expenses, other current assets and other long-term assets			(37.3	)			—				(37.3	)
Accounts payable			35.5				—				35.5
Accrued compensation			(12.1	)			—				(12.1	)
Accrued warranty			(1.3	)			—				(1.3	)
Other accrued liabilities			(16.2	)			—				(16.2	)
Deferred revenue			57.5				—				57.5
Net cash provided by operating activities			445.4				—				445.4
Investing Activities
Purchases of property and equipment			(58.9	)			—				(58.9	)
Purchases of available-for-sale investments			(639.3	)			—				(639.3	)
Maturities and sales of available-for-sale investments			540.9				—				540.9
Increase in restricted cash			(7.1	)			—				(7.1	)
Minority equity investments			(9.8	)			—				(9.8	)
Payments for business acquisitions, net of cash and cash equivalents			(199.1	)			—				(199.1	)
Net cash used in investing activities			(373.3	)			—				(373.3	)

		Nine months ended September 30, 2005
		As previously
		reported				Adjustments				As restated
Financing Activities
Proceeds form issuance of common stock			103.1				—				103.1
Purchases and subsequent retirement of common stock			—				—				—
Tax benefits from stock-based compensation			—				—				—
Net cash provided by financing activities		$	103.1			$	—			$	103.1
Net increase in cash and cash equivalents		$	175.2			$	—			$	175.2
Cash and cash equivalents at beginning of period		$	713.2			$	—			$	713.2
Cash and cash equivalents at end of period		$	888.4			$	—			$	888.4

Note 3. Goodwill and Purchased Intangible Assets

     The Company allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their fair values. The excess purchase price over those fair values is recorded as goodwill. The purchase price allocation and goodwill are subject to change due to the release of the amounts held in escrow to secure certain indemnity obligations, additional contingent payments and changes in acquisition related assets and liabilities. Changes in the Company’s goodwill are as follows (in millions):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2006				2005				2006				2005
						As Restated (1)								As Restated (1)
Beginning balance		$	3,627.2			$	4,557.6			$	4,879.6			$	4,409.4
Goodwill acquired during the period			—				250.6				—				393.2
Impairment of goodwill			—				—				(1,280.0	)			—
Escrow and other additions to existing goodwill			(2.2	)			(0.2	)			25.4				5.4
Ending balance		$	3,625.0			$	4,808.0			$	3,625.0			$	4,808.0

     In the three months ended June 30, 2006, the Company concluded that the carrying value of goodwill for the SLT segment was impaired and recorded a goodwill impairment charge of $1,280.0 million which is included in the Company’s consolidated statements of operations for nine months ended September 30, 2006. There was no impairment of goodwill in the three months ended September 30, 2006. The Company made its determination to perform an impairment review in the early May 2006 time frame. A significant portion of the goodwill was initially recorded based on stock prices at the time related merger agreements were executed and announced. The impairment of goodwill was primarily attributable to the decline in the Company’s market capitalization that occurred over a period of approximately six months prior to the impairment review and, to a lesser extent, a decrease in the forecasted future cash flows used in the income approach. The first step of the impairment test compared the fair value of each reporting unit to its carrying value, including the goodwill related to the respective reporting units. The Company determined that it has four reporting units at the time of the impairment test, consisting of Infrastructure and Service which were the same as the respective segments and Security and Application Acceleration which were the two components of the SLT segment. The Company utilized independent external service providers to calculate the fair value of the reporting units using a combination of the income and market approaches. The income approach requires estimates of expected revenue, gross margin and operating expenses in order to discount the sum of undiscounted future cash flows using each particular reporting unit’s weighted average cost of capital. The Company’s growth estimates were based on historical data and internal estimates developed as part of its long-term planning process. The Company tested the reasonableness of the inputs and outcomes of its discounted cash flow analysis by comparing to available market data. In determining the carrying value of the reporting unit, the Company allocated the fair values of shared tangible net assets to each reporting unit based on revenue. As the fair values of the Security and Application Acceleration reporting units were lower than the allocated book values, the Company performed step two of the goodwill impairment calculation for those two reporting units within the SLT segment.

     During the second step of the goodwill impairment review, management estimated the fair value of the Company’s tangible and intangible net assets with the assistance of independent external service providers. Identified intangible assets were valued specifically for each reporting unit tested. The difference between the estimated fair value of each reporting unit and the sum of the fair value of the identified net assets results in the residual value of goodwill. Future impairment indicators, including further declines in the Company’s market capitalization or changes in forecasted future cash flows, could require additional impairment charges. There was no goodwill impairment during the three and nine months ended September 30, 2005.

     In the nine months ended September 30, 2006, increases to goodwill are primarily related the distribution of $15.1 million in cash for the resolution of certain indemnity obligations for the Redline Networks, Inc. (“Redline”) and Kagoor Networks, Inc. (“Kagoor”) acquisitions and the release of 0.8 million shares of common stock held in escrow with a total market value of $10.3 million in conjunction with the resolution of certain indemnity obligations associated with the Peribit Networks, Inc. (“Peribit”) acquisition. The decrease in goodwill in the three months ended September 30, 2006 of $2.2 million is primarily related to changes in the market value of the common stock related to the Peribit escrow between the resolution date and the release date. In the nine months ended September 30, 2005, increases to goodwill of $5.4 million was primarily related to the resolution of certain earn-out obligations associated with the acquisition of NetScreen Technologies, Inc. (“NetScreen”).

     Restated year end balances include $6.0 million and $18.5 million decreases in goodwill for 2005 and 2004, respectively, related to misclassified tax benefits from deductions from stock options assumed in acquisitions.

     The following is a summary of the Company’s purchased intangibles assets with definite lives (in millions):

						Accumulated
		Gross				Amortization				Net
As of September 30, 2006:
Technologies and patents		$	379.6			$	(221.5	)		$	158.1
Other			68.9				(34.0	)			34.9
Total		$	448.5			$	(255.5	)		$	193.0
As of December 31, 2005:
Technologies and patents		$	382.4			$	(156.3	)		$	226.1
Other			69.5				(25.7	)			43.8
Total		$	451.9			$	(182.0	)		$	269.9

     For the nine months ended September 30, 2006, the Company recorded an impairment charge of $3.4 million due to a significant decrease in forecasted cash flows associated with its stand-alone session border control (“SBC”) products in the second quarter of 2006. There were no impairment charges in the three months ended September 30, 2006.

     There were no additions to purchased intangible assets during the three and nine months ended September 30, 2006. Amortization expense of purchased intangible assets of $24.4 million and $23.0 million were included in operating expenses and cost of product revenue for the three months ended September 30, 2006 and 2005, respectively, and $73.5 million and $61.4 million for the nine months ended September 30, 2006 and 2005, respectively.

     The estimated future amortization expense of purchased intangible assets with definite lives for the next five years is as follows (in millions):

Year Ending December 31,		Amount
2006 (remaining three months)		$	24.4
2007			91.9
2008			45.2
2009			17.9
2010			4.1
Thereafter			9.5
Total		$	193.0

Note 4. Other Financial Information

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

		As of
		September 30,				December 31,
		2006				2005
Commercial paper		$	—			$	8.0
Government securities			350.0				319.6
Corporate debt securities			637.2				700.7
Asset-backed securities and equity securities			92.7				95.5
Other			0.8				4.9
Total		$	1,080.7			$	1,128.7
Reported as:
Short-term investments		$	514.2			$	510.4
Long-term investments			566.5				618.3
Total		$	1,080.7			$	1,128.7

     Restricted cash as of September 30, 2006 and December 31, 2005 consisted of escrow accounts required by certain acquisitions and the Directors & Officers (“D&O”) trust. In the three months ended September 30, 2006, the Company reduced restricted cash by $2.0 million related to the cash distribution for the partial resolution of certain indemnity obligations for the Kagoor acquisition. In the nine months ended September 30, 2006, the Company reduced restricted cash by $20.8 million, of which $5.9 million was related to the removal of deposit requirements for standby letters of credits issued for facility leases, and $15.1 million was related to the cash distributions for the resolution of certain indemnity obligations for the Redline and Kagoor acquisitions. During the nine months ended September 30, 2005, the Company added $20.0 million to restricted cash for the escrow accounts established in connection with the Kagoor and Redline acquisitions.

     As of September 30, 2006 and December 31, 2005, the carrying values of the Company’s minority equity investments in privately held companies of $16.3 million and $13.2 million, respectively, were included in other long-term assets in the condensed consolidated balance sheets. There was no additional minority equity investment in privately-held companies during the three months ended September 30, 2006. During the nine months ended September 30, 2006, the Company made minority equity investments of $3.1 million in privately-held companies. During the three and nine months ended September 30, 2005, the Company invested $10.0 million and $11.0 million, respectively, in privately held companies and recognized a gain of $1.7 million resulting from the sale of the one of the Company’s portfolio companies with a cost basis of $1.0 million. There was no gain or impairment against the Company’s minority equity investments in the three and nine months ended September 30, 2006.

     As of September 30, 2006 and December 31, 2005, warranty reserve was $34.1 million and $35.3 million, respectively. Changes in the Company’s warranty reserve are as follows (in millions):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2006				2005				2006				2005
Beginning balance		$	35.2			$	36.1			$	35.3			$	38.9
Provisions made during the period			6.8				12.2				27.3				22.8
Changes in estimates			(1.5	)			(1.3	)			(4.7	)			(2.5	)
Actual costs incurred during the period			(6.4	)			(9.3	)			(23.8	)			(21.5	)
Ending balance		$	34.1			$	37.7			$	34.1			$	37.7
Reported as:
Current		$	27.5			$	30.9			$	27.5			$	30.9
Non-current (included in other long-term liabilities)			6.6				6.8				6.6				6.8
Ending balance		$	34.1			$	37.7			$	34.1			$	37.7

     Deferred revenue consists of the following (in millions):

		As of
		September 30,				December 31,
		2006				2005
Service		$	267.2			$	201.7
Product			78.8				51.1
Total		$	346.0			$	252.8
Reported as:
Current		$	282.5			$	213.5
Non-current			63.5				39.3
Total		$	346.0			$	252.8