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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



(Mark one)

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2003



OR



| ̈ |  | 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 0-33387



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NETSCREEN TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 77-0469208                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



805 11th Avenue

Building 3

Sunnyvale, California 94089

(Address of principal executive offices and zip code)



(408) 543-2100

(Registrants telephone number, including area code)



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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
filing requirements for the past 90 days.  Yes  x  No ̈



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



As of July 31, 2003, 81,411,698 shares of the
registrants common stock, $0.001 par value, were outstanding.



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##### Table of Contents

NETSCREEN TECHNOLOGIES, INC.



FORM 10-Q



For the quarterly period ended June 30, 2003



INDEX



|                             |  |                                                                                                                           |  | Page
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION |  |                                                                                                                          
|                             |  |                                                                                                                          
|Item 1.                      |  | Financial Statements:                                                                                                     |  |     
|                             |  |                                                                                                                          
|                             |  | a.
Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and September 30, 2002                           |  | 3   
|                             |  |                                                                                                                          
|                             |  | b.
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2003 and 2002 (Unaudited) |  | 4   
|                             |  |                                                                                                                          
|                             |  | c.
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and 2002 (Unaudited)           |  | 5   
|                             |  |                                                                                                                          
|                             |  | d.
Notes to Condensed Consolidated Financial Statements (Unaudited)                                                       |  | 6   
|                             |  |                                                                                                                          
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 15  
|                             |  |                                                                                                                          
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 35  
|                             |  |                                                                                                                          
|Item 4.                      |  | Controls and Procedures                                                                                                   |  | 35  
|                             | 
|PART IIOTHER INFORMATION    |  |                                                                                                                          
|                             |  |                                                                                                                          
|Item 1.                      |  | Legal Proceedings                                                                                                         |  | 36  
|                             |  |                                                                                                                          
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                                                                 |  | 36  
|                             |  |                                                                                                                          
|Item 3.                      |  | Defaults upon Senior Securities                                                                                           |  | 36  
|                             |  |                                                                                                                          
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 36  
|                             |  |                                                                                                                          
|Item 5.                      |  | Other Information                                                                                                         |  | 36  
|                             |  |                                                                                                                          
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                                          |  | 36  
|                             | 
|SIGNATURE                    |  | 37                                                                                                                       



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Financial Statements



NETSCREEN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



|                                                                                                                                                                      |  | June 30,2003 |         |   | September 30,2002* |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------------ | -
|                                                                                                                                                                      |  | (Unaudited)  |         |   |                    |  
|Assets                                                                                                                                                                |  |              |         |   |                    |  
|Current assets:                                                                                                                                                       |  |              |         |   |                    |  
|Cash and cash equivalents                                                                                                                                             |  | $            | 76,649  |   |                    | $
|Short-term investments                                                                                                                                                |  |              | 238,559 |   |                    |  
|Restricted cash                                                                                                                                                       |  |              | 308     |   |                    |  
|Accounts receivable, net                                                                                                                                              |  |              | 28,518  |   |                    |  
|Refundable income taxes                                                                                                                                               |  |              | 243     |   |                    |  
|Inventories                                                                                                                                                           |  |              | 3,195   |   |                    |  
|Deferred taxes                                                                                                                                                        |  |              | 35,771  |   |                    |  
|Other current assets                                                                                                                                                  |  |              | 4,324   |   |                    |  
|                                                                                                                                                                      |  |              |         |   |                    |  
|Total current assets                                                                                                                                                  |  |              | 387,567 |   |                    |  
|                                                                                                                                                                      |  |              |         |   |                    |  
|Property and equipment, net                                                                                                                                           |  |              | 9,969   |   |                    |  
|Restricted cash                                                                                                                                                       |  |              | 827     |   |                    |  
|Intangible assets                                                                                                                                                     |  |              | 5,025   |   |                    |  
|Goodwill                                                                                                                                                              |  |              | 54,522  |   |                    |  
|Other assets                                                                                                                                                          |  |              | 540     |   |                    |  
|                                                                                                                                                                      |  |              |         |   |                    |  
|Total assets                                                                                                                                                          |  | $            | 458,450 |   |                    | $
|                                                                                                                                                                      |  |              |         |   |                    |  
|Liabilities and Stockholders Equity                                                                                                                                  |  |              |         |   |                    |  
|Current liabilities:                                                                                                                                                  |  |              |         |   |                    |  
|Accounts payable                                                                                                                                                      |  | $            | 6,329   |   |                    | $
|Accrued expenses                                                                                                                                                      |  |              | 15,319  |   |                    |  
|Accrued compensation                                                                                                                                                  |  |              | 10,028  |   |                    |  
|Accrued income taxes                                                                                                                                                  |  |              |        |   |                    |  
|Deferred revenue                                                                                                                                                      |  |              | 47,375  |   |                    |  
|Current portion of restructuring liabilities                                                                                                                          |  |              | 682     |   |                    |  
|Current portion of debt and capital lease obligations                                                                                                                 |  |              | 114     |   |                    |  
|                                                                                                                                                                      |  |              |         |   |                    |  
|Total current liabilities                                                                                                                                             |  |              | 79,847  |   |                    |  
|                                                                                                                                                                      |  |              |         |   |                    |  
|Restructuring liabilities, less current portion                                                                                                                       |  |              | 2,154   |   |                    |  
|Long-term portion of debt and capital lease obligations                                                                                                               |  |              |        |   |                    |  
|Commitments and contingencies                                                                                                                                         |  |              |         |   |                    |  
|Stockholders equity:                                                                                                                                                 |  |              |         |   |                    |  
|Preferred stock, $0.001 par value:                                                                                                                                    |  |              |         |   |                    |  
|Authorized shares10,000,000 at June 30, 2003 and September 30, 2002 Issued and outstanding shares: none at June 30, 2003 and September 30, 2002                      |  |              |        |   |                    |  
|Common stock, $0.001 par value:                                                                                                                                       |  |              |         |   |                    |  
|Authorized shares500,000,000 at June 30, 2003 and September 30, 2002 Issued and outstanding shares81,334,001 and 77,893,007 at June 30, 2003 and September 30, 2002 |  |              | 81      |   |                    |  
|Additional paid-in capital                                                                                                                                            |  |              | 486,167 |   |                    |  
|Accumulated deficit                                                                                                                                                   |  |              | (88,177 | ) |                    |  
|Accumulated other comprehensive income                                                                                                                                |  |              | 300     |   |                    |  
|Deferred stock compensation                                                                                                                                           |  |              | (21,851 | ) |                    |  
|Stockholders notes receivable                                                                                                                                        |  |              | (71     | ) |                    |  
|                                                                                                                                                                      |  |              |         |   |                    |  
|Total stockholders equity                                                                                                                                            |  |              | 376,449 |   |                    |  
|                                                                                                                                                                      |  |              |         |   |                    |  
|Total liabilities and stockholders equity                                                                                                                            |  | $            | 458,450 |   |                    | $
|                                                                                                                                                                      |  |              |         |   |                    |  

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|* |  | Derived from audited financial statements.
|- |  | ------------------------------------------



See accompanying notes.



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NETSCREEN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share amounts)



|                                                                                               |  | Three Months EndedJune 30, |        |      | Nine Months EndedJune 30, |       
|---------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ---- | ------------------------- | ------
|                                                                                               |  | 2003                       |        | 2002 |                           |       
|Revenues:                                                                                      |  |                            |        |      |                           |       
|Product                                                                                        |  | $                          | 52,573 |      | $                         | 30,091
|Maintenance and service                                                                        |  |                            | 11,767 |      |                           | 6,320 
|                                                                                               |  |                            |        |      |                           |       
|Total revenues                                                                                 |  |                            | 64,340 |      |                           | 36,411
|                                                                                               |  |                            |        |      |                           |       
|Cost of revenues:                                                                              |  |                            |        |      |                           |       
|Product (1) (2)                                                                                |  |                            | 11,728 |      |                           | 7,292 
|Maintenance and service (1)                                                                    |  |                            | 3,177  |      |                           | 2,129 
|                                                                                               |  |                            |        |      |                           |       
|Total cost of revenues                                                                         |  |                            | 14,905 |      |                           | 9,421 
|                                                                                               |  |                            |        |      |                           |       
|Gross margin                                                                                   |  |                            | 49,435 |      |                           | 26,990
|                                                                                               |  |                            |        |      |                           |       
|Operating expenses:                                                                            |  |                            |        |      |                           |       
|Research and development (1) (2)                                                               |  |                            | 11,161 |      |                           | 8,578 
|Sales and marketing (1) (2)                                                                    |  |                            | 22,707 |      |                           | 16,338
|General and administrative (1)                                                                 |  |                            | 4,883  |      |                           | 4,214 
|                                                                                               |  |                            |        |      |                           |       
|Total operating expenses                                                                       |  |                            | 38,751 |      |                           | 29,130
|                                                                                               |  |                            |        |      |                           |       
|Income (loss) from operations                                                                  |  |                            | 10,684 |      |                           | (2,140
|Interest and other income, net                                                                 |  |                            | 1,090  |      |                           | 948   
|                                                                                               |  |                            |        |      |                           |       
|Income (loss) before taxes                                                                     |  |                            | 11,774 |      |                           | (1,192
|Benefit from (provision for) income taxes                                                      |  |                            | 23,496 |      |                           | (1,250
|                                                                                               |  |                            |        |      |                           |       
|Net income (loss)                                                                              |  |                            | 35,270 |      |                           | (2,442
|Deemed dividend on Series E and F redeemable convertible preferred stock                       |  |                            |       |      |                           |      
|                                                                                               |  |                            |        |      |                           |       
|Net income (loss) applicable to common stockholders                                            |  | $                          | 35,270 |      | $                         | (2,442
|                                                                                               |  |                            |        |      |                           |       
|Basic net income (loss) per share applicable to common stockholders                            |  | $                          | 0.44   |      | $                         | (0.03 
|                                                                                               |  |                            |        |      |                           |       
|Shares used in computing basic net income (loss) per share applicable to common stockholders   |  |                            | 79,935 |      |                           | 71,317
|                                                                                               |  |                            |        |      |                           |       
|Diluted net income (loss) per share applicable to common stockholders                          |  | $                          | 0.41   |      | $                         | (0.03 
|                                                                                               |  |                            |        |      |                           |       
|Shares used in computing diluted net income (loss) per share applicable to common stockholders |  |                            | 85,180 |      |                           | 71,317
|                                                                                               |  |                            |        |      |                           |       
|(1) Includes stock-based compensation of the following:                                        |  |                            |        |      |                           |       
|Cost of product revenues                                                                       |  | $                          | 387    |      | $                         | 411   
|Cost of maintenance and service revenues                                                       |  |                            | 276    |      |                           | 274   
|Research and development                                                                       |  |                            | 1,908  |      |                           | 1,928 
|Sales and marketing                                                                            |  |                            | 2,763  |      |                           | 2,794 
|General and administrative                                                                     |  |                            | 720    |      |                           | 742   
|                                                                                               |  |                            |        |      |                           |       
|Total stock-based compensation                                                                 |  | $                          | 6,054  |      | $                         | 6,149 
|                                                                                               |  |                            |        |      |                           |       
|(2) Includes amortization of intangible assets of the following:                               |  |                            |        |      |                           |       
|Cost of product revenues                                                                       |  | $                          | 186    |      | $                         |      
|Research and development                                                                       |  |                            | 23     |      |                           |      
|Sales and marketing                                                                            |  |                            | 36     |      |                           |      
|                                                                                               |  |                            |        |      |                           |       
|Total amortization of intangible assets                                                        |  | $                          | 245    |      | $                         |      
|                                                                                               |  |                            |        |      |                           |       



See accompanying notes.



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NETSCREEN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)



|                                                                                                          |  | Nine Months EndedJune 30, |         
|--------------------------------------------------------------------------------------------------------- |  | ------------------------- | --------
|                                                                                                          |  | 2003                      |         
|Operating activities                                                                                      |  |                           |         
|Net income (loss)                                                                                         |  | $                         | 44,373  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:                  |  |                           |         
|Depreciation and amortization                                                                             |  |                           | 4,005   
|Amortization of deferred stock compensation                                                               |  |                           | 17,615  
|Compensation expense related to warrants and accelerated vesting of stock options                         |  |                           | 8       
|Tax benefits related to employee stock options                                                            |  |                           | 9,878   
|Changes in operating assets and liabilities:                                                              |  |                           |         
|Accounts receivable, net                                                                                  |  |                           | (10,472 
|Refundable income taxes                                                                                   |  |                           | (243    
|Inventories                                                                                               |  |                           | (946    
|Deferred taxes                                                                                            |  |                           | (33,012 
|Other current assets                                                                                      |  |                           | 907     
|Other assets                                                                                              |  |                           | 305     
|Accounts payable                                                                                          |  |                           | 1,302   
|Accrued expenses                                                                                          |  |                           | 3,867   
|Accrued compensation                                                                                      |  |                           | 3,119   
|Accrued income taxes                                                                                      |  |                           | (1,865  
|Deferred revenue                                                                                          |  |                           | 21,225  
|Restructuring liabilities                                                                                 |  |                           | (282    
|                                                                                                          |  |                           |         
|Net cash provided by operating activities                                                                 |  |                           | 59,784  
|                                                                                                          |  |                           |         
|Investing activities                                                                                      |  |                           |         
|Purchase of property and equipment                                                                        |  |                           | (6,976  
|Cash used in business combination                                                                         |  |                           | (474    
|Purchases of short-term investments                                                                       |  |                           | (380,488
|Maturities of short-term investments                                                                      |  |                           | 380,439 
|                                                                                                          |  |                           |         
|Net cash used in investing activities                                                                     |  |                           | (7,499  
|                                                                                                          |  |                           |         
|Financing activities                                                                                      |  |                           |         
|Proceeds from borrowing arrangements                                                                      |  |                           |        
|Principal payments on debt and capital lease obligations                                                  |  |                           | (3,160  
|Restricted cash                                                                                           |  |                           | 476     
|Proceeds from initial public offering of common stock, net                                                |  |                           |        
|Proceeds from issuance of common stock under employee stock option and purchase plans, net of repurchases |  |                           | 14,464  
|Proceeds from issuance of convertible preferred stock, net                                                |  |                           |        
|Repayments of stockholders notes                                                                         |  |                           | 1,431   
|                                                                                                          |  |                           |         
|Net cash provided by financing activities                                                                 |  |                           | 13,211  
|                                                                                                          |  |                           |         
|Net increase in cash and cash equivalents                                                                 |  |                           | 65,496  
|Cash and cash equivalents at beginning of period                                                          |  |                           | 11,153  
|                                                                                                          |  |                           |         
|Cash and cash equivalents at end of period                                                                |  | $                         | 76,649  
|                                                                                                          |  |                           |         
|Supplemental disclosures of cash flow information:                                                        |  |                           |         
|Cash paid for interest                                                                                    |  | $                         | 346     
|Cash paid for taxes                                                                                       |  | $                         | 8,573   
|Supplemental schedule of non-cash investing and financing activities:                                     |  |                           |         
|Deferred stock compensation related to options issued below fair market value                             |  | $                         |        
|Reversal of deferred stock compensation for terminated employees                                          |  | $                         | 2,696   
|Deemed dividends on Series E and F preferred stock                                                        |  | $                         |        
|Conversion of preferred stock to common stock                                                             |  | $                         |        



See accompanying notes.



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##### Table of Contents

NETSCREEN TECHNOLOGIES, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Note 1. Background and Basis of Presentation



The Company



NetScreen Technologies, Inc. (the Company or
NetScreen) was incorporated in Delaware on October 30, 1997. NetScreen develops, markets and sells a broad family of integrated network security solutions for enterprises, carriers and government entities. NetScreens solutions
provide key security technologies, such as virtual private networking, denial of service protection, firewall and intrusion detection and prevention, in a line of easy-to-manage security systems and appliances.



The accompanying condensed consolidated financial statements of NetScreen
Technologies, Inc. have been prepared, without audit, in accordance with generally accepted accounting principles in the United States (GAAP) and the rules and regulations of the Securities and Exchange Commission (the SEC).
Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with these rules and regulations. The information in this report should be read in
conjunction with the Companys financial statements and notes thereto included in its Form 10-K filed with the SEC on December 30, 2002.



In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary to summarize fairly the Companys financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine month periods ended June 30, 2003 are
not necessarily indicative of the results that may be expected for the year ending September 30, 2003 or for any other future period.



Accounting Policies



Revenue recognition



The Company derives revenues primarily from sales of its hardware-based security systems and appliances and maintenance arrangements, and, to a lesser
extent, sales of software products and services. The Company generally recognizes revenues when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed or determinable and
collection is probable. For newly introduced technically complex products, the Company defers revenues from the sale of these products until they have successfully performed in the marketplace and sales returns are not unusually high. The
determination of which products are complex, and the timing of the end of deferral for particular products, can be expected to vary.



The Company defers revenues on sales to its distributors until the distributor has sold the products to its customers. The Companys agreements with
distributors provide for limited stock rotation and price protection rights. Stock rotation rights provide distributors with the right to exchange unsold inventory for alternate products of equal or greater value. Price protection rights grant
distributors the right to credit on future purchases in the event of decreases in the prices of the Companys products. The Companys agreements with value-added resellers typically do not include stock rotation or price protection rights.
At the time of shipment to value-added resellers, the Company reserves for estimated returns and exchanges. These revenue reserves are estimated and adjusted periodically based on historical rates of returns and allowances, inventory levels for
value-added resellers that submit inventory or sell-through reports, the volume of sales to value-added resellers that the Company ships directly to end customers, and for sales to value-added resellers that do not submit inventory or sell-through
reports, accounts receivable balances, payment history and other related factors.



The Company defers a portion of its product revenues based on the value of certain maintenance arrangements included with each product sale and recognizes these revenues over the applicable maintenance period. The
Company also derives a portion of its revenues from sales of separate extended maintenance arrangements. The Company sells extended hardware maintenance, faster hardware replacements for defective units, software maintenance as well as world-wide
technical support with access 24 hours a day, seven days a week. These arrangements are sold as a bundle or as separate support offerings providing only hardware maintenance, technical support or software maintenance. For bundled arrangements,
revenue is allocated among the elements at the time of sale based on their fair values as determined by the prices charged by the Company when each element is sold separately. Revenue from extended maintenance arrangements is recognized over the
period of coverage purchased by the customer.



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Accounts receivable



The Company has a large, diversified customer base, which includes customers located in foreign countries. The Company
monitors the creditworthiness of its customers but has experienced losses related to its accounts receivable in the past. The Company records an allowance for doubtful accounts based on past history, current economic conditions and the composition
of its accounts receivable aging and, in some cases, makes allowances for specific customers based on several factors, such as the creditworthiness of those customers and payment history.



Sales return reserve



The Company regularly records a sales return reserve that approximates the aggregate dollar amount of expected future returns and allowances. The sales
return reserve is calculated based on past return history, product mix, channel mix and, in some cases, allowances for specific customers based on several factors such as return rights included in the Companys agreements with customers. The
sales return reserve is recorded against revenue that has been recognized or as an offset to deferred revenue.



Inventory



Given the volatility of the networking market, the rapid obsolescence of technology and short product life cycles, the Company writes down inventories to
net realizable value based on backlog and forecasted demand.



Warranty obligations



The Companys
hardware products carry a one-year warranty that includes factory repair services or replacement parts as needed. The Company accrues estimated expenses for warranty obligations at the time that products are shipped based on historical product
repair and replacement information.



Valuation of long-lived
assets including goodwill and other intangible assets



The
Company reviews property, plant and equipment, goodwill and other intangible assets for impairment on an annual basis in its fourth fiscal quarter and whenever events or circumstances indicate the carrying amount of the assets may not be
recoverable. The Companys review of goodwill and other intangible assets is based on the estimated future cash flows the assets are expected to generate. The Companys review is based on its best estimate of a variety of factors,
including future market growth, forecasted revenues and costs and a strategic review of its business and operations. In the event the Company determines that an asset is impaired in the future, an adjustment to the value of the asset would be
charged to earnings in the period such determination is made.



Principles of consolidation



The condensed
consolidated financial statements include the Companys accounts and those of its wholly owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions have been eliminated.



Foreign currency transactions



Foreign currency transactions of foreign operations are measured using U.S.
dollars as the functional currency. Accordingly, monetary accounts (principally cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities) are remeasured using the foreign exchange rate at the balance sheet date.
Accounts related to operations and non-monetary balance sheet items are remeasured at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations and were immaterial for all
periods presented.



Use of estimates



The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



Reclassifications



Certain amounts reported in previous periods have been reclassified to
conform to the current presentation.



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##### Table of Contents

Income taxes



As required by Statement of Financial Accounting Standards (SFAS) No. 109, the Company recognizes deferred tax
assets on the balance sheet if it is more likely than not that they will be realized on future tax returns. Through March 31, 2003, the Company had provided a full valuation allowance against accumulated deferred tax assets, reflecting
the uncertainty associated with its future profitability. During the quarter ended June 30, 2003, the Company determined that it was more likely than not that it would be in a position to utilize its deferred tax assets in the future. Factors
considered by the Company included: its earnings history, ability to meet prior forecasts and projected future taxable income. Based on this evidence, the Company concluded that it is more likely than not that deferred tax assets would be realized.
Accordingly, the Company released a valuation allowance of $35.8 million, which resulted in an income tax benefit of approximately $33.8 million, including benefits taken in previous quarters. The remaining $2.0 million was credited to goodwill as
it related to the tax benefit from utilizing net operating loss deductions acquired in connection with the acquisition of OneSecure, Inc. Should the Company determine that it will not be able to realize all or part of its deferred tax assets in the
future, a deferred tax provision would be charged against income in the period such determination is made. As of June 30, 2003, the Company had $35.8 million in deferred tax assets.



Comprehensive income (loss)



Comprehensive income (loss) includes certain unrealized gains and losses that are recorded as a component of stockholders equity and excluded
from the determination of net income (loss). The Companys only component of accumulated other comprehensive income (loss) was unrealized losses on investments of approximately $(123,000) and $(201,000) in the three and nine months ended June
30, 2003. Accumulated other comprehensive income was approximately $300,000 and $501,000 at June 30, 2003 and September 30, 2002, respectively.



Cash and cash equivalents



The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. The carrying
value of cash and cash equivalents approximated fair value at June 30, 2003 and September 30, 2002.



Concentrations of credit risk



Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term
available-for-sale investments and accounts receivable. The Company places all of its cash equivalents with high credit-rated issuers. Carrying amounts of financial instruments held by the Company, which include cash equivalents, short-term
available-for-sale investments, restricted cash, accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short duration. The Company performs ongoing credit evaluations of its customers, generally requires
customers to prepay for maintenance and maintains reserves for potential losses. The Companys customer base is composed of businesses throughout the Americas, which includes North and Latin America, Asia and the Pacific Rim (APAC) and Europe,
the Middle East and Africa (EMEA).



Stock-based compensation



The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Expenses associated with stock-based compensation are amortized ratably over the vesting periods of
the individual awards consistent with the method described in Financial Accounting Standards Board (FASB) Interpretation No. 28. The Company provides additional pro forma disclosures as required under SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123) and SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Options granted to consultants and other non-employees are accounted for in accordance with
Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services, and valued using the Black-Scholes method
prescribed by SFAS 123. The options are subject to periodic revaluation over their vesting periods.



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##### Table of Contents

The following table illustrates the effect on net income (loss) applicable to common stockholders and net
income (loss) per share applicable to common stockholders as if the fair value recognition provisions of SFAS 123 had been applied to all outstanding and unvested stock-based awards in each period (in thousands, except per share amounts):



|                                                                                                                                                    |  | Three Months EndedJune 30, |         |   | Nine Months EndedJune 30, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | -
|                                                                                                                                                    |  | 2003                       |         |   | 2002                      |  
|Net income (loss) applicable to common stockholders                                                                                                 |  | $                          | 35,270  |   |                           | $
|Add: Stock-based employee compensation expense included in reported net income (loss) applicable to common stockholders, net of
related tax effects |  |                            | 6,054   |   |                           |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects         |  |                            | (10,894 | ) |                           |  
|                                                                                                                                                    |  |                            |         |   |                           |  
|Net income (loss) applicable to common stockholders                                                                                                 |  | $                          | 30,430  |   |                           | $
|                                                                                                                                                    |  |                            |         |   |                           |  
|Shares used in computing basic net income (loss) per share applicable to common stockholders                                                        |  |                            | 79,935  |   |                           |  
|                                                                                                                                                    |  |                            |         |   |                           |  
|Shares used in computing diluted net income (loss) per share applicable to common stockholders                                                      |  |                            | 85,180  |   |                           |  
|                                                                                                                                                    |  |                            |         |   |                           |  
|Earnings (loss) per share:                                                                                                                          |  |                            |         |   |                           |  
|Basic net income (loss) per share applicable to common stockholdersas reported                                                                     |  | $                          | 0.44    |   |                           | $
|                                                                                                                                                    |  |                            |         |   |                           |  
|Basic net income (loss) per share applicable to common stockholderspro forma                                                                       |  | $                          | 0.38    |   |                           | $
|                                                                                                                                                    |  |                            |         |   |                           |  
|Diluted net income (loss) per share applicable to common stockholdersas reported                                                                   |  | $                          | 0.41    |   |                           | $
|                                                                                                                                                    |  |                            |         |   |                           |  
|Diluted net income (loss) per share applicable to common stockholderspro forma                                                                     |  | $                          | 0.36    |   |                           | $
|                                                                                                                                                    |  |                            |         |   |                           |  
|The following weighted average assumptions were used in determining the fair value of the Companys employee and non-employee option
plans:        
|                                                                                                                                                    |  | Three Months EndedJune 30, |         |   | Nine Months EndedJune 30, |  
|                                                                                                                                                    |  | 2003                       |         |   | 2002                      |  
|Expected life                                                                                                                                       |  |                            | 3 years |   |                           |  
|Expected stock price volatility                                                                                                                     |  |                            | 70      | % |                           |  
|Riskfree interest rate                                                                                                                             |  |                            | 2.02    | % |                           |  
|Dividend yield                                                                                                                                      |  |                            | None    |   |                           |  



The fair value for the
Companys employee stock purchase plan during the quarter ended June 30, 2003 was estimated using an expected life of 0.91 years, expected price volatility of 84%, a risk-free interest rate of 2.23% and no dividend yield. The fair value for the
employee stock purchase plan during the quarter ended June 30, 2002 was estimated using an expected life of 0.47 years, expected price volatility of 84%, a risk-free interest rate of 1.89% and no dividend yield.



The option valuation models were developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Companys employee stock options have characteristics
significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.



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Recent Accounting Pronouncements



In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46). FIN 46 requires consolidation of variable interest entities (VIE) by the entitys primary beneficiary if the entitys equity investors do not have characteristics of a controlling
financial interest or sufficient equity at risk. FIN 46 is effective for all new VIEs after January 31, 2003. FIN 46 must be applied beginning July 1, 2003, to VIEs existing prior to February 1, 2003. The Company adopted FIN 46 in January 2003, does
not currently have any interest in VIEs and, accordingly, does not expect that FIN 46 will have a material impact on its current financial position or results of operations.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, (SFAS 149) which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133.
SFAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The Company does not expect that SFAS 149 will have a material impact on its current
financial position or results of operations.



In May 2003, the
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). This statement established standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as
liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect
that SFAS 150 will have a material impact on its current financial position or results of operations.



Note 2. Inventories



Inventories are stated at the lower of standard cost, which approximates actual cost (first-in, first-out method) or market value (estimated net realizable value). The valuation of inventories at the lower of standard cost or market value
requires the use of estimates regarding the amount of inventory that will be sold and the prices at which current inventory will be sold. These estimates are dependent on the Companys assessment of current and expected orders from its
customers.



Inventories consist of the following (in
thousands):



|               |  | June 30,2003 |       | September 30,2002
|-------------- |  | ------------ | ----- | -----------------
|Raw materials  |  | $            | 550   |                  
|Finished goods |  |              | 2,645 |                  
|               |  |              |       |                  
|               |  | $            | 3,195 |                  
|               |  |              |       |                  



Note 3. Net Income (Loss) Per Share



In accordance with SFAS No. 128, Earnings per
Share, basic net income (loss) per share is calculated using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net income per share for the three and nine months
ended June 30, 2003 gives effect to the dilutive effect of common stock equivalents consisting of stock options and shares subject to repurchase using the treasury stock method. Potentially dilutive securities, consisting of stock options and shares
subject to repurchase, have been excluded from the Companys diluted net loss per share computations for the three and nine months ended June 30, 2002 as their inclusion would be antidilutive. The total number of shares excluded from the
computation of diluted net loss per share was approximately 10,856,000 for the three and nine months ended June 30, 2002.



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##### Table of Contents

The following table presents the calculation of basic and diluted net income (loss) per share applicable
to common stockholders (in thousands, except per share amounts):



|                                                                                               |  | Three Months EndedJune 30, |        |   | Nine Months EndedJune 30, |  
|---------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | -
|                                                                                               |  | 2003                       |        |   | 2002                      |  
|Net income (loss) applicable to common stockholders                                            |  | $                          | 35,270 |   |                           | $
|                                                                                               |  |                            |        |   |                           |  
|Shares used in computing net income (loss) per share:                                          |  |                            |        |   |                           |  
|Weighted-average shares of common stock outstanding                                            |  |                            | 80,687 |   |                           |  
|Less weighted-average shares subject to repurchase (1)                                         |  |                            | (752   | ) |                           |  
|                                                                                               |  |                            |        |   |                           |  
|Shares used in computing basic net income (loss) per share applicable to common stockholders   |  |                            | 79,935 |   |                           |  
|                                                                                               |  |                            |        |   |                           |  
|Outstanding dilutive stock options and unvested common stock                                   |  |                            | 5,245  |   |                           |  
|                                                                                               |  |                            |        |   |                           |  
|Shares used in computing diluted net income (loss) per share applicable to common stockholders |  |                            | 85,180 |   |                           |  
|                                                                                               |  |                            |        |   |                           |  
|Basic net income (loss) per share applicable to common Stockholders                            |  | $                          | 0.44   |   |                           | $
|                                                                                               |  |                            |        |   |                           |  
|Diluted net income (loss) per share applicable to common Stockholders                          |  | $                          | 0.41   |   |                           | $
|                                                                                               |  |                            |        |   |                           |  

---

|(1) |  | The weighted-average shares subject to repurchase represent unvested shares. Employees purchased these shares by exercising options before the options had vested. The unvested
shares are subject to a lapsing right of repurchase by the Company at the initial purchase price if the employee ceases to be employed by the Company before the employee satisfies the service requirement, generally four years.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 4. Business Combination



On September 18, 2002, the Company completed its acquisition of OneSecure
Inc., a developer of intrusion detection and prevention technology. The acquisition of OneSecure expanded the Companys product portfolio to include an intrusion detection and prevention device, and allowed the Company to enter the intrusion
detection and prevention system market. The preliminary purchase price was $60.8 million and the transaction has been accounted for as a purchase. The Company issued 3.2 million shares of its common stock with a fair value of $43.7 million for all
of the outstanding stock of OneSecure. The common stock issued in the acquisition was valued using the average closing price of the Companys common stock on The Nasdaq National Market from two days before to two days after the date the
transaction was announced, which was $13.71 per share. The Company also assumed all of the outstanding stock options of OneSecure, which were converted into options to purchase approximately 349,000 shares of the Companys common stock, and
issued options to purchase 1.4 million shares of the Companys common stock, each with an exercise price of $11.65 per share, in connection with the transaction. The fair value of the stock options assumed and issued in connection with the
transaction, net of deferred stock compensation, was approximately $15.9 million. The options were valued using the Black-Scholes option pricing model using a volatility factor of 80%, expected lives of two to five years, a risk-free interest rate
of 4.3% and a per share market value of $13.71 as described above. The total purchase price also includes an estimate of the direct costs associated with the transaction totaling approximately $1.2 million, including approximately $474,000 of
additional costs incurred in the three months ended December 31, 2002.



The acquisition has been accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total purchase price is allocated to the
tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. The fair values assigned to the tangible and intangible assets
acquired and liabilities assumed are based on estimates and assumptions provided by management, and other information compiled by management, including independent valuations, prepared by independent valuation specialists, that utilize established
valuation techniques appropriate for the high technology industry. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill will be reviewed periodically for impairment. During the three months ended June 30, 2003,
an income tax benefit in the amount of $2.8 million was recorded relating to the net operating losses of OneSecure that the Company expects to utilize. This benefit represents an adjustment to the purchase price allocation, reducing goodwill.



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##### Table of Contents

A summary of the adjusted purchase price is as follows (in thousands):



|Common stock                                                            |  | $ | 43,687
|----------------------------------------------------------------------- |  | - | ------
|Outstanding OneSecure stock options, net of deferred stock compensation |  |   | 2,588 
|NetScreen stock options issued in connection with the transaction       |  |   | 13,328
|Estimated direct costs of the acquisition                               |  |   | 1,190 
|                                                                        |  |   |       
|Total purchase price                                                    |  | $ | 60,793
|                                                                        |  |   |       



The adjusted purchase
price has been allocated as follows (in thousands):



|Equipment                             |  | $ | 728    |  
|------------------------------------- |  | - | ------ | -
|Other assets and liabilities, net     |  |   | 897    |  
|Deferred taxes                        |  |   | 2,007  |  
|Restructuring liabilities             |  |   | (3,118 | )
|Accounts payable                      |  |   | (830   | )
|                                      |  |   |        |  
|Fair value of net liabilities assumed |  |   | (316   | )
|In-process research and development   |  |   | 200    |  
|Purchased technology                  |  |   | 2,450  |  
|Technology patent application         |  |   | 2,550  |  
|Non-compete agreements                |  |   | 550    |  
|Value-added reseller relationships    |  |   | 250    |  
|Goodwill                              |  |   | 54,522 |  
|Deferred stock compensation           |  |   | 587    |  
|                                      |  |   |        |  
|Total purchase price                  |  | $ | 60,793 |  
|                                      |  |   |        |  



A summary of
intangible assets is as follows (in thousands):



|                                   |  | Gross |       | Accumulated Amortization |   |      | Net
|---------------------------------- |  | ----- | ----- | ------------------------ | - | ---- | ---
|As of June 30, 2003:               |  |       |       |                          |   |      |    
|Purchased technology               |  | $     | 2,450 |                          | $ | (388 | )  
|Technology patent application      |  |       | 2,550 |                          |   | (202 | )  
|Non-compete agreements             |  |       | 550   |                          |   | (145 | )  
|Value-added reseller relationships |  |       | 250   |                          |   | (40  | )  
|                                   |  |       |       |                          |   |      |    
|Total                              |  | $     | 5,800 |                          | $ | (775 | )  
|                                   |  |       |       |                          |   |      |    
|As of September 30, 2002:          |  |       |       |                          |   |      |    
|Purchased technology               |  | $     | 2,450 |                          | $ | (20  | )  
|Technology patent application      |  |       | 2,550 |                          |   | (11  | )  
|Non-compete agreements             |  |       | 550   |                          |   | (8   | )  
|Value-added reseller relationships |  |       | 250   |                          |   | (2   | )  
|                                   |  |       |       |                          |   |      |    
|Total                              |  | $     | 5,800 |                          | $ | (41  | )  
|                                   |  |       |       |                          |   |      |    



The estimated future
amortization of intangible assets is as follows (in thousands):



|Year ending September 30:     |  |   |      
|----------------------------- |  | - | -----
|2003 (remaining three months) |  | $ | 244  
|2004                          |  |   | 978  
|2005                          |  |   | 971  
|2006                          |  |   | 795  
|2007                          |  |   | 773  
|2008 and thereafter           |  |   | 1,264
|                              |  |   |      
|Total                         |  | $ | 5,025
|                              |  |   |      



Note 5. Guarantees



Certain of the Companys operating lease arrangements include
collateral restrictions that require the Company to maintain standby letters of credit as restricted cash. Total restricted cash as of June 30, 2003 was $1.1 million, of which $308,000 is classified as current as it is scheduled to become
unrestricted in July 2003. The remaining $827,000 is classified as long-term and relates to operating leases and is scheduled to become unrestricted in February 2008.



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The Companys hardware products carry a one-year warranty that includes factory repair services or
replacement parts as needed. The Companys software products carry a three-month maintenance agreement. The Company accrues estimated expenses for warranty obligations at the time that products are shipped based on historical product repair and
replacement information. Factors that affect the Companys warranty liability include the number of installed units, historical rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.



Changes in
the Companys estimated product warranty liability during the nine months ended June 30, 2003 were as follows (in thousands):



|Balance September 30, 2002                              |  | $ | 1,693 |  
|------------------------------------------------------- |  | - | ----- | -
|Additions charged to cost of revenues during the period |  |   | 350   |  
|Settlements made during the period                      |  |   | (296  | )
|                                                        |  |   |       |  
|Balance June 30, 2003                                   |  | $ | 1,747 |  
|                                                        |  |   |       |  



Note 6. Commitments and
Contingencies



Commitments



Flash Electronics, Inc. manufactures, assembles, tests and fulfills orders
for the NetScreen-25, NetScreen-50, NetScreen-204, NetScreen-208, NetScreen IDP-10, NetScreen IDP-100 and NetScreen IDP-500 products. Solectron Corporation manufactures, assembles, tests and fulfills orders for the NetScreen-5XP, NetScreen-5XT,
NetScreen-500, NetScreen-5200 and NetScreen-5400 products. Accton Technologies Corporation manufactures, assembles and tests the NetScreen-5GT and Solectron Corporation fulfills orders for the NetScreen-5GT. The Company purchases from these and
other manufacturers on a purchase order basis and does not have a long-term supply contract with any of them. At June 30, 2003, the Company had placed non-cancelable purchase orders totaling $5.5 million.



Contingencies



The Company is subject to legal proceedings, claims and litigation arising
in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse affect on its consolidated financial
position, results of operations or cash flows.



Note 7. Restructuring
Liabilities



In connection with the acquisition of
OneSecure, the Company assumed non-cancelable operating leases for domestic sales offices which were not occupied by OneSecure and which will not be occupied by the Company. In addition, the Company assumed the non-cancelable operating lease for
OneSecures headquarters in Sunnyvale, California, which is a duplicate facility. The Company has recorded a restructuring liability for the net present value of these leases, net of expected sublease income, for the periods these facilities
will be unoccupied. The liability for the net present value of future net lease payments for the excess facilities, discounted at a 6.5% borrowing rate, will decrease as required lease payments are made as follows:



|Year ending June 30:    |  |   |      
|----------------------- |  | - | -----
|2003                    |  | $ | 682  
|2004                    |  |   | 599  
|2005                    |  |   | 573  
|2006                    |  |   | 446  
|2007                    |  |   | 425  
|Thereafter              |  |   | 111  
|                        |  |   |      
|Total net present value |  | $ | 2,836
|                        |  |   |      



During the three
months ended June 30, 2003, the Company made payments on the non-cancelable operating leases that were included in restructuring liabilities. The net present value of the amounts paid during the three months ended June 30, 2003 was approximately
$128,000.



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##### Table of Contents

Note 8. Business Segment and Significant Customer Information



The Company operates in one business segment, the sale of security solutions
for network environments. The Company sells its products and services to customers in the Americas, APAC and EMEA. Revenues by geographic regions were as follows (in thousands):



|         |  | Three Months EndedJune 30, |        | Nine Months EndedJune 30,
|-------- |  | -------------------------- | ------ | -------------------------
|         |  | 2003                       |        | 2002                     
|Americas |  | $                          | 25,373 |                          
|APAC     |  |                            | 24,350 |                          
|EMEA     |  |                            | 14,617 |                          
|         |  |                            |        |                          
|Total    |  | $                          | 64,340 |                          
|         |  |                            |        |                          



No customer accounted
for 10% or more of total revenues in the three ended June 30, 2003. One customer accounted for 12.2% of our total revenues in the three months ended June 30, 2002.



No customer accounted for 10% or more of total revenues in the nine months ended June 30, 2003 or 2002.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Forward-Looking Statements



This Managements Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with the
accompanying condensed consolidated financial statements and related notes appearing elsewhere in this report. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. In many cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, anticipate,
believe, estimate, potential, intend or continue, or comparable terminology. These forward-looking statements include our expectations about revenue, revenue mix, channel mix, cost of
revenues, gross margin and various operating expenses. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those presented below, under the
caption Factors That May Affect Our Business and Future Results of Operations and Financial Condition, and elsewhere in this report. You should carefully review the risks described in other documents we file from time to time with the
Securities and Exchange Commission, including our Annual Report on Form 10-K for the period ended September 30, 2002, which was filed on December 30, 2002, as well as other periodic reports that we filed in 2002 and 2003 or will file in 2003. We
undertake no obligation to update any forward-looking statements for any reason, except as required by law, even if new information becomes available or other events occur in the future.



Overview



We develop, market and sell a broad family of integrated network security solutions for enterprises, carriers and government
entities. Our security solutions provide key technologies such as firewall, virtual private networking, denial of service protection and intrusion detection and prevention in a line of easy-to-manage security systems and appliances. Our firewall and
VPN systems and appliances deliver integrated firewall, virtual private networking and denial of service protection capabilities in a single device using our proprietary application specific integrated circuits, which we refer to as GigaScreen and
GigaScreen-II ASICs, and our proprietary security operating system, ScreenOS. Our NetScreen-5GT firewall and VPN appliance uses a reduced instruction set computer (RISC) processor and ScreenOS. Our intrusion detection and prevention appliances run a
secure version of the Linux operating system and use proprietary software and multiple detection methods to identify network attacks. Our products are based on industry standard communication protocols and can be combined with our management
software so that they can be easily integrated into networks, easily managed and will interoperate with other security devices and applications.



We derive a substantial portion of our revenues from outside the Americas, which includes North and Latin America. Revenues from outside the Americas were
62.7% in the nine months ended June 30, 2003, compared to 55.0% in the nine months ended June 30, 2002. Specifically, revenues from Asia and the Pacific Rim (APAC) accounted for approximately 39.8% and 33.2% of our total revenues in the nine months
ended June 30, 2003 and 2002, respectively. Revenues from Europe, the Middle East and Africa (EMEA) accounted for approximately 22.9% and 21.8% of our total revenues in the nine months ended June 30, 2003 and 2002, respectively. The increase in
revenues from outside the Americas as a percentage of total revenues was primarily attributable to the strength in the large enterprise and service provider markets in APAC and increased demand for our products in international markets. We cannot
assure you that we will be able to maintain or increase the demand for our products in international markets or that regional challenges such as economic downturns or the outbreak of hostilities will not have an adverse impact on our performance in
international markets.



In the second half of the quarter ended
June 30, 2003, we experienced a business slowdown in APAC related to severe acute respiratory syndrome (SARS), primarily in China and Hong Kong. While we cannot quantify the complete effect of SARS on our business, we expect that SARS will continue
to have a follow-on impact in the quarter ending September 30, 2003 and may have an impact in the quarter ending December 31, 2003. Such impact could take the form of lower than expected rates of growth, decreased revenues, longer sales cycles and
lower sales prices, all or any of which could have an adverse impact on our results of operations and may cause us to underperform against the expectations of the public market. Any prolonged or increased outbreak of SARS could have a material
adverse impact on our performance in international markets.



On
September 18, 2002, we completed our acquisition of OneSecure, Inc., a provider of network intrusion detection and prevention solutions. Achieving the anticipated benefits of the merger will depend, in part, upon whether the operations, products and
technology of OneSecure can be integrated with our operations, products and technology in a timely and cost-effective manner. The process of combining the two companies is a complex, expensive and time-consuming process and may cause an interruption
of, or loss of momentum in, the development and sales activities and operations of both companies. Likewise, we may not be able to effectively combine OneSecures technologies into our own products, successfully market or enhance
OneSecures line of intrusion detection and prevention products, or offer a viable combined hardware or management product that addresses the needs of our customers. We cannot assure you that any part or all of the integration will be
accomplished on a timely basis, or at all.



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##### Table of Contents

We have experienced consecutive improvements in revenues and net income (loss) before deemed dividend in
each quarter of fiscal 2002 and during the first three quarters of fiscal 2003. We first achieved profitability on a generally accepted accounting principles in the United States (GAAP) basis in the quarter ended December 31, 2002, and we have
remained profitable on a GAAP basis in the subsequent two quarters. Prior to the quarter ended December 31, 2002, we had incurred significant losses in each fiscal period since our inception. As of June 30, 2003, we had an accumulated deficit of
$88.2 million. In the first through fourth quarters of fiscal 2002, our revenues were $29.0 million, $32.0 million, $36.4 million and $41.1 million, respectively, and our net loss before deemed dividend was $5.7 million, $3.3 million, $2.4 million
and approximately $925,000, respectively. In the first, second and third quarters of fiscal 2003, our revenues were $51.1 million, $58.3 million and $64.3 million, respectively, and our net income was $3.2 million, $5.9 million and $35.3 million,
respectively. We cannot assure you that our revenues will continue to grow at the same rate as in the past or at all, or that we will maintain profitability in future periods. In addition, our revenue recognition is dependent on many factors, some
of which are outside our control, such as sell-through and related reports thereon from distributors, the aggregate value of direct shipments to end users and the timing of new product introductions for technically complex products.



As required by Statement of Financial Accounting Standards No. 109
(SFAS 109), we recognize deferred tax assets on the balance sheet if it is more likely than not that they will be realized on future tax returns. Through March 31, 2003, we had provided a full valuation allowance against
accumulated deferred tax assets, reflecting the uncertainty associated with our future profitability. During the quarter ended June 30, 2003, we determined that it was more likely than not that we would be in a position to utilize our deferred tax
assets in the future. Factors we considered included: our earnings history, ability to meet prior forecasts and projected future taxable income. Based on this evidence, we concluded that it is more likely than not that deferred tax assets would be
realized. Accordingly, we released a valuation allowance of $35.8 million, which resulted in an income tax benefit of approximately $33.8 million, including benefits taken in previous quarters. The remaining $2.0 million was credited to goodwill as
it related to the tax benefit from utilizing net operating loss deductions acquired in connection with the acquisition of OneSecure. As a result of the release of this valuation allowance, to the extent we maintain profitability we expect to record
a provision for income taxes in future periods. Should we determine that we will not be able to realize all or part of our deferred tax assets in the future, a deferred tax provision would be charged against income in the period such determination
is made. As of June 30, 2003, we had $35.8 million in deferred tax assets.



We recorded a deemed dividend of $27.6 million in the three months ended December 31, 2001 related to our October 2001 issuance of Series F preferred stock at a price subsequently deemed to be below its fair value.
The deemed dividend was calculated based on the difference between the deemed fair market value on the date the Series F preferred stock was issued and the purchase price of the Series F preferred stock. We also recorded deemed dividends of $1.1
million in the three months ended December 31, 2001 to account for cumulative dividend rights attributable to our Series E and F preferred stock. At the time of our initial public offering (IPO), all of our outstanding preferred stock automatically
converted to common stock and all dividend rights, as well as voting and liquidation rights, attributable to the preferred stock terminated. No dividends were paid on the preferred stock.



Cost of product revenues consists of the costs associated with manufacturing, assembling and testing our products, related
overhead costs, compensation and other costs related to manufacturing support and logistics. We rely on contract manufacturers to manufacture, assemble, test and fulfill orders for our hardware products. Accordingly, a major portion of our cost of
product revenues consists of payments to these contract manufacturers. Cost of maintenance and service revenues consists of customer support costs, training and professional service expenses and warranty-related costs.



Our gross margin has been, and will continue to be, affected by a variety of
factors, including competition, the mix and average selling prices of products, maintenance and services, new product introductions and enhancements, the availability and cost of components and manufacturing labor, the cost of manufacturing
overhead, fluctuations in manufacturing volumes and the mix of distribution channels through which our products are sold. Our overall gross margin will be adversely affected by price declines if we are unable to reduce costs on existing products and
do not continue to introduce new products with higher margins.



Research and development expenses consist of salaries and related expenses for development and engineering personnel, fees paid to consultants, license fees paid to third parties and prototype costs related to the design, development,
testing and enhancement of our application specific integrated circuits (ASICs), security systems and appliances, ScreenOS, IDP software, management applications and VPN client software. We expense our research and development costs as they are
incurred. Our research and development efforts require significant expenditures, the timing of which can cause significant quarterly variability in our expenses. We are devoting substantial resources to the continued development of new products. As
a result, we expect our research and development expenses to increase substantially in absolute dollars in the upcoming quarter.



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Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged
in marketing, sales and sales support functions and costs associated with promotional and other marketing activities. We intend to expand our sales operations substantially, both domestically and internationally, in order to increase sales of our
products. In addition, we believe part of our future success will be dependent upon establishing successful relationships with a variety of additional resellers in other countries. We expect that sales and marketing expenses will increase
substantially in absolute dollars in the upcoming quarter as we expand our domestic and international sales efforts, hire additional sales and marketing personnel and initiate additional marketing programs.



General and administrative expenses consist of salaries and related expenses
for executive, finance, accounting, legal and human resources personnel, professional fees and corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we employ additional personnel, and incur additional
expenses related to the growth of our business and our operation as a public company, including new corporate governance requirements.



We account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). Expenses associated with stock-based compensation are amortized ratably over the vesting periods of the individual awards consistent with the method described in FASB
Interpretation No. 28. During the three months ended December 31, 2001, in connection with the grant of stock options to employees, we recorded deferred stock compensation of $13.5 million representing the difference between the exercise price of
the stock options and the deemed fair value for financial reporting purposes of the underlying common stock on the date these stock options were granted. We also recorded deferred stock compensation of approximately $587,000 in the fourth quarter of
fiscal 2002, representing the intrinsic value of unvested stock options assumed in connection with the acquisition of OneSecure. Restricted stock acquired through the exercise of unvested stock options is subject to our right to repurchase the
unvested stock at the price paid, which right lapses over time. Deferred stock compensation is included as a reduction of stockholders equity and is amortized ratably over the vesting period of the individual award, generally four years,
consistent with the method described in FASB Interpretation No. 28. During both of the three months ended June 30, 2003 and 2002, we recorded amortization of deferred stock compensation of $6.1 million. During the nine months ended June 30, 2003 and
2002, we recorded amortization of deferred stock compensation of $17.6 million and $18.1 million, respectively. This deferred stock compensation expense relates to stock options granted to individuals in all cost of revenues and operating expense
categories and has been included in those categories. At June 30, 2003, $21.9 million of deferred stock compensation related to employee stock options remained unamortized. This amount will be amortized as follows (in thousands):



|Year ending September 30:         |  |   |       
|--------------------------------- |  | - | ------
|2003 (remaining three months)     |  | $ | 5,710 
|2004                              |  |   | 11,623
|2005                              |  |   | 4,255 
|2006                              |  |   | 263   
|                                  |  |   |       
|Total deferred stock compensation |  | $ | 21,851
|                                  |  |   |       



The income tax benefit
in the three months ended June 30, 2003 was due primarily to the release of the valuation allowance on our cumulative deferred tax assets, offset by a current tax provision for federal, state and foreign income taxes. The provision for income taxes
in other periods is primarily related to federal alternative minimum, state and foreign income taxes. The provision for income taxes also reflects the impact of non-deductible stock-based compensation expense.



Critical Accounting Policies



The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Our most critical accounting estimates include: the assessment of technical complexity and market acceptance of technically complex products, which impact revenue recognition; deferral of revenue for distributors and
value-added resellers and revenue reserves, which impact revenue recognition; potential return rates and probability of collections, which impact revenue recognition, accounts receivable and warranty reserves; the valuation of inventory, which
impacts cost of sales and gross margin; the assessment of recoverability of goodwill and other intangible assets, which impacts write-offs of goodwill and identified intangible assets; and, the assessment of our realization of deferred tax assets,
which impacts income taxes.



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Revenue recognitiongeneral



We derive our revenues primarily from sales of our hardware-based security systems and appliances and maintenance
arrangements, and, to a lesser extent, from sales of software products and services. We generally recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed
or determinable, and collectibility is probable. We defer a portion of product revenues based on the value of basic maintenance services bundled with each product sale. For these bundled arrangements, revenue is allocated among each element of the
bundle at the time of sale based on the fair value of each element of the bundle. The fair value of each element is determined by reference to the prices we charge when each element is sold separately. Maintenance revenue is deferred and recognized
over the applicable maintenance period. We also derive a portion of our revenues from sales of separate extended maintenance arrangements.



For newly introduced technically complex products, we defer recognition of revenues from the sale of these products until they have successfully performed
in the marketplace and sales returns are not unusually high. Determining which products are sufficiently technically complex to merit this revenue deferral requires us to exercise judgment, as does the determination of when products have achieved
sufficient acceptance in the market so that deferral is no longer appropriate. The determination of which products are complex, and the timing of the end of deferral for particular products, can be expected to vary. If we define technically complex
products too broadly, we will defer revenue unnecessarily; if we define these products too narrowly, revenue will be recognized earlier but product returns and warranty claims will be higher in future periods.



Revenue recognitiondistributors and value-added resellers



We sell to value-added resellers and distributors. We derived approximately
92.1% of our total revenues from value-added resellers and distributors in the three months ended June 30, 2003. We defer revenue on sales to our distributors until the distributor has sold our products to its customers. Our agreements with
distributors provide for limited stock rotation and price protection rights. Stock rotation rights provide distributors with the right to exchange unsold inventory for alternate products of equal or greater value. Price protection rights grant
distributors the right to credit on future purchases in the event of decreases in the prices of our products. Our agreements with value-added resellers typically do not include stock rotation or price protection rights. At the time of shipment to
value-added resellers, we reserve for estimated returns and exchanges. These revenue reserves are estimated and adjusted periodically based on historical rates of returns and allowances, inventory levels for value-added resellers that submit
inventory or sell-through reports, the volume of sales to value-added resellers that we ship directly to end customers, and for sales to value-added resellers that do not submit inventory or sell-through reports, accounts receivable balances,
payment history and other related factors. These reserves require the exercise of our judgment in determining if historical experience applies to new products, and to new distributors and value-added resellers. If our estimate of returns and
exchanges is too low, additional charges will be incurred in future periods, and these additional charges could have a material adverse effect on our financial position and results of operations.



Sales return and warranty reserves



We record sales return and warranty reserves based on estimates of expected
future returns and allowances and expected future repair and replacement costs. We record a sales return reserve that approximates the aggregate amount of expected future returns and allowances. Our sales return reserve is based on past return
history, product mix, channel mix and, in some cases, allowances for specific customers based on several factors such as return rights included in our agreements with customers. We record the sales return reserve against revenue that has been
recognized or as an offset to deferred revenue. Our warranty reserve approximates the aggregate amount of future repair and replacement costs for our products. Our warranty reserve is based on historical product repair and replacement information.
In the event we determine that our current or future sales returns and allowances and product repair and replacement costs differ from our estimates, an adjustment to these reserves would be charged to earnings in the period such determination is
made.



Allowance for doubtful accounts



We have a large, diversified customer base, which includes customers located
in foreign countries. We monitor the creditworthiness of our customers but have experienced losses related to our accounts receivable in the past. We record an allowance for doubtful accounts based on past history, current economic conditions and
the composition of our accounts receivable aging and, in some cases, make allowances for specific customers based on several factors, such as the creditworthiness of those customers and payment history. These allowances require our subjective
judgment. Actual write-offs may differ from the allowances for doubtful accounts, and this difference may have a material effect on our financial position and results of operations.



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Inventory



Given the volatility of the networking market, the rapid obsolescence of technology and short product life cycles, we write down inventories to net
realizable value based on backlog and forecasted demand. However, backlog is subject to revisions, cancellations and rescheduling. If actual demand is lower than our forecasted demand, and we fail to reduce manufacturing output accordingly, we could
be required to record additional inventory write-downs, which would have a negative effect on our gross margin.



Valuation of long-lived assets including goodwill and other intangible assets



We review property, plant and equipment, goodwill and other intangible assets for impairment on an annual basis in our
fourth fiscal quarter and whenever events or circumstances indicate the carrying amount of the assets may not be recoverable. Our review of goodwill and other intangible assets is based on the estimated future cash flows the assets are expected to
generate. Our review is based on our best estimate of a variety of factors, including future market growth, forecasted revenues and costs and a strategic review of our business and operations. In the event we determine that an asset is impaired in
the future, an adjustment to the value of the asset would be charged to earnings in the period such determination is made.



Income taxes



As required by SFAS 109, we recognize deferred tax assets on the balance sheet if it is more likely than not that they will be realized on
future tax returns. Through March 31, 2003, we had provided a full valuation allowance against accumulated deferred tax assets, reflecting the uncertainty associated with our future profitability. During the quarter ended June 30, 2003, we
determined that it was more likely than not that we would be in a position to utilize our deferred tax assets in the future. Factors we considered included: our earnings history, ability to meet prior forecasts and projected future taxable income.
Based on this evidence, we concluded that it is more likely than not that the deferred tax assets would be realized. Accordingly, we released a valuation allowance of $35.8 million, which resulted in an income tax benefit of $33.8 million, including
benefits taken in previous quarters. The remaining $2.0 million was credited to goodwill as it related to the tax benefit from utilizing net operating loss deductions acquired in the OneSecure acquisition. As a result of the release of this
valuation allowance, to the extent we maintain profitability we expect to record a provision for income taxes in future periods. Should we determine that we will not be able to realize all or part of our deferred tax assets in the future, a deferred
tax provision would be charged against income in the period such determination is made. As of June 30, 2003, we had $35.8 million in deferred tax assets.



Results of Operations for the Three Months Ended June 30, 2003 and 2002



Revenues



Product Revenues. Revenues from sales of our products increased 74.7% to $52.6 million in the three months ended June 30, 2003 from $30.1 million
in the three months ended June 30, 2002. This increase was primarily attributable to increased sales of all product categories, principally an increase in revenue recognized from our low-range and high-range products, including revenue from
shipments made in the quarter and deferred revenue recognized from shipments in prior quarters. Hardware revenue units increased to approximately 34,000 units in the three months ended June 30, 2003 from approximately 19,000 units in the three
months ended June 30, 2002.



Maintenance and Service
Revenues. Revenues from maintenance and services increased 86.2% to $11.8 million in the three months ended June 30, 2003 from $6.3 million in the three months ended June 30, 2002. This increase was the result of the higher volume of products
shipped and the related recognition of revenues associated with the portion of product revenues attributable to maintenance and services over the applicable maintenance period, as well as increased customer purchases of enhanced service offerings
and renewals of maintenance contracts across a larger installed base of customers.



No single customer accounted for 10% or more of our total revenues in the three months ended June 30, 2003. One customer accounted for 12.2% of our total revenues in the three months ended June 30, 2002.



We cannot assure you that our revenues will continue to increase in
absolute dollars at the rate at which they have grown in recent periods, or at all.



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Cost of Revenues; Gross Margin



Product Cost of Revenues. Product cost of revenues increased 60.8% to $11.7 million in the three months ended June
30, 2003 from $7.3 million in the three months ended June 30, 2002. This increase reflects the greater quantity of products sold, partially offset by reductions in the prices at which we purchase our products from our manufacturers. Product cost of
revenues included stock-based compensation and amortization of intangible assets of approximately $573,000 and $411,000 for the three months ended June 30, 2003 and 2002, respectively.



Product Gross Margin. Product gross margin, including stock-based compensation and amortization of intangible assets,
as a percentage of product revenues increased to 77.7% in the three months ended June 30, 2003 from 75.8% in the three months ended June 30, 2002. The increase in product gross margin was primarily attributable to improved selling prices of our
high-range products. The increase in product gross margin was also attributable to reductions in the prices at which we purchase our products from our manufacturers. We expect our selling prices and product gross margin percentage to decline over
time.



Maintenance and Service Cost of Revenues.
Maintenance and service cost of revenues increased 49.2% to $3.2 million in the three months ended June 30, 2003 from $2.1 million in the three months ended June 30, 2002. This increase was primarily related to the expansion of our customer support
infrastructure and the larger installed base of products for which we provide service and, to a lesser extent, increased third party professional services costs that generate service revenue. Maintenance and service cost of revenues included
stock-based compensation of approximately $276,000 and $274,000 in the three months ended June 30, 2003 and 2002, respectively.



Maintenance and Service Gross Margin. Maintenance and service gross margin, including stock-based compensation, as a percentage of maintenance and
service revenues was 73.0% in the three months ended June 30, 2003 compared to 66.3% in the three months ended June 30, 2002. The increase in maintenance and service gross margin was primarily attributable to our ability to support higher service
revenues with our existing organization and support infrastructure. We expect our maintenance and service gross margin percentage to decline over time.



Operating Expenses



Research and Development Expenses. Research and development expenses increased 30.1% to $11.2 million in the three months ended June 30, 2003 from
$8.6 million in the three months ended June 30, 2002. Research and development expenses represented 17.3% and 23.6% of total revenues for the three months ended June 30, 2003 and 2002, respectively. The dollar increase was primarily attributable to
increased personnel costs and related support costs as a result of increased headcount. Research and development expenses included stock-based compensation and amortization of intangible assets of $1.9 million for both of the three months ended June
30, 2003 and 2002.



Sales and Marketing Expenses. Sales
and marketing expenses increased 39.0% to $22.7 million in the three months ended June 30, 2003 from $16.3 million in the three months ended June 30, 2002. Sales and marketing expenses were 35.3% and 44.9% of total revenues for the three months
ended June 30, 2003 and 2002, respectively. The dollar increase was primarily related to the expansion of our sales and marketing organizations, including increased compensation-related expenses resulting from the growth of our sales force and
higher commissions expense associated with increased revenues and, to a lesser extent, increased marketing-related program costs. Sales and marketing expenses included stock-based compensation and amortization of intangible assets of $2.8
million in both of the three months ended June 30, 2003 and 2002.



General and Administrative Expenses. General and administrative expenses increased 15.9% to $4.9 million in the three months ended June 30, 2003 from $4.2 million in the three months ended June 30, 2002. General and administrative
expenses were 7.6% and 11.6% of total revenues for the three months ended June 30, 2003 and 2002, respectively. The dollar increase was primarily related to increased consulting services expense and increased personnel costs and related support
costs, partially offset by a reduction in bad debt expense. General and administrative expenses included stock-based compensation of approximately $720,000 and $742,000 in the three months ended June 30, 2003 and 2002, respectively.



Stock-based Compensation. During both of the three months ended June
30, 2003 and 2002, we recorded stock-based compensation expense of $6.1 million. As of June 30, 2003, $21.9 million of deferred stock compensation remained to be amortized over the next ten quarters.



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Amortization of Intangible Assets. During the three months ended June 30, 2003 and 2002, we
recorded amortization of intangible assets of approximately $245,000 and $0, respectively. The amortization of intangible assets is associated with the OneSecure acquisition that we completed in September 2002 and amortization will continue until
fiscal 2012. As of June 30, 2003, $5.0 million of intangible assets remained unamortized.



Interest and Other Income, Net



Interest and other income, net, was $1.1 million and approximately $948,000 in the three months ended June 30, 2003 and 2002, respectively. The impact of higher average cash, cash equivalents and short-term investment balances was partially
offset by lower average investment income yield.



Provision for Income Taxes



We recorded an income tax benefit of $23.5 million and an
income tax provision of $1.3 million for the three months ended June 30, 2003 and 2002, respectively. For the three months ended June 30, 2003, the income tax benefit represented a provision for income taxes of $7.6 million, offset by a benefit from
the reversal of the valuation allowance on deferred tax assets of $31.1 million.



For the three months ended June 30, 2002, the provision for income taxes represented federal income taxes and income taxes payable on income generated in non-U.S. tax jurisdictions for which no U.S. tax benefit was
recognizable.



Results of Operations for the Nine Months Ended June 30, 2003
and 2002



Revenues



Product Revenues. Revenues from sales of our products increased 77.2%
to $143.0 million in the nine months ended June 30, 2003 from $80.7 million in the nine months ended June 30, 2002. This increase was primarily attributable to increased sales of all product categories, including revenue from shipments made in the
period and deferred revenue recognized from shipments in prior quarters. Hardware revenue units increased to approximately 90,000 units in the nine months ended June 30, 2003 from approximately 53,000 units in the nine months ended June 30, 2002.



Maintenance and Service Revenues. Revenues from
maintenance and services increased 84.0% to $30.8 million in the nine months ended June 30, 2003 from $16.7 million in the nine months ended June 30, 2002. This increase was the result of the higher volume of products shipped and the related
recognition of revenues associated with the portion of product revenues attributable to maintenance and services over the applicable maintenance period, as well as increased customer purchases of enhanced service offerings and renewals of
maintenance contracts across a larger installed base of customers.



No single customer accounted for 10% or more of our total revenues in the nine months ended June 30, 2003 or 2002.



We cannot assure you that our revenues will continue to increase in absolute dollars or at the rate at which they have grown in recent periods or at all.



Cost of Revenues; Gross Margin



Product Cost of Revenues. Product cost of revenues increased 49.6% to
$31.6 million in the nine months ended June 30, 2003 from $21.1 million in the nine months ended June 30, 2002. This increase reflects the greater quantity of products sold, partially offset by reductions in the prices at which we purchase our
products from our manufacturers. Product cost of revenues included stock-based compensation and amortization of intangible assets of $1.8 million and approximately $1.2 million for the nine months ended June 30, 2003 and 2002, respectively.



Product Gross Margin. Product gross margin including
stock-based compensation and amortization of intangible assets, as a percentage of product revenues increased to 77.9% in the nine months ended June 30, 2003 from 73.8% in the nine months ended June 30, 2002. The increase in product gross margin was
primarily attributable to increased sales and improved selling prices of our mid-range products. The increase in product gross margin was also attributable to reductions in the prices at which we purchase our products from our manufacturers. We
expect our selling prices and product gross margin percentage to decline over time.



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Maintenance and Service Cost of Revenues. Maintenance and service cost of revenues increased 66.7%
to $8.8 million in the nine months ended June 30, 2003 from $5.3 million in the nine months ended June 30, 2002. This increase was primarily related to increases in costs related to the expansion of our customer support infrastructure and the larger
installed base of products for which we provide service and, to a lesser extent, increased third party professional services costs that generate service revenue. Maintenance and service cost of revenues included stock-based compensation of
approximately $830,000 and $742,000 for the nine months ended June 30, 2003 and 2002, respectively.



Maintenance and Service Gross Margin. Maintenance and service gross margin, including stock-based compensation, as a percentage of maintenance and
service revenues was 71.3% in the nine months ended June 30, 2003 compared to 68.4% in the nine months ended June 30, 2002. The increase in maintenance and service gross margin was primarily attributable to our ability to support higher service
revenues with our existing organization and support infrastructure. We expect our maintenance and service gross margin percentage to decline over time.



Operating Expenses



Research and Development Expenses. Research and development expenses increased 32.4% to $32.0 million in the nine months ended June 30, 2003 from
$24.2 million in the nine months ended June 30, 2002. These expenses represented 18.4% and 24.8% of total revenues for the nine months ended June 30, 2003 and 2002, respectively. The dollar increase was primarily attributable to increased personnel
costs and related support costs as a result of increased headcount. Research and development expenses included stock-based compensation and amortization of intangible assets of $5.9 million and $5.7 million in the nine months ended June 30, 2003 and
2002, respectively.



Sales and Marketing Expenses. Sales
and marketing expenses increased 37.0% to $62.9 million in the nine months ended June 30, 2003 from $45.9 million in the nine months ended June 30, 2002. Sales and marketing expenses were 36.2% and 47.1% of total revenues for the nine months ended
June 30, 2003 and 2002, respectively. The dollar increase was primarily related to the expansion of our sales and marketing organizations, including increased compensation-related expenses resulting from the growth of our sales force and higher
commissions expense associated with increased revenues and, to a lesser extent, increased marketing-related program costs. Sales and marketing expenses included stock-based compensation and amortization of intangible assets of $7.7 million and $8.4
million in the nine months ended June 30, 2003 and 2002, respectively.



General and Administrative Expenses. General and administrative expenses increased 10.2% to $13.9 million in the nine months ended June 30, 2003 from $12.6 million in the nine months ended June 30, 2002. General and administrative
expenses were 8.0% and 13.0% of total revenues for the nine months ended June 30, 2003 and 2002, respectively. The dollar increase was primarily related to increased consulting services expense and increased personnel costs and related support
costs, partially offset by a reduction in bad debt expense. General and administrative expenses included stock-based compensation of $2.1 million in both the nine months ended June 30, 2003 and 2002.



Stock-based Compensation. During the nine months ended June 30, 2003
and 2002, we recorded stock-based compensation expense of $17.6 million and $18.1 million, respectively. As of June 30, 2003, $21.9 million of deferred stock compensation remained to be amortized over the next ten quarters.



Amortization of Intangible Assets. During the nine months ended June
30, 2003 and 2002, we recorded amortization of intangible assets of approximately $734,000 and $0, respectively. The amortization of intangible assets is associated with the OneSecure acquisition that we completed in September 2002 and amortization
will continue until fiscal 2012. As of June 30, 2003, $5.0 million of intangible assets remained unamortized.



Interest and Other Income, Net



Interest and other income, net, was $3.2 million in the nine months ended June 30, 2003 compared to interest and other income, net, of approximately $2.2 million in the nine months ended June 30, 2002. The increase in interest and other
income, net, was primarily a result of increased interest income earned on higher average cash, cash equivalent and short-term investment balances in the nine months ended June 30, 2003, partially offset by lower investment income yield.



Provision for Income Taxes



We recorded an income tax benefit of $16.8 million and an income tax
provision of $1.9 million for the nine months ended June 30, 2003 and 2002, respectively. For the nine months ended June 30, 2003, the income tax benefit represented a provision for income taxes of $17.0 million, offset by a benefit from the
reversal of the valuation allowance on deferred tax assets of $33.8 million.



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For the nine months ended June 30, 2002, the provision for income taxes represented federal income taxes
and income taxes payable on income generated in non-U.S. tax jurisdictions for which no U.S. tax benefit was recognizable.



Liquidity and Capital Resources



Since our inception, we have financed our operations primarily through sales of our equity securities and, more recently, from cash generated from
operations. Prior to our IPO, we raised a total of $82.6 million through the private sale of convertible preferred stock. In December 2001, we completed the sale of 11,500,000 shares of common stock in our IPO. We realized net proceeds of $168.6
million upon the close of our IPO.



Net cash provided by
operating activities was $59.8 million for the nine months ended June 30, 2003, compared to $21.6 million for the nine months ended June 30, 2002. Net cash provided by operating activities for the nine months ended June 30, 2003 was primarily the
result of cash generated from our net income, after adjusting for non-cash operating expenses, of $75.9 million and an increase in deferred revenue, partially offset by increases in deferred taxes and accounts receivable. The net cash provided by
operating activities for the nine months ended June 30, 2002 was primarily the result of cash generated from our net loss, after adjusting for non-cash operating expenses, of $9.5 million and increases in deferred revenue and accrued expenses.



Net cash used in investing activities for the nine months
ended June 30, 2003 was $7.5 million, compared to $201.3 million for the nine months ended June 30, 2002. Net cash used in investing activities for the nine months ended June 30, 2003 was primarily the result of purchases of property and equipment.
Net cash used in investing activities for the nine months ended June 30, 2002 was almost entirely due to net purchases of short-term investments.



Net cash provided by financing activities for the nine months ended June 30, 2003 was $13.2 million, compared to $201.2 million in the nine months ended
June 30, 2002. Net cash provided by financing activities for the nine months ended June 30, 2003 was primarily due to net proceeds from the issuance of common stock under employee stock option and purchase plans, partially offset by principal
payments on debt and lease obligations. Net cash provided by financing activities for the nine months ended June 30, 2002 was primarily due to the net proceeds from our IPO and the sale of our Series F convertible preferred stock.



As of June 30, 2003, our principal source of liquidity was $315.2 million of
cash, cash equivalents and short-term investments. At that date, we had future minimum lease payments under non-cancelable operating leases of $15.5 million and long-term debt and restructuring obligations, including the current portion, of $2.8
million. At June 30, 2003, we had no material commitments for capital expenditures, but we expect to spend between $1.0 million and $2.0 million during the remaining three months of fiscal 2003 on capital expenditures related to operational
infrastructure.



In February 2001, we entered into an equipment
leasing arrangement of $514,000. The lease is payable in monthly installments of principal and interest of approximately $15,000 through February 2004. As of June 30, 2003, approximately $114,000 was outstanding under this arrangement.



In April 2001, we entered into a loan and security agreement under which
we could borrow up to $3.5 million to finance eligible equipment purchases. The lender has a security interest in the purchased equipment. Borrowings under the agreement bear interest at the U.S. Treasury note rate for notes with a three-year
maturity plus 3.75% and are payable in equal monthly installments over a three-year term. A final payment equal to 9% of the amount borrowed, due at the end of the three-year term, has been treated as an additional finance charge and is being
amortized over the term of the loan. We are not required to meet any financial covenants under this agreement. Borrowings under this agreement totaled $2.0 million at an annual interest rate of 8.2% and the available commitment expired on November
30, 2001. During the quarter ended June 30, 2003, we repaid the outstanding borrowings under this agreement in full.



In August 2001, we entered into a loan and security agreement under which we could borrow up to $3.0 million to finance eligible equipment purchases. The
lender has a security interest in the purchased equipment. Borrowings under the agreement bear interest at the U.S. Treasury note rate for notes with a three-year maturity plus 9.5% and are payable in equal monthly installments over terms ranging
from 33 to 36 months. We are required to maintain an unrestricted domestic cash balance of $11.0 million while borrowings are outstanding under the agreement. Borrowings under this agreement totaled $1.3 million at an annual interest rate of 13.8%
and the available commitment expired on November 30, 2001. During the quarter ended June 30, 2003, we repaid the outstanding borrowings under this agreement in full.



In August 2000, we entered into a lease for approximately 51,000 square feet of office space in Sunnyvale, California, which
commenced on January 21, 2001 and terminated on February 14, 2003. The lease was secured by a $269,000 standby letter of credit as of June 30, 2003, which was subsequently released in July 2003.



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In October 2002, we entered into a lease for a new approximately 156,000 square foot corporate
headquarters in Sunnyvale, California. Rent payments under the lease are approximately $231,000 per month and commenced February 14, 2003. The lease terminates on May 13, 2008. Under the terms of the lease, we may lease an additional approximately
22,000 square feet in the facility at an additional monthly rent of approximately $32,000. We can exercise this option to lease the additional space at anytime through February 14, 2004. The lease was secured by a $694,000 standby letter of credit
as of June 30, 2003.



We acquired OneSecure in September 2002.
In connection with the acquisition, we assumed non-cancelable operating leases for domestic sales offices that were not occupied by OneSecure and that will not be occupied by us. In addition, we assumed the non-cancelable operating lease for
OneSecures headquarters in Sunnyvale, California, which is a duplicate facility. We have recorded a restructuring liability for the net present value of these leases, net of expected sublease income, for the periods these facilities will be
unoccupied.



We have entered into several leases for domestic
and foreign sales office facilities. The leases expire at various dates through August 2007. The related cost of the leases is approximately $116,000 per month.



Flash Electronics, Inc. manufactures, assembles, tests and fulfills order for the NetScreen-25, NetScreen-50, NetScreen-204, NetScreen-208, NetScreen
IDP-10, NetScreen IDP-100 and NetScreen IDP-500 products. Solectron Corporation manufactures, assembles, tests and fulfills orders for the NetScreen-5XP, NetScreen-5XT, NetScreen-500, NetScreen-5200, and NetScreen-5400 products. Accton Technologies
Corporation manufactures, assembles and tests the NetScreen-5GT and Solectron Corporation fulfills orders for the NetScreen-5GT. We purchase from these and other manufacturers on a purchase order basis and do not have a long-term supply contract
with any of them. At June 30, 2003, we had placed non-cancelable purchase orders totaling $5.5 million.



A summary of our obligations and commitments as of June 30, 2003 are as follows (in thousands):



|                                              |  |       |        |                   |   | Payments Due by Period |  |                  
|--------------------------------------------- |  | ----- | ------ | ----------------- | - | ---------------------- |  | -----------------
|                                              |  | Total |        | Less ThanOne Year |   | One to ThreeYears      |  | Four to FiveYears
|Debt and capital lease obligations            |  | $     | 114    |                   | $ | 114                    |  | $                
|Restructuring liabilities                     |  |       | 2,836  |                   |   | 682                    |  |                  
|Non-cancelable inventory purchase commitments |  |       | 5,522  |                   |   | 5,522                  |  |                  
|Operating leases                              |  |       | 15,499 |                   |   | 3,860                  |  |                  
|                                              |  |       |        |                   |   |                        |  |                  
|Total contractual cash obligations            |  | $     | 23,971 |                   | $ | 10,178                 |  | $                
|                                              |  |       |        |                   |   |                        |  |                  



Recent Accounting Pronouncements



In January, 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires consolidation of variable interest entities (VIE) by the entitys primary beneficiary if the entitys equity investors do not have
characteristics of a controlling financial interest or sufficient equity at risk. FIN 46 is effective for all new VIEs after January 31, 2003. FIN 46 must be applied beginning July 1, 2003, to VIEs existing prior to February 1, 2003. We adopted FIN
46 in January 2003, do not currently have any interest in VIEs and, accordingly, do not expect that FIN 46 will have a material impact on our current financial position or results of operations.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, (SFAS 149) which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. We do not expect SFAS 149 to have a material impact
on our current financial position or results of operations.



In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (SFAS 150). This statement established standards for how an issuer classifies and
measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be
classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. We do not
expect SFAS 150 to have a material impact on our current financial position or results of operations.



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FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS OF

OPERATIONS AND FINANCIAL CONDITION



In addition to other information in this report, the following risk factors should be carefully considered in evaluating us and our business because
these factors may have a significant impact on our business, operating results or financial condition. Actual results could differ materially from those projected in the forward-looking statements contained in this report as a result of the risk
factors discussed below and elsewhere in this report.



Prolonged
weakness in the Internet infrastructure, network security and related markets may decrease our revenues and margins.



The market for our products depends on economic conditions affecting the broader Internet infrastructure, network security and related markets. Weakness
in these markets may cause enterprises, carriers and government entities to delay or cancel security projects, reduce their overall or security-specific information technology budgets or reduce or cancel orders for our products. In this environment,
distributors, value-added resellers and end customers may experience financial difficulty, cease operations and fail to budget or reduce budgets for the purchase of our products. This, in turn, may lead to longer sales cycles, delays in purchase
decisions and difficulties with payment and collection, and may also result in price pressures, causing us to realize lower revenues, gross margins and operating margins. In addition, general economic uncertainty caused by potential hostilities
involving the United States, terrorist activities, severe acute respiratory syndrome (SARS), the decline in specific markets such as the service provider market in the United States, and the general decline in capital spending in the information
technology sector make it difficult to predict changes in the purchase and network requirements of our customers and the markets we serve. We believe that a prolonged weakness in these markets could cause some businesses to curtail or eliminate
capital spending on information technology. If capital spending in our markets declines, our revenues, gross margins and operating margins may decline and we may not be able to achieve our financial goals and maintain profitability.



Competition may decrease our revenues, market share and margins.



The market for network security products is highly competitive, and we
expect competition to intensify in the future. Competitors may gain market share and introduce new competitive products for the same markets and customers currently served by our products. These products may have better performance, lower prices and
broader acceptance than our products.



Current and potential
competitors in our market include the following, all of which sell worldwide or have a presence in most of the major geographical markets for their products:



| |  |  | firewall and VPN software vendors, such as Check Point Software Technologies Ltd. and Symantec Corporation;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | network equipment manufacturers, such as Cisco Systems, Inc., Lucent Technologies Inc., Nokia Corporation and Nortel Networks Corporation;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | security appliance suppliers, such as SonicWALL, Inc., WatchGuard Technologies, Inc. and Symantec Corporation;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | intrusion detection system vendors, such as Internet Security Systems, Inc., Cisco Systems, Inc., Network Associates, Inc. and Enterasys Networks, Inc.;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | low-cost network hardware suppliers with products that include network security functionality; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | emerging intrusion detection and other security companies that may position their systems as replacements for our products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



Many of our current or potential competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. In addition, some of our competitors currently combine their products with other companies networking and
security products to compete with our products. These competitors also often combine their sales and marketing efforts to compete with our products. This competition may result in reduced prices, lower gross and operating margins and longer sales
cycles for our products. If any of our larger competitors were to commit greater technical, sales, marketing and other resources to our markets, or reduce prices for their products over a sustained period of time, our ability to successfully sell
our products, increase revenue or meet our or investor expectations could be adversely affected.



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Our business may suffer due to risks associated with international sales and operations.



Revenues from outside of the Americas were 62.7% of our total revenues for
the nine months ended June 30, 2003 and 55.3% of our total revenues for the year ended September 30, 2002. We expect revenues from outside of the Americas will continue to represent a substantial portion of our total revenues for the foreseeable
future. If we are unable to maintain or increase international market demand and revenues from our products, our revenues and operating results would be adversely affected.



We may not be able to maintain or increase international market demand or international revenues from our products. For
example, general economic conditions in international markets can fluctuate and downturns in these markets could have a significant adverse impact on our ability to meet public market expectations and sustain profitability. Also, as agreements with
international distributors expire, we may be unable to renew those agreements on favorable terms or make alternative arrangements with other distributors.



We intend to continue expanding our existing international operations and to enter new international markets. This expansion will require significant
management attention and financial resources. We currently have limited experience in marketing and distributing our products internationally and in developing versions of our products that comply with local standards. In addition, international
operations are subject to other inherent risks, including:



| |  |  | potential foreign government regulation of our technology or unexpected changes in regulatory requirements;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | greater difficulty and delays in accounts receivable collection;
| | - |  | ----------------------------------------------------------------



| |  |  | difficulties in and costs of staffing and managing foreign operations;
| | - |  | ----------------------------------------------------------------------



| |  |  | reduced protection for intellectual property rights in some countries;
| | - |  | ----------------------------------------------------------------------



| |  |  | currency fluctuations; and
| | - |  | --------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------



The health crisis related to SARS led to a business slowdown in APAC and may adversely affect our results of operations.



In the second half of the quarter ended June 30, 2003, we experienced a
business slowdown in APAC related to SARS, primarily in China and Hong Kong. While we cannot quantify the complete effect of SARS on our business, we expect that SARS will continue to have a follow-on impact in the quarter ending September 30, 2003
and may have an impact in the quarter ending December 31, 2003. Such impact could take the form of lower than expected rates of growth, decreased revenues, longer sales cycles and lower sales prices, all or any of which could have an adverse impact
on our results of operations and may cause us to underperform against the expectations of the public market. Any prolonged or increased outbreak of SARS could have a material adverse impact on our performance in international markets.



We may not be successful in integrating the operations of OneSecure or any other future
acquisitions.



Achieving the anticipated benefits of the
OneSecure acquisition will depend in part upon whether we can integrate the operations, products and technology of OneSecure with our operations, products and technology in a timely and cost-effective manner. The process of combining two companies
is complex, expensive and time consuming and may cause an interruption of, or loss of momentum in, the product development and sales activities and operations of both companies. We cannot assure you that any part or all of the integration will be
accomplished on a timely basis, or at all. Assimilating OneSecure, or any other companies we may seek to acquire in the future, involves a number of other risks, including, but not limited to:



| |  |  | adverse effects on existing customer relationships, such as cancellation of orders or the loss of key customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in integrating or an inability to retain the employees of the acquired company;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | difficulties in integrating the operations of the acquired company, such as information technology resources, manufacturing processes, and financial and operational data;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in integrating the technologies of the acquired company into our products;
| | - |  | ---------------------------------------------------------------------------------------



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| |  |  | unanticipated costs or the incurrence of unknown liabilities;
| | - |  | -------------------------------------------------------------



| |  |  | potential incompatibility of business cultures;
| | - |  | -----------------------------------------------



| |  |  | any perceived adverse changes in business focus;
| | - |  | ------------------------------------------------



| |  |  | entering into markets and acquiring technologies in areas in which we have little experience;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | potential dilution to existing stockholders if we have to issue equity or convertible debt securities to pay for any future acquisitions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | additional expenses associated with the amortization of intangible assets; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | an inability to maintain uniform standards, controls, procedures and policies.
| | - |  | ------------------------------------------------------------------------------



In addition, the integration of certain operations following any merger will require the time and attention of our management, which may distract attention from the
day-to-day business of the combined company. Failure to effectively integrate the operations of OneSecure, or any other companies we may seek to acquire in the future, could have an adverse effect on our business, financial condition and results of
operations.



The unpredictability of our quarterly results may cause the
trading price of our common stock to decline.



Our
quarterly revenues and operating results have varied in the past and will likely continue to vary in the future due to a number of factors, many of which are outside of our control. Any of these factors could cause the price of our common stock to
decline. The primary factors that may affect our revenues and operating results include the following:



| |  |  | the demand for our products;
| | - |  | ----------------------------



| |  |  | the length of our sales and implementation cycle;
| | - |  | -------------------------------------------------



| |  |  | the timing of recognizing revenues;
| | - |  | -----------------------------------



| |  |  | new product introductions by us or our competitors;
| | - |  | ---------------------------------------------------



| |  |  | changes in our pricing policies or the pricing policies of our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | variations in sales channels, product costs or mix of products sold;
| | - |  | --------------------------------------------------------------------



| |  |  | our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain sufficient supplies of sole or limited source components, including ASICs, and power supplies, for our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | variations in the prices of the components we purchase;
| | - |  | -------------------------------------------------------



| |  |  | our ability to attain and maintain production volumes and quality levels for our products at reasonable prices at our third-party manufacturers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to manage our customer base and credit risk and to collect our accounts receivable; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the financial strength of our value-added resellers and distributors.
| | - |  | ---------------------------------------------------------------------



Our operating expenses are largely based on anticipated revenues and a high percentage of our expenses are, and will continue to be, fixed in the short
term. As a result, lower than anticipated revenues for any reason could cause significant variations in our operating results from quarter to quarter and, because of our rapidly growing operating expenses, could result in substantial operating
losses.



Due to the factors summarized above, we believe that
quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Also, it is likely that, in some future quarters, our operating results will be below the expectations of public market analysts and
investors. In this event, the price of our common stock would likely decline.



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The long sales and implementation cycles for our products may cause revenues and operating results to vary
significantly.



An end customers decision to
purchase our products often involves a significant commitment of its resources and a lengthy evaluation and product qualification process. Throughout the sales cycle, we often spend considerable time educating and providing information to
prospective customers regarding the use and benefits of our products. Budget constraints and the need for multiple approvals within enterprises, carriers and government entities may also delay the purchase decision. Failure to obtain the required
approval for a particular project or purchase decision may delay the purchase of our products. Additionally, our security systems and intrusion detection and prevention products are complex systems designed for the enterprise and service provider
markets. These systems and products require us to maintain a sophisticated sales force, engage in extensive negotiations, and provide high-level engineering support to complete sales. If these systems and products are not successful with enterprise
and service provider customers, our revenue could be below our expectations and our operating results could be adversely affected.



Even after making the decision to purchase our products, our end customers may not deploy our products broadly within their networks. The timing of
implementation can vary widely and depends on the skill set of the end customer, the size of the network deployment, the complexity of the end customers network environment and the degree of hardware and software configuration necessary to
deploy our products. End customers with large networks usually expand their networks in large increments on a periodic basis and large deployments and purchases of our security systems also require a significant outlay of capital from end customers.
If our end customers delay implementation of our products due to these factors, our revenue could be below our expectations and our operating results could be adversely affected.



Failure to successfully develop and introduce new products or product enhancements and address evolving standards in the network security
industry would cause our revenues to decline.



We may not
be able to develop new products or product enhancements in a timely manner, or at all. In particular, we may not be able to effectively combine OneSecures technologies into our own products, successfully market or enhance OneSecures line
of IDP appliances, or offer a viable combined hardware or management product that addresses the needs of our customers. Any failure to develop or introduce new products and product enhancements might cause our existing products to be less
competitive, may adversely affect our ability to sell solutions to address large customer deployments and, as a consequence, our revenues may decline. In addition, the introduction of products embodying new technologies could render our existing
products obsolete, which would have a direct, adverse effect on our market share and revenues. Any failure of our future products or product enhancements to achieve market acceptance could cause our revenue to be below our or investor expectations
and our operating results could be adversely affected.



The
market for network security products is characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. We expect to continue to introduce new products and
enhancements to existing products to address current and evolving customer requirements and broader networking trends and vulnerabilities. We also expect to develop products with strategic partners and incorporate third-party advanced security
capabilities into our products. In addition, we expect to continue to introduce products and enhancements to existing products to address the needs of larger customers that will require greater levels of complexity and support than we have delivered
in the past. Some of these new products and enhancements may require us to develop new hardware architectures and ASICs that involve complex and time consuming processes. In developing and introducing our products, we have made, and will continue to
make, assumptions with respect to which features, security standards, performance criteria and support levels will be required by our customers. If we implement features, security standards, performance criteria and support levels that are different
from those required by our customers, market acceptance of our products may be significantly reduced or delayed, which would harm our ability to penetrate existing or new markets.



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If we fail to develop or maintain relationships with value-added resellers or distribution partners, or if our
value-added resellers or distribution partners are not successful in their sales efforts, sales of our products may decrease and our operating results would suffer.



We derived approximately 93.0% of our total revenues from value-added resellers and distributors in the nine months ended
June 30, 2003. In the year ended September 30, 2002, we derived approximately 86.9% of our total revenues from value-added resellers and distributors. We expect our revenues to continue to depend in large part on the performance of these third-party
distributors and resellers. In addition, our value-added resellers and distributors may be unsuccessful in selling our products and services, may sell products and services that are competitive with ours, may devote more resources to competitive
products and may cease selling our products and services altogether. The loss of or reduction in sales to our value-added resellers or distributors could materially reduce our revenues. If we fail to develop and maintain additional relationships
with these distribution partners, or if these partners are not successful in their sales efforts, sales of our products may decrease and our operating results would suffer.



Our reliance on third parties to manufacture, assemble, test and fulfill orders for our products could cause a delay in our ability to
fill orders, which might cause us to lose sales.



Flash
Electronics, Inc. manufactures, assembles, tests and fulfills orders for the NetScreen-25, NetScreen-50, NetScreen-204, NetScreen-208, NetScreen IDP-10, NetScreen IDP-500 and NetScreen IDP-100 products at its Fremont, California facility. Solectron
Corporation manufactures, assembles, tests and fulfills orders for the NetScreen-5400, NetScreen-5200 and NetScreen-500 products at its San Jose, California facility and the NetScreen-5XP and NetScreen-5XT products at its facility in China. Accton
Technologies Corporation manufactures, assembles and tests the NetScreen-5GT at its facility in Taiwan. Solectron Corporation fulfills orders for the NetScreen-5GT at its San Jose, California facility. We currently do not have a long-term supply
contract with Flash Electronics, Solectron or Accton Technologies, and we purchase from these manufacturers on a purchase order basis. If we should fail to manage our relationship with Flash Electronics, Solectron or Accton Technologies effectively,
or if these manufacturers experience delays, disruptions or quality control problems in their manufacturing and order fulfillment operations, our ability to ship products to our customers could be delayed.



The absence of dedicated capacity with Flash Electronics, Solectron and
Accton Technologies means that, with little or no notice, they could refuse to continue manufacturing some or all of our products. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming. If we are
required or choose to change contract manufacturers, we could lose revenues and damage our customer relationships.



Our proprietary GigaScreen and GigaScreen-II ASICs, which are key to the functionality of our hardware-based products, are fabricated by foundries
operated by Toshiba America Electronic Components, Inc. We have no long-term contract with Toshiba and purchase our ASICs on a purchase order basis. If Toshiba materially delays its supply of ASICs to us, or requires us to find an alternate supplier
and we are not able to do so on a timely and reasonable basis, our revenue and operating results would be adversely affected.



Our reliance on third-party manufacturers also exposes us to the following risks outside our control:



| |  |  | unexpected increases in manufacturing and repair costs;
| | - |  | -------------------------------------------------------



| |  |  | interruptions in shipments if one of our manufacturers is unable to complete production;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | inability to control quality of finished products;
| | - |  | --------------------------------------------------



| |  |  | inability to control delivery schedules;
| | - |  | ----------------------------------------



| |  |  | unpredictability of manufacturing yields;
| | - |  | -----------------------------------------



| |  |  | financial strength required of these manufacturers to meet our procurement and manufacturing needs; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | potential lack of adequate capacity to provide all or a part of the services we require.
| | - |  | ----------------------------------------------------------------------------------------



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We rely on single or limited sources for several key components.



We currently purchase several key components, including semiconductors, from
single or limited sources. We carry very little inventory of some of our products and product components, and we rely on our suppliers to deliver necessary components to our contract manufacturers in a timely manner based on the forecasts we
provide. Some of the semiconductors we require are very complex, and we may not be able to develop an alternate source in a timely manner, which could hurt our ability to deliver our products to our customers. We also purchase power supplies from a
single source and purchase other custom components from other sole or limited sources. If we are unable to buy these components on a timely basis, we will not be able to deliver products to our customers and our revenue and operating results would
be adversely affected.



At various times, some of the key
components for our products, such as flash memory, have been in short supply. Delays in receiving components would harm our ability to deliver our products on a timely basis. In addition, because we rely on purchase orders rather than long-term
contracts with our suppliers, we cannot predict with certainty our ability to procure components in the longer term. If we receive a smaller allocation of components than is necessary to manufacture products in quantities sufficient to meet customer
demand, customers could choose to purchase competing products.



A breach of
network security could harm public perception of our products, which could cause us to lose revenues.



If an actual or perceived breach of network security occurs in one of our end customers network systems, regardless of whether the breach is
attributable to our products, the market perception of the effectiveness of our products could be harmed. This could cause us to lose current and potential end customers or cause us to lose current and potential value-added resellers and
distributors. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques.



Undetected product errors or defects could result in loss of revenues, delayed market
acceptance and claims against us.



We offer a warranty on
all of our products, allowing the end customer to have any defective unit repaired, or to receive a replacement product for it during the warranty period. Our products may contain undetected errors or defects. If there is a broad product failure
across our customer base, we may decide to replace all affected products or we may decide to refund the purchase price for defective units. Such defects and actions may adversely affect our ability to record revenue for units. Some errors are
discovered only after a product has been installed and used by end customers. Any errors discovered after commercial release could result in loss of revenues and claims against us.



If we are unable to fix errors or other problems that later are identified after full deployment, in addition to the
consequences described above, we could experience:



| |  |  | failure to achieve market acceptance;
| | - |  | -------------------------------------



| |  |  | loss of customers;
| | - |  | ------------------



| |  |  | loss of or delay in revenues and loss of market share;
| | - |  | ------------------------------------------------------



| |  |  | diversion of development resources;
| | - |  | -----------------------------------



| |  |  | increased service and warranty costs;
| | - |  | -------------------------------------



| |  |  | legal actions by our customers; and
| | - |  | -----------------------------------



| |  |  | increased insurance costs.
| | - |  | --------------------------



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If our products do not interoperate with our end customers networks, installations would be delayed or
cancelled, which could significantly reduce our revenues.



Our products are designed to interface with our end customers existing networks, each of which has different specifications and utilizes multiple protocol standards. Many of our end customers networks contain multiple
generations of products that have been added over time as these networks have grown and evolved. Our products must interoperate with all of the products within these networks as well as with future products that might be added to these networks in
order to meet our end customers requirements. If we find errors in the existing software used in our end customers networks, we may elect to modify our software to fix or overcome these errors so that our products will interoperate and
scale with their existing software and hardware. If our products do not interoperate with those within our end customers networks, customer installations could be delayed or orders for our products could be cancelled, which could significantly
reduce our revenues.



If we fail to predict our manufacturing requirements
accurately, we could incur additional costs or experience manufacturing delays, which could reduce our gross margins or cause us to lose sales.



Because we currently do not have long-term supply contracts with our contract manufacturers, they are not obligated to supply products to us for any
specific period, in any specific quantity or at any certain price, except as may be provided in a particular purchase order. We provide forecasts of our demand to our contract manufacturers up to six months prior to scheduled delivery of products to
our customers. If we overestimate our requirements, our contract manufacturers may have excess inventory, which would increase our costs. If we underestimate our requirements, our contract manufacturers may have an inadequate component inventory,
which could interrupt manufacturing of our products and result in delays in shipments and revenues. In addition, lead times for materials and components that we order vary significantly and depend on factors such as the specific supplier, contract
terms and demand for each component at a given time. We may also experience shortages of components from time to time, which also could delay the manufacturing of our products.



We may experience losses and may not maintain profitability.



We achieved profitability on a GAAP basis for the first time in the three months ended December 31, 2002. Prior to the
quarter ended December 31, 2002, we had incurred significant losses since our inception in October 1997. We may incur losses in the future. As of June 30, 2003, we had an accumulated deficit of $88.2 million. We had net losses applicable to common
stockholders of $41.1 million for the year ended September 30, 2002, $34.2 million for the year ended September 30, 2001, and $33.7 million for the year ended September 30, 2000. We expect to continue to incur increasing sales and marketing,
research and development and general and administrative expenses. As a result, we will need to continue generating higher revenues to maintain profitability. Revenue growth depends on many factors, including those described elsewhere in these
Factors That May Affect Our Business and Future Results of Operations and Financial Condition. Our revenues may not grow, our gross margins and operating margins may decline and we may not maintain profitability. A failure to maintain
profitability could cause our stock price to decline.



We depend on our key
personnel to manage our business effectively in a rapidly changing market, and if we are unable to hire additional personnel or retain existing personnel, our ability to execute our business strategy would be impaired.



Our future success depends upon the continued services of our executive
officers, including in particular Robert D. Thomas and Feng Deng and other key engineering, sales, marketing and support personnel. None of our officers or key employees are bound by an employment agreement for any specific term, and no one is
constrained from terminating his or her employment relationship with us at any time. In addition, since a number of our long-standing employees have most of their stock options or restricted stock vested, their economic incentive to remain in our
employ may be diminished. Further, we do not have key person life insurance policies covering any of our employees. We also intend to hire a significant number of engineering, sales, marketing and support personnel in the future, and we believe our
success depends, in large part, upon our ability to attract and retain these key employees. The loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required
personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products.



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We may experience difficulties with our systems of management and internal controls that could harm our business.



Our ability to sell our products and implement our
business plan successfully in a volatile and growing market requires effective management, information technology and financial systems, and a system of internal processes and controls. Growth in future operations may cause strain on our systems,
processes and controls. To meet these challenges, we will need to improve our management and information technology systems as well as our internal controls for financial reporting. We will also need to scale these systems and controls to meet the
requirements of our growth in international markets and continue to expand, train and manage our workforce worldwide. If we do not meet these challenges, we may be unable to expand our business or to meet competitive challenges and it will be more
difficult to manage our operations.



We are exposed to fluctuations in
currency exchange rates that could negatively impact our results of operations.



Our international sales are currently denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less price competitive in
international markets, affect our customers ability to pay amounts due and negatively impact our revenues from international operations. Additionally, in the future we may elect to invoice some of our international customers in local currency,
which could subject our revenues related to such customers to fluctuations in exchange rates between the U.S. dollar and the local currency.



We might have to defend lawsuits or pay damages in connection with any alleged or actual failure of our products and services.



Because our products and services provide and monitor network security and
may protect valuable information, we could face claims for product liability, tort or breach of warranty. Anyone who circumvents our security measures could misappropriate the confidential information or other property of end customers using our
products, or interrupt their operations. If that happens, affected end customers or others may sue us. In addition, we may face liability for breaches caused by faulty installation of our products by our service and support organizations. Provisions
in our contracts relating to warranty disclaimers and liability limitations may be unenforceable. Some courts, for example, have found contractual limitations of liability in standard computer and software contracts to be unenforceable in some
circumstances. Defending a lawsuit, regardless of its merit, could be costly and could divert management attention. Our business liability insurance coverage may be inadequate or future coverage may be unavailable on acceptable terms or at all.



If we fail to protect our intellectual property rights, end customers or
potential competitors might be able to use our technologies to develop their own solutions, which could weaken our competitive position or reduce our revenues.



We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. As of June 30, 2003, we had nine patent applications pending in the United States relating to our products, three of which have been extended to other countries. Our pending patent applications may not result in the
issuance of any patents. Even if we obtain such patents, that will not guarantee that our patent rights will be valuable, create a competitive barrier or will be free from infringement. Furthermore, if any patent is issued, it might be invalidated
or circumvented or otherwise fail to provide us any meaningful protection. We also enter into confidentiality agreements with our employees, consultants and corporate partners, and control the use, access to and distribution of our software,
documentation and other proprietary information. Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and the steps we have taken may not prevent
unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.



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We could become subject to litigation regarding intellectual property rights that could be costly and result in the
loss of significant rights.



In recent years, there has
been significant litigation in the United States involving patents and other intellectual property rights. We may become a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of another
partys intellectual property. Claims for alleged infringement and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation could also force us to do one or more of the following:



| |  |  | stop or delay selling, incorporating or using products that use the challenged intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms or at
all; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign the products that use that technology.
| | - |  | -----------------------------------------------



If we are forced to take any of these actions, our business might be seriously harmed. Our insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that could be imposed.



The inability to
obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could seriously harm our business,
financial condition and results of operations.



From time
to time, we may be required to license technology from third parties to develop new products or product enhancements. Third-party licenses may not be available to us on commercially reasonable terms or at all. The inability to obtain any third-party
license required to develop new products or product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could seriously harm our business, financial condition and results
of operations.



We will record substantial expenses related to our issuance
of stock options that will have a material negative impact on our results of operations.



We have granted stock options under our stock option plans since November 1997. We are required to recognize, as a reduction of stockholders equity, deferred stock compensation expense equal to the difference
between the deemed fair market value of our common stock for financial reporting purposes and the exercise price of these options at the date of grant. This expense is amortized over the vesting period of the applicable options, generally four
years, using the straight-line vesting method. At June 30, 2003, approximately $21.9 million of deferred stock compensation expense related to employee stock options remained unamortized. The resulting amortization expense will have a material
negative impact on our results of operations in future periods through the quarter ending December 31, 2005.



Governmental regulations affecting the import or export of products could negatively affect our revenues.



Governmental regulation of imports or exports or failure to obtain required export approval of our encryption technologies could harm our international
and domestic sales. The United States and various foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies, especially encryption technology. In addition, from time to time,
governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys.



In particular, in light of recent terrorist activity, governments could enact additional regulation or restrictions on the
use, import or export of encryption technology. Additional regulation of encryption technology could delay or prevent the acceptance and use of encryption products and public networks for secure communications. This might decrease demand for our
products and services. In addition, some foreign competitors are subject to less stringent controls on exporting their encryption technologies. As a result, they may be able to compete more effectively than we can in the domestic and international
network security market.



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Earthquakes, other natural disasters and power shortages may damage our facilities or the facilities of third parties
on which we depend.



Our corporate headquarters and two of
our third-party manufacturers are located in Northern California near major earthquake faults that have experienced earthquakes in the past. An earthquake or other natural disaster near our headquarters or near one or more of the facilities of third
parties upon which we rely could disrupt our operations or the operations of those parties. None of these disruptions would be covered by insurance, so the supply of our products could be limited, our business could be hampered and our financial
condition and results of operations could be harmed.



The price of our
common stock is likely to be volatile.



The market prices
of the securities of technology-related companies have been extremely volatile. Thus, the market price of our common stock is likely to be subject to wide fluctuations. If our revenues do not grow or grow slower than investors anticipate, if
operating or capital expenditures exceed our expectations and cannot be reduced appropriately, if our gross margin or operating margin declines or declines faster than investors anticipate, or if some other event adversely affects us, the market
price of our common stock could decline. In addition, if the market for technology-related stocks or the stock market in general experiences a continued or greater loss in investor confidence or otherwise fails, the market price of our common stock
could decline for reasons unrelated to our business, results of operations and financial condition. The market price of our stock also might decline in reaction to events that affect other companies in our industry even if these events do not
directly affect us. General political or economic conditions, such as an outbreak of war, a recession or interest rate or currency rate fluctuations, could also cause the market price of our common stock to decline. Our common stock has experienced,
and is likely to continue to experience, these fluctuations in price, regardless of our performance.



Management could invest or spend our cash or cash equivalents and investments in ways that might not enhance our results of operations or market share.



We have made no specific allocations of our cash or cash equivalents and
investments. Consequently, management will retain a significant amount of discretion over the application of our cash or cash equivalents and investments and could spend the proceeds in ways that do not improve our operating results or increase our
market share. In addition, these proceeds may not be invested to yield a favorable rate of return.



Future sales of shares by existing stockholders could cause our stock price to decline.



If our existing stockholders sell, or are perceived to sell, substantial amounts of our common stock in the public market, the market price of our common
stock could decline. As of June 30, 2003, there were 81,334,001 shares of common stock outstanding. Large portions of these freely tradable shares are still held by the same entities that purchased our preferred stock prior to our initial public
offering. In October 2002, 5,762,502 shares resulting from the conversion of Series F preferred stock became saleable pursuant to Rule 144 of the Securities Act. Additionally, 11,711,403 shares were held by directors, executive officers and other
affiliates, that are subject to volume limitations under Rule 144, various vesting agreements and our quarterly and other blackout periods. Furthermore, shares subject to outstanding options and warrants and shares reserved for future
issuance under our stock option and purchase plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act.



Provisions in our charter documents might deter a company from acquiring
us, which could inhibit a stockholder from receiving an acquisition premium for their shares.



We have adopted a classified board of directors. Our board is divided into three classes that serve staggered three-year terms. Only one class of
directors will be elected each year, while the directors in the other classes will continue on our board for the remainder of their terms. This classification of our board could make it more difficult for a third party to acquire, or could
discourage a third party from acquiring, control of NetScreen since it would make it more difficult and time-consuming to replace our then current directors. In addition, our stockholders are unable to call special meetings of stockholders, to act
by written consent, to remove any director or the entire board of directors without a supermajority vote or to fill any vacancy on our board of directors. Our stockholders must also meet advance notice requirements for stockholder proposals. Our
board may also issue preferred stock without any vote or further action by the stockholders. These provisions and other provisions under Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our
stockholders.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk.



We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive
in foreign markets.



As of June 30, 2003, our investment
portfolio consisted of money market funds, corporate-backed debt obligations, municipal bonds and U.S. government discount notes, and earned interest at an average rate of 1.7%. We place investments with high quality issuers and limit the amount of
credit exposure to any one issuer. These securities are subject to interest rate risks. Based on our portfolio content and our ability to hold investments to maturity, we believe that, a hypothetical 10% increase or decrease in interest rates would
not materially affect our interest income, although we cannot assure you of this.



Item 4. Controls and Procedures



Evaluation of
disclosure controls and procedures



We carried out an
evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2003, the end of the quarter covered by this report,
our disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information relating to NetScreen (including its consolidated subsidiaries) required to be included in our Exchange Act
filings.



Changes in internal controls



During the quarter ended June 30, 2003, there were no significant changes in
our internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



Limitations on effectiveness of controls and procedures



Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NetScreen have been detected. These inherent limitations include, but are not limited to, the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.



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PART IIOTHER INFORMATION



Item 1. Legal Proceedings



We are
subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material
adverse effect on our consolidated financial position, results of operations or cash flows.



Item 2. Changes in Securities and Use of Proceeds



(d) The Securities and Exchange Commission declared our first registration statement, filed on Form S-1 under the Securities Act of 1933 (File No. 333-71048), relating to our initial public offering (IPO) of our common stock, effective on
December 11, 2001. We are furnishing the following information with respect to the use of proceeds from our IPO:



|Gross proceeds from our IPO |  | $ | 184,000,000
|--------------------------- |  | - | -----------
|                            |  |   |            
|Offering expenses:          |  |   |            
|Underwriting fees           |  |   | 12,880,000 
|Other offering expenses     |  |   | 2,481,000  
|                            |  |   |            
|Total offering expenses     |  |   | 15,361,000 
|                            |  |   |            
|Net proceeds from our IPO   |  | $ | 168,639,000
|                            |  |   |            



To date, we have not used any of the
net proceeds of the IPO.



Item 3. Defaults upon Senior Securities



None.



Item 4. Submission of Matters to a Vote of Security Holders



None.



Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



(a)
Exhibits



|             | 
|------------ | 
|Exhibit 31.1 | 
|             | 
|Exhibit 31.2 | 
|             | 
|Exhibit 32.1 | 
|             | 
|Exhibit 32.2 | 



(b) Reports on Form 8-K



On April 23, 2003, we filed a report on Form 8-K dated April 23, 2003, that furnished (not
filed) under Item 12 the press release entitled NetScreen Technologies, Inc. Reports Record Second Quarter Results relating to our results for the quarter ended March 31, 2003.



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SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



NETSCREEN TECHNOLOGIES, INC.By:

/s/ REMO E. CANESSARemo E. Canessa Chief Financial Officer and Corporate Secretary (Duly Authorized and Principal Financial
Officer)




Date: August 14, 2003



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EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------
|            | 
|31.1        |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|31.2        |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.1        |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.