0001262039-11-000039 | 10-Q | XBRL Viewer

Deferred Revenue

9 Months Ended

Sep. 30, 2011

Deferred Revenue Disclosure [Text Block]

DEFERRED REVENUE

Deferred revenue consisted of the following ($ amounts in 000's):



	September 30, 2011	December 31, 2010
Product	6,195	4,466
Services	250,437	219,022
Ratable and other revenue	18,494	29,143
Total deferred revenue	275,126	252,631
Reported As:
Current	192,927	169,648
Non-current	82,199	82,983
Total deferred revenue	275,126	252,631

Document and Entity Information - shares	9 Months Ended
Document and Entity Information - shares	Sep. 30, 2011	Oct. 28, 2011
Document Information [Line Items]
Entity Registrant Name	FORTINET INC
Entity Central Index Key	0001262039
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Amendment Flag	false
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		154,027,282

Stockholder's Equity

9 Months Ended

Sep. 30, 2011

Stockholders' Equity Attributable to Parent [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

STOCKHOLDERS' EQUITY

Stock Plans—We issue shares under three plans and we grant equity compensation awards to acquire our common shares from one plan, and which collectively are referred to as our stock plans below. For further discussion of these Plans, refer to Note 11, "Stock Plans," of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2010.

Common Shares Reserved for Issuance—At September 30, 2011, we had reserved 40.2 million common shares for issuance.

Stock-based compensation under ASC 718—Stock-based compensation is accounted for in accordance with ASC 718, which requires compensation costs related to share-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. Under ASC 718, the fair value of each option award is estimated on the grant date using the Black-Scholes option pricing model. We determined weighted-average valuation assumptions as follows:

Expected Term—The expected term represents the period that our stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we have based our expected term on the simplified method available under ASC 718-10 (formerly referred to as Staff Accounting Bulletin 110).

Expected Volatility—The computation of expected volatility for the periods presented includes the historical and implied stock volatility of comparable companies from a representative peer group selected based on industry and market capitalization data and to a lesser extent, our weighted historical and implied volatility following our IPO in November 2009.

Fair Value of Common Stock—The fair value of our common stock is the closing sales price of the Common Stock (or the closing bid, if no sales were reported) on the effective grant date.

Risk-Free Interest Rate—We base the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend—The expected dividend weighted-average assumption is based on our current expectations about our anticipated dividend policy.

The following table summarizes the weighted-average assumptions relating to our stock options as follows:



	Three Months Ended		Nine Months Ended
	September 30, 2011	September 30, 2010	September 30, 2011	September 30, 2010
Expected term in years	4.6	4.6	4.6	4.6
Volatility (%)	46.2	41.8	40.4 - 46.2	37.6 - 41.8
Risk-free interest rate (%)	1.5	1.6	1.5 - 2.0	1.6 - 2.4
Dividend rate (%)	—	—	—	—

Stock-based compensation expense is included in costs and expenses as follows ($ amounts in 000's):



	Three Months Ended		Nine Months Ended
	September 30, 2011	September 30, 2010	September 30, 2011	September 30, 2010
Cost of product revenue	64	26	129	76
Cost of services revenue	564	242	1,124	684
Research and development	1,516	600	2,954	1,741
Sales and marketing	2,708	1,017	6,289	2,780
General and administrative	882	549	2,178	1,565
	5,734	2,434	12,674	6,846

A summary of the option activity under our stock plans and changes during the reporting periods are presented below (in 000's, except per share amounts):



			Options Outstanding
	Shares Available For Grant		Number Of Shares		Weighted- Average Exercise Price ($)	Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value ($)
Balance-December 31, 2010	15,091		22,490		4.21
Authorized	7,438		—		—
Granted	(5,920	)	5,920		20.75
Forfeited	1,027		(1,027	)	10.61
Exercised (aggregate intrinsic value of $86,961)	—		(4,834	)	2.90
Balance—September 30, 2011	17,636		22,549		8.54
Options vested and expected to vest—September 30, 2011			21,569		8.40	4.78	201,785
Options vested and exercisable—September 30, 2011			11,282		3.34	3.87	151,886

At September 30, 2011, total compensation cost related to unvested stock-based awards granted to employees under our stock plans but not yet recognized was $53.3 million, net of estimated forfeitures. This cost is expected to be amortized on a straight-line basis over a weighted-average period of 3.15 years. Future option grants will increase the amount of compensation expense to be recorded in these periods.

The total fair value of awards vested under our stock plans was $2.5 million and $1.8 million for the three months ended September 30, 2011 and September 30, 2010, respectively. The total fair value of awards vested under our stock plans was $8.3 million and $6.7 million for the nine months ended September 30, 2011 and September 30, 2010, respectively. The weighted-average fair value of options granted during the three and nine months ended September 30, 2011 was $8.04 and $7.80 per share, respectively.

Employee Stock Purchase Plan—The ESPP was originally adopted by our Board of Directors (the “Board”) in April 2011 and subsequently approved by our stockholders in June 2011. Under the ESPP, we can grant stock purchase rights to all eligible employees during a six months offering period with purchase dates at the end of each offering period. The first offering period under the ESPP began on August 15, 2011 and ends on February 14, 2012. Shares are purchased through employees' payroll deductions, up to a maximum of 15.0% of employees' compensation for each purchase period, at purchase prices equal to 85.0% of the lesser of the fair market value of our common stock at the first trading date of the applicable offering period or the purchase date. No participant may purchase more than 4,000 shares of common stock in any one calendar year period. The ESPP is compensatory and results in compensation expense. During the three months ended September 30, 2011, compensation expense recognized in connection with the ESPP was $0.5 million.

The following table summarizes the weighted-average assumptions relating to our ESPP during the three and nine months ended September 30, 2011 as follows:



Expected term in years	0.5
Volatility (%)	59.9
Risk-free interest rate (%)	0.07
Dividend rate (%)	—
Estimated fair value ($)	6.56

Non-employees—During the three months ended September 30, 2011, we issued options to purchase 5,760 shares of common stock, at an exercise price of $20.13 per share, to non-employees in exchange for services. During the three months ended September 30, 2010, no options were granted to non-employees in exchange for services. During the nine months ended September 30, 2011 and September 30, 2010, we granted to non-employees in exchange for services, options to purchase 34,144 and 22,860 shares of Common Stock, respectively, at a range of exercise prices of $8.43 to $23.04 per share. These options vest over periods of up to 48 months, and in accordance with ASC 505-50 (formerly referred to as Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services), we accounted for these options as variable awards. The options were valued using the Black-Scholes option pricing model with the following weighted-average assumptions:



	Three Months Ended		Nine Months Ended
	September 30, 2011	September 30, 2010	September 30, 2011	September 30, 2010
Expected term in years	3.6 - 6.1	4.6 - 6.3	3.6 - 6.3	4.6 - 6.8
Volatility (%)	46.2	41.8	40.4 - 46.2	37.6 - 41.8
Risk-free interest rate (%)	1.5	1.6	1.5 - 2.0	1.6 - 2.4
Dividend rate (%)	—	—	—	—

- Definition

The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

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+ Details

Segment Information

9 Months Ended

Sep. 30, 2011

Segment Information [Abstract]

Segment Reporting Disclosure [Text Block]

SEGMENT INFORMATION

ASC 280 (formerly referred to as SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information) establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our chief executive officer. Our chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, we are considered to be in a single reportable segment and operating unit structure.

Revenue by geographic region is based on the billing address of the customer. The following tables set forth revenue, interest income and property and equipment by geographic region ($ amounts in 000's):



	Three Months Ended		Nine Months Ended
Revenue	September 30, 2011	September 30, 2010	September 30, 2011	September 30, 2010
Americas:
United States	36,565	27,494	88,838	66,661
Other Americas	13,463	7,902	37,376	21,442
	50,028	35,396	126,214	88,103
Europe, Middle East and Africa (EMEA)	37,942	28,926	108,216	85,482
Asia Pacific and Japan (APAC)	28,456	20,649	78,285	57,512
Total revenue	116,426	84,971	312,715	231,097



Property and Equipment—Net	September 30, 2011	December 31, 2010
Americas:
United States	2,269	1,639
Canada	3,734	3,933
Other Americas	28	13
	6,031	5,585
Europe, Middle East and Africa (EMEA)	664	616
Asia Pacific and Japan (APAC)	790	855
Total property and equipment—net	7,485	7,056

- Definition

The entire disclosure for reporting segments including data and tables. Reportable segments include those that meet any of the following quantitative thresholds a) it's reported revenue, including sales to external customers and intersegment sales or transfers is 10 percent or more of the combined revenue, internal and external, of all operating segments b) the absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount of 1) the combined reported profit of all operating segments that did not report a loss or 2) the combined reported loss of all operating segments that did report a loss c) its assets are 10 percent or more of the combined assets of all operating segments.

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+ Details

Income Per Share

9 Months Ended

Sep. 30, 2011

Income (Loss) Per Share [Abstract]

Earnings Per Share [Text Block]

INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, plus the dilutive effects of stock options and warrants.

Potentially dilutive common shares are determined by applying the treasury stock method to the assumed exercise of outstanding stock options.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is as follows ($ and share amounts in 000's, except per share amounts):



	Three Months Ended		Nine Months Ended
	September 30, 2011	September 30, 2010	September 30, 2011	September 30, 2010
Numerator:
Net income	17,917	14,017	45,998	25,104

Denominator:
Basic shares:
Weighted-average common shares outstanding - basic	153,265	143,672	151,958	138,376

Diluted shares:
Weighted-average common shares outstanding - basic	153,265	143,672	151,958	138,376
Effect of potentially dilutive securities:
Employee stock options	10,590	11,984	11,582	14,736
Employee stock purchase rights	14	—	14	—
Warrants to purchase common stock	—	186	—	178
Weighted-average shares used to compute diluted net income per share	163,869	155,842	163,554	153,290
Net income per share:
Basic	0.12	0.10	0.30	0.18
Diluted	0.11	0.09	0.28	0.16

The following outstanding options and employee stock purchase rights were excluded from the computation of diluted net income per common share applicable to common stockholders for the periods presented as their effect would have been antidilutive (in 000's):



	Three Months Ended		Nine Months Ended
	September 30, 2011	September 30, 2010	September 30, 2011	September 30, 2010
Options to purchase common stock	5,058	3,512	3,375	2,590
Employee stock purchase rights	186	—	186	—
	5,244	3,512	3,561	2,590

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$ 45,998	$ 25,104
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	5,114	4,233
Loss on disposal of fixed assets	22	14
Amortization of investment premiums	9,508	4,934
Stock-based compensation	12,674	6,846
Excess tax benefit from employee stock option plans	(9,264)	(4,191)
Changes in operating assets and liabilities:
Accounts receivable—net	(3,559)	(5,011)
Inventory—net	(1,478)	(2,815)
Deferred tax assets	(5,546)	(8)
Prepaid expenses and other current assets	(2,429)	(2,905)
Deferred cost of revenues	3,188	(274)
Other assets	(1,456)	50
Accounts payable	2,514	(689)
Accrued liabilities	4,867	1,711
Accrued payroll and compensation	1,582	4,312
Deferred settlement and other liabilities	2,664	0
Deferred revenue	22,471	33,321
Income taxes payable	23,413	7,327
Net cash provided by operating activities	110,283	71,959
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments	(407,110)	(311,995)
Maturities and sales of investments	279,681	80,097
Purchases of property and equipment	(2,785)	(2,900)
Payment made in connection with business acquisition, net	(2,623)	0
Deposits of restricted cash		(4)
Net cash used in investing activities	(132,837)	(234,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	14,018	23,892
Offering costs paid in connection with Initial Public Offering	0	(872)
Excess tax benefit from employee stock option plans	9,264	4,191
Net cash provided by financing activities	23,282	27,211
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	(957)	313
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(229)	(135,319)
CASH AND CASH EQUIVALENTS—Beginning of period	66,859	212,458
CASH AND CASH EQUIVALENTS—End of period	66,630	77,139
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) for income taxes	(689)	1,536
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment not yet paid	$ 301	$ 317

Inventory—Net

9 Months Ended

Sep. 30, 2011

Inventory [Abstract]

Inventory Disclosure [Text Block]

INVENTORY—Net

Inventory, net, consisted of the following ($ amounts in 000's):



	September 30, 2011	December 31, 2010
Raw materials	3,257	2,593
Finished goods	9,711	10,924
Inventory—net	12,968	13,517

Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
REVENUE:
Product	$ 53,093	$ 35,913	$ 139,945	$ 94,060
Services	57,835	44,527	159,192	124,116
Ratable and other revenue	5,498	4,531	13,578	12,921
Total revenue	116,426	84,971	312,715	231,097
COST OF REVENUE:
Product	20,606	13,263	51,272	36,399
Services	9,438	6,565	25,815	19,851
Ratable and other revenue	1,095	1,615	4,026	4,733
Total cost of revenue	31,139	21,443	81,113	60,983
GROSS PROFIT:
Product	32,487	22,650	88,673	57,661
Services	48,397	37,962	133,377	104,265
Ratable and other revenue	4,403	2,916	9,552	8,188
Total gross profit	85,287	63,528	231,602	170,114
OPERATING EXPENSES:
Research and development	16,834	12,389	47,197	36,999
Sales and marketing	36,934	26,987	105,548	81,487
General and administrative	5,359	5,993	16,473	16,985
Total operating expenses	59,127	45,369	169,218	135,471
OPERATING INCOME	26,160	18,159	62,384	34,643
INTEREST INCOME	904	514	2,560	1,181
OTHER INCOME (EXPENSE)—Net	60	(402)	(242)	(565)
INCOME BEFORE INCOME TAXES	27,124	18,271	64,702	35,259
PROVISION FOR INCOME TAXES	9,207	4,254	18,704	10,155
Net Income	$ 17,917	$ 14,017	$ 45,998	$ 25,104
Net income per share:
Basic	$ 0.12	$ 0.10	$ 0.30	$ 0.18
Diluted	$ 0.11	$ 0.09	$ 0.28	$ 0.16
Weighted-average shares outstanding:
Basic	153,265	143,672	151,958	138,376
Diluted	163,869	155,842	163,554	153,290

Income Taxes	9 Months Ended
Income Taxes	Sep. 30, 2011
Income Taxes [Abstract]
Income Tax Disclosure [Text Block]	INCOME TAXES The effective tax rate was 33.9% for the three months ended September 30, 2011, compared to an effective tax rate of 23.3% for the three months ended September 30, 2010. The effective tax rate was 28.9% for the nine months ended September 30, 2011, compared to an effective tax rate of 28.8% for the nine months ended September 30, 2010. The provision for income taxes for the three months and nine months ended September 30, 2011 is comprised of foreign income taxes, U.S. federal and state taxes, and withholding tax. The provision for income taxes for the three months and nine months ended September 30, 2010 is comprised of foreign income taxes, U.S. federal and state taxes, and withholding tax. As of September 30, 2011 and December 31, 2010, unrecognized tax benefits determined in accordance with authoritative guidance on accounting for uncertainty in income taxes, approximated $17.2 million and $11.2 million, respectively. The total amount of unrecognized tax benefits, if recognized, would favorably impact the effective tax rate. It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of September 30, 2011, we had approximately $0.3 million accrued for estimated interest related to uncertain tax positions. For the nine months ended September 30, 2011, we recorded estimated interest of $0.1 million. Penalties were immaterial at September 30, 2011.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
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-Name Regulation S-X (SX)
-Number 210
-Section 08
-Paragraph h
-Article 4

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-Name Statement of Financial Accounting Standard (FAS)
-Number 109
-Paragraph 136, 172
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+ Details

Acquisitions	9 Months Ended
Acquisitions	Sep. 30, 2011
Acquisitions [Abstract]
Mergers, Acquisitions and Dispositions Disclosures [Text Block]	ACQUISITIONS On April 6, 2011, we completed the acquisition of TalkSwitch Corp. (TalkSwitch), a privately held company that provides voice over IP phones and phone systems, for a cash payment of $2.6 million. We accounted for this acquisition as a purchase of a business and, accordingly, the total purchase price has been allocated to TalkSwitch tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair market values as of the acquisition date. The purchase price allocation resulted in purchased tangible assets of approximately $0.9 million and liabilities of $0.1 million and purchased identifiable intangible assets of approximately $1.8 million. Identifiable intangible assets consist of purchased technology. The fair value assigned to identifiable intangible assets acquired is determined using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by us. Purchased identifiable intangible assets are being amortized on a straight-line basis over three years.

- Definition

The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable).

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Emerging Issues Task Force (EITF)
-Number 88-16
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
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Reference 3: http://www.xbrl.org/2003/role/presentationRef
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+ Details

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Summary of Significant Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business—Fortinet, Inc. (“Fortinet”) was incorporated in Delaware in November 2000 and is a leading provider of network security appliances and Unified Threat Management (UTM) network security solutions to enterprises, service providers and government entities worldwide. Fortinet's solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, antispam and WAN acceleration.

Basis of Presentation and Preparation—The condensed consolidated financial statements include the accounts of Fortinet and its wholly owned subsidiaries (collectively, the “Company,” “we,” “us,” or “our”). All intercompany transactions and balances have been eliminated in consolidation. The accompanying condensed consolidated balance sheet as of September 30, 2011, the condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and September 30, 2010, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2011 and September 30, 2010 are unaudited. The condensed consolidated balance sheet data as of December 31, 2010 was derived from the audited consolidated financial statements, which are included in our Annual Report on Form 10-K (“Form 10-K”). The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Form 10-K.

The accompanying unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2011 and September 30, 2010 have been prepared on the same basis as the audited consolidated statements and reflect all adjustments, consisting of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations, and cash flows for the interim periods presented. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the operating results for any subsequent quarter, for the full year or any future periods.

Effective June 1, 2011, we completed a two-for-one stock split of our outstanding common shares in the form of a stock dividend. In accordance with GAAP, all shares and per share information referenced throughout the condensed consolidated financial statements have been retroactively adjusted to reflect this stock split. We have changed the caption Ratable product and services revenue on our condensed consolidated statement of operations to Ratable and other revenue. We have made this change to reflect a $2.6 million sale of previously-acquired patents during the third quarter.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include implicit service periods for revenue recognition, the best estimate of selling price, litigation and settlement costs and other loss contingencies, sales returns and allowances, reserve for bad debt, inventory write-offs, reserve for warranty costs, stock-based compensation, valuation of deferred tax assets, and tangible and intangible assets. We base our estimates on historical experience and also on assumptions that we believe are reasonable. Actual results could differ from those estimates.

Certain Significant Risks and Uncertainties—We are subject to certain risks and uncertainties that could have a material adverse effect on our future financial position or results of operations, such as the following: changes in level of demand for our products and services, seasonality, the timing of new product introductions, price and sales competition and our ability to adapt to changing market conditions and dynamics, changes in the expenses caused by, for example, fluctuations in foreign currency exchange rates, management of inventory, internal control over financial reporting, market acceptance of our new products and services, demand for UTM products and services in general, failure of our channel partners to perform, the quality of our products and services, general economic conditions, challenges in doing business outside of the United States of America, changes in customer relationships, litigation, or claims against us based on intellectual property, patent, product regulatory or other factors (Note 7), product obsolescence, and our ability to attract and retain qualified employees.

We rely on sole suppliers and independent contract manufacturers for certain of our components and one third-party logistics company for distribution of some of our products. The inability of any of these parties to fulfill our supply and logistics requirements could negatively impact our future operating results.

Concentration of Credit Risk—Financial instruments that subject us to concentration of credit risk consist primarily of cash, cash equivalents, short-term and long-term investments, and accounts receivable. We maintain our cash and cash equivalents in fixed income securities with major financial institutions, which our management assesses to be of high credit quality, in order to limit the exposure of each investment. Deposits held with banks may exceed the amount of insurance provided on such deposits.

Credit risk with respect to accounts receivable in general is diversified due to the number of different entities comprising our customer base and their location throughout the world. We perform ongoing credit evaluations of our customers and generally do not require collateral on accounts receivable. We maintain reserves for estimated potential credit losses.

During the three and nine months ended September 30, 2011 and September 30, 2010, no single customer accounted for more than 10.0% of total net revenue.

At September 30, 2011 and December 31, 2010, no single customer accounted for more than 10.0% of net accounts receivable.

Financial Instruments and Fair Value—We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Due to their short-term nature, the carrying amounts reported in the consolidated financial statements approximate the fair value for accounts receivable, accounts payable, accrued compensation, and other current liabilities.

Comprehensive Income—Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 220 (formerly referred to as Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income) establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income includes certain changes in equity from non-owner sources that are excluded from net income. Specifically, cumulative foreign currency translation adjustments and unrealized gains and losses on available-for-sale investments are included in comprehensive income in stockholders' equity.

Foreign Currency Translation—Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect at the balance sheet dates and revenue and expenses are translated using average exchange rates during the period. The resulting foreign translation adjustments are recorded in accumulated other comprehensive income. Foreign currency transaction gains (losses) of $0.1 million and $(0.4) million, are included in other income (expense), net for the three months ended September 30, 2011 and September 30, 2010, respectively. Foreign currency transaction losses of $(0.2) million and $(0.6) million are included in other income (expense), net for the nine months ended September 30, 2011 and September 30, 2010, respectively.

Cash, Cash Equivalents and Investments—We consider all highly liquid investments, purchased with original maturities of three months or less, to be cash equivalents. Cash and cash equivalents consist of cash on-hand, balances with banks, and highly liquid investments in money market funds, commercial paper, government securities, certificates of deposit, municipal bonds and corporate debt securities.

Our investments consist of marketable debt securities, which are classified as available-for-sale and are recognized at fair value. We include these investments on our balance sheet as either short-term or long-term investments depending on their maturity at the time of purchase. Investments with original maturities greater than three months that mature less than one year from the consolidated balance sheet date are classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments.

Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. We consult with our investment managers and consider available quantitative and qualitative evidence in evaluating potential impairment of our investments on a quarterly basis. If the cost of an individual investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

For debt securities in an unrealized loss position which are deemed to be other-than-temporary, the difference between the security's then-current amortized cost basis and fair value is separated into (i) the amount of the impairment related to the credit loss (i.e., the credit loss component) and (ii) the amount of the impairment related to all other factors (i.e., the non-credit loss component). The credit loss component is recognized in earnings. The non-credit loss component is recognized in accumulated other comprehensive loss.

Inventory—Inventory is recorded at the lower of cost (using the first-in, first-out method) or market, after we give appropriate consideration to obsolescence and inventory in excess of anticipated future demand. In assessing the ultimate recoverability of inventory, we are required to make estimates regarding future customer demand, the timing of new product introductions, economic trends and market conditions. If the actual product demand is significantly lower than forecasted, we could be required to record additional inventory write-downs, which could have an adverse impact on our gross margins and profitability.

Deferred Cost of Revenues—Deferred cost of revenues represents the unamortized cost of products associated with ratable and other revenue, which is based upon the actual cost of the hardware sold and is recognized over the service periods of the arrangements. Deferred cost of revenues associated with short-term deferred revenue is classified as short-term and deferred cost of revenues associated with long-term deferred revenue is classified as long-term.

Property and Equipment—Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally one to three years. Evaluation units are transferred from inventory at cost and are amortized over one year from the date of transfer. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the lease term.

Impairment of Long-Lived Assets—We evaluate events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future undiscounted cash flows is less than the carrying amount of those assets, we record an impairment charge in the period in which we make the determination. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Deferred Revenue—Deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue.

Income Taxes—We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. We assess the likelihood that some portion or all of our deferred tax assets will be recovered from future taxable income within the respective jurisdictions, and to the extent we believe that recovery does not meet the “more-likely-than-not” standard, based solely on its technical merits as of the reporting date, we establish a valuation allowance. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide for tax contingencies whenever it is deemed more likely than not that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, relevant tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

Stock-Based Compensation—We apply ASC 718 (formerly referred to as SFAS No. 123R) to our stock option grants and stock purchase rights, which requires compensation expense related to share-based transactions, including employee stock options and stock purchase rights under our employee stock purchase plan ("ESPP"), to be measured and recognized in the financial statements based on fair value. Under ASC 718, the fair value of each option award is estimated on the grant date using the Black-Scholes option pricing model.

Research and Development Costs—Research and development costs are expensed as incurred.

Software Development Costs—The costs to develop software have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility.

Revenue Recognition—In October 2009, the FASB amended the ASC as summarized in Accounting Standards Update ("ASU") No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU 2009-14 amends industry specific revenue accounting guidance for software and software related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product's essential functionality. ASU 2009-13 amends the accounting for multiple-element arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method. ASU 2009-13 also requires an entity to allocate revenue using the relative selling price method. The standard establishes a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on vendor-specific objective evidence ("VSOE"), third-party evidence ("TPE"), and the best estimate of selling price ("BESP"). If VSOE is available, it would be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used.

Effective January 1, 2011, we adopted the provisions of ASU 2009-13 and ASU 2009-14 for new and materially modified arrangements originating after December 31, 2010. The adoption of ASU 2009-13 and ASU 2009-14, increased revenues $5.1 million and $14.1 million for the three and nine months ended September 30, 2011, respectively. The increase was primarily due to certain product revenue, which can now be recognized upon shipment, but would have been deferred under the previous revenue recognition rules. We expect the adoption of ASU 2009-13 and ASU 2009-14 to have an impact on future periods; however, we cannot reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified arrangements in any given period.

This guidance does not generally change the units of accounting for our revenue transactions. Most non-software products and services qualify as separate units of accounting because they have value to the customer on a standalone basis and our revenue arrangements generally do not include a right of return relative to delivered products.

The majority of our products are hardware appliances containing software components that function together to provide the essential functionality of the product, therefore, our hardware appliances are considered non-software deliverables and are no longer within the scope of ASC 985-605 (formerly SOP 97-2, Software Revenue Recognition).

Our product revenue also includes software products that may operate on the hardware appliances, but are not considered essential to the functionality of the hardware and continue to be subject to the guidance at ASC 985-605, which remains unchanged. This includes the use of the residual method for multiple element arrangements. Certain of our software, when sold with our appliances, is considered essential to its functionality and as a result is no longer accounted for under ASC 985-605; however, this same software if sold separately is accounted for under the guidance at ASC 985-605.

For all transactions originating or materially modified after December 31, 2010, we recognize revenue in accordance with ASU 2009-13. Certain arrangements with multiple deliverables may continue to have software deliverables that are subject to ASC 985-605 along with non-software deliverables that are subject to the ASU 2009-13. When a sales arrangement contains multiple elements, such as hardware appliances, software, customer support services, and/or professional services, we allocate revenue to each element based on the aforementioned selling price hierarchy. In multiple element arrangements where software is more-than-incidental, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy in ASU 2009-13.

VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, we consider major segments, geographies, customer classifications, and other variables in determining VSOE.

We are typically not able to determine TPE for our products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products' selling prices are on a stand-alone basis.

For our hardware appliances we use BESP as our selling price. For our support and services, we generally use VSOE as our selling price. When we are unable to establish a selling price using VSOE for our support and services, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP for a product or service by considering multiple factors including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies, customer classes and distribution channels. We review our BESP estimates on a quarterly basis to coincide with our VSOE review process.

We recognize revenue for our software sales based on software revenue recognition guidance pursuant to ASC 985-605. Under ASC 985-605, we use the residual method to recognize revenue when a product agreement includes one or more elements to be delivered and VSOE of fair value for all undelivered elements exists. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established. When the undelivered element for which we do not have VSOE of fair value is support, revenue for the entire arrangement is recognized ratably over the support period.

We derive revenue from sales of products, including appliances and software, and services, including subscription, support and other services. Our appliances include operating system software that is integrated into the appliance hardware and is deemed essential to its functionality. As a result, we account for revenue in accordance with ASC 985-605 and all related interpretations.

Revenue is recognized when all of the following criteria have been met:


•	Persuasive evidence of an arrangement exists. Binding contracts or purchase orders are generally used to determine the existence of an arrangement.


•	Delivery has occurred. Delivery occurs when we fulfill an order and title and risk of loss has been transferred or upon delivery of the service contract registration code.


•	The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. In the event payment terms differ from our standard business practices, the fees are deemed to be not fixed or determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.


•	Collectability is probable. We assess collectability based primarily on creditworthiness as determined by credit checks and analysis, as well as payment history. Payment terms generally range from 30 to 90 days from invoice date.

For arrangements which include end-customer acceptance criteria, no revenue is recognized prior to acceptance. We recognize product revenue on sales to distributors that have no general right of return and end-customers upon shipment, once all other revenue recognition criteria have been met. We also make sales through distributors under agreements that allow for rights of returns that we estimate and reduce revenue for under our sales returns and allowances. We recognize product revenue on sales made through such distributors upon sale by the distributor to the customer. Substantially all of our products have been sold in combination with services, which consist of subscriptions and/or support. Subscription services provide access to our antivirus, intrusion prevention, web filtering, and anti-spam functionality. Support services include rights to unspecified software upgrades, maintenance releases and patches, telephone and Internet access to technical support personnel, and hardware support.

The subscription and support services start on the date the customer registers the appliance. The customer is then entitled to service for the stated contractual period beginning on the registration date.

We offer certain sales incentives to channel partners. We reduce revenue for estimates of sales returns and allowances. Additionally, in limited circumstances we may permit end-customers, distributors and resellers to return our products, subject to varying limitations, for a refund within a reasonably short period from the date of purchase. We estimate and record reserves for sales incentives and sales returns based on historical experience.

Accounts Receivable—Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and reserves for sales returns and allowances. The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts. We regularly review the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer's ability to pay. The reserve for sales returns and allowances is based on specific criteria including agreements to provide rebates and other factors known at the time, as well as estimates of the amount of goods shipped that will be returned. To determine the adequacy of the reserves for sales returns and allowances, we analyze historical experience of actual rebates and returns as well as current product return information.

Warranties—We generally provide a one-year warranty on hardware products and a 90-day warranty on software. A provision for estimated future costs related to warranty activities is recorded as a component of cost of product revenues when the product revenues are recognized, based upon historical product failure rates and historical costs incurred in correcting product failures. In the event we change our warranty reserve estimates, the resulting charge against future cost of sales or reversal of previously recorded charges may materially affect our gross margins and operating results.

Accrued warranty activities are summarized as follows ($ amounts in 000's):



	For The Nine Months Ended And As Of		For The Year Ended And As Of
	September 30, 2011		December 31, 2010
Accrued warranty balance - beginning of the period	1,878		2,257
Warranty costs incurred	(1,329	)	(1,337	)
Provision for warranty	1,530		1,069
Adjustments to previous estimates	195		(111	)
Accrued warranty balance - end of the period	2,274		1,878

Foreign Currency Derivatives—Our sales contracts are primarily denominated in U.S. dollars and therefore substantially all of our revenue is not subject to foreign currency translation risk. However, a substantial portion of our operating expenses incurred outside the U.S. are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Canadian Dollar (CAD), Euro (EUR), British Pound (GBP), and Japanese Yen (JPY). To help protect against significant fluctuations in the value and volatility of future cash flows caused by changes in currency exchange rates, we engage in foreign currency risk management activities to hedge balance sheet items denominated in EUR, GBP, and CAD and occasionally to hedge future forecasted cash outflows denominated in CAD. We do not use these contracts for speculative or trading purposes. All of the derivative instruments involved are with high quality financial institutions and we monitor the creditworthiness of these parties. These contracts typically have maturities between one and three months. We account for our hedges under ASC 815, Derivatives and Hedging. We record changes in the fair value of forward exchange contracts related to balance sheet accounts as other income (expense), net in the condensed consolidated statements of operations. Gains or losses resulting from settled forward exchange contracts related to future forecasted cash outflows are recorded in operating expenses in the consolidated statement of operations, in the same period the hedged item occurs. Gains or losses resulting from unsettled forward exchange contracts related to future forecasted cash outflows are recorded in other comprehensive income in the consolidated balance sheet.

Additionally, independent of any hedging activities, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of operations. Our hedging activities are intended to reduce, but not eliminate, the impact of currency exchange rate movements. As our hedging activities are relatively short-term in nature, long-term material changes in the value of the U.S. dollar versus the EUR, GBP, CAD or JPY could adversely impact our operating expenses in the future.

The notional amount of forward exchange contracts to hedge balance sheet accounts and cash flows as of September 30, 2011 was (amounts in 000's):



	Buy/Sell	Notional
To hedge operation cash outflows:
Currency
CAD	Buy	7,500

To hedge balance sheet accounts:
Currency
EUR	Buy	5,393
GBP	Buy	1,390
CAD	Buy	12,800

Recent Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. This accounting update will be applicable to the Company beginning in the first quarter of fiscal year 2012. The Company does not believe the adoption of this guidance will have a material impact on its condensed consolidated financial statements, as it only requires a change in the format of presentation.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) – Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This accounting update will be applicable to the Company beginning in the first quarter of fiscal year 2012 and should be applied prospectively. The Company does not believe the adoption of this guidance will have a material impact on its condensed consolidated financial statements.

Condensed Consolidated Balance Sheets Parenthetical - USD ($) shares in Thousands, $ in Thousands	Sep. 30, 2011	Dec. 31, 2010
Allowance for doubtful accounts	$ 180	$ 303
Common Stock, par value	$ 0.001	$ 0.001
Common Stock, shares authorized	300,000	600,000
Common Stock, shares issued	155,006	150,172
Common Stock, shares outstanding	153,597	148,763

Employee Benefit Plan	9 Months Ended
Employee Benefit Plan	Sep. 30, 2011
Employee Benefit Plan [Abstract]
Compensation and Employee Benefit Plans [Text Block]	EMPLOYEE BENEFIT PLAN We have established a 401(k) tax-deferred savings plan (the “401(k) Plan”) which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($16,500 for the calendar year 2011). In Canada, we have established a Group Registered Retirement Savings Plan program (the "RRSP Plan") which permits participants to make tax deductible contributions up to the maximum RRSP contribution limits under the Income Tax Act. As of January 1, 2011, our board of directors approved 50.0% matching contributions on employee contributions, up to 4.0% of the employee's eligible earnings. Our matching contributions to the RRSP and 401(k) Plans for the three and nine months ended September 30, 2011 were $0.4 million and $1.2 million, respectively.

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2011	Dec. 31, 2010
CURRENT ASSETS:
Cash and cash equivalents	$ 66,630	$ 66,859
Short-term investments	322,536	246,651
Accounts receivable, net of allowance for doubtful accounts of $180 and $303 at September 30, 2011 and December 31, 2010, respectively	75,835	72,336
Inventory—Net	12,968	13,517
Deferred tax asset	14,330	8,158
Prepaid expenses and other current assets	9,258	8,849
Deferred cost of revenues	2,369	3,788
Total current assets	503,926	420,158
PROPERTY AND EQUIPMENT—Net	7,485	7,056
DEFERRED TAX ASSET—Non-current	37,443	37,443
DEFERRED COST OF REVENUES	3,775	5,543
LONG-TERM INVESTMENTS	113,801	73,950
OTHER ASSETS	4,557	1,272
TOTAL ASSETS	670,987	545,422
CURRENT LIABILITIES:
Accounts payable	15,342	12,761
Accrued liabilities	22,286	16,303
Accrued payroll and compensation	21,112	19,670
Deferred revenue	192,927	169,648
Total current liabilities	251,667	218,382
DEFERRED REVENUE—Non-current	82,199	82,983
OTHER NON-CURRENT LIABILITIES	20,254	11,603
Total liabilities	354,120	312,968
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value - 300,000 shares authorized; 155,006 and 150,172 shares issued and 153,597 and 148,763 shares outstanding at September 30, 2011 and December 31, 2010, respectively	155	150
Additional paid-in-capital	292,440	251,845
Treasury stock	(2,995)	(2,995)
Accumulated other comprehensive income	(4)	2,181
Retained earnings (accumulated deficit)	27,271	(18,727)
Total stockholders' equity	316,867	232,454
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 670,987	$ 545,422

Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies Disclosure [Text Block]

COMMITMENTS AND CONTINGENCIES

Leases and Minimum Royalties—We lease our facilities under various noncancelable operating leases, which expire through 2015. Rent expense was $2.1 million and $1.7 million for the three months ended September 30, 2011 and September 30, 2010, respectively and $6.1 million and $5.2 million for the nine months ended September 30, 2011 and September 30, 2010, respectively. Rent expense is recognized using the straight-line method over the term of the lease.

We entered into a Settlement and Patent License Agreement with Trend Micro Incorporated ("Trend Micro") in January 2006 (see "Litigation" below). The aggregate future noncancelable minimum rental payments on operating leases and minimum royalties payable if we continued paying under the Trend Micro Settlement and License Agreement as of September 30, 2011 are as follows ($ amounts in 000's):



	Rental Payment	Royalty ⁽¹⁾
Fiscal Years:
2011 (remainder)	2,056	250
2012	6,235	1,000
2013	4,111	1,000
2014	2,248	500
2015	1,299	500
Total	15,949	3,250

-----------

(1) Consists of minimum royalties claimed by Trend Micro pursuant to the January 2006 settlement and license agreement between Trend Micro and Fortinet, which are subject to dispute (see "Litigation" below). The $250,000 listed in the chart above as the "2011 (remainder)" represents the minimum royalties, pursuant to the settlement and license agreement, for the fourth quarter of fiscal 2011. We have accrued a total payment including interest of $6.3 million as of September 30, 2011, related to amounts under the settlement and license agreement with Trend Micro which have not been paid pursuant to the dispute.

Contract Manufacturer Commitments—Our independent contract manufacturers procure components and build our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate component supply, we may issue purchase orders to some of our independent contract manufacturers which may not be cancelable. As of September 30, 2011, we had $32.5 million of open purchase orders with our independent contract manufacturers that may not be cancelable compared to $18.3 million as of June 30, 2011. The increase from prior quarter is required to replenish current inventories and to ensure adequate future inventories due to new product releases and product lead-times for certain sole source products.

Litigation—In August 2009, Trend Micro filed a complaint against us in the Superior Court of the State of California for Santa Clara County alleging breach of contract and seeking a declaratory judgment that we are obligated to make certain royalty payments to Trend Micro pursuant to a settlement and license agreement entered into in January 2006. We maintain that the patents that are the basis for the royalty payments are invalid, and, as a result of the patents' invalidity along with other defenses, we believe we have no contractual obligation to pay the royalties. We filed an action in the U.S. District Court for the Northern District of California that is stayed pending the resolution of the state court action. We have continued to accrue expense based on the quarterly royalties provided for in the settlement and license agreement. In May 2011, in response to petitions for re-examination we filed with the U.S. Patent and Trademark Office (“PTO”) on two Trend Micro patents, the PTO issued final office actions rejecting a number of the Trend Micro patent claims allegedly forming the basis for the royalty payments. Trend Micro has responded disputing one of the final office actions. We have determined that, as of this time, there is not a reasonable possibility that a loss exceeding amounts already recognized may be incurred.

In August 2009, Enhanced Security Research, LLC and Security Research Holdings LLC (collectively “ESR”), a non-practicing entity, filed a complaint against us in the United States District Court for the District of Delaware alleging infringement by us and other defendants of two patents. The plaintiffs are claiming unspecified damages and requesting an injunction against the alleged infringement. In June 2010, the Court granted our motion to stay pending the outcome of reexamination proceedings on both asserted patents. The PTO has finally rejected all of the claims of the patents in the suit and ESR has appealed this result to the Board of Patent Appeals and Interferences (“BPAI”). There was a related action that was dismissed by the District Court and appealed by ESR to the Federal Circuit. The Federal Circuit in June 2011 rejected ESR's appeal and confirmed the dismissal. We have determined that, as of this time, there is not a reasonable possibility that a loss may be incurred.

In July 2010, Network Protection Sciences, LLC ("NPS"), a non-practicing entity, filed a complaint in the United States District Court for the Eastern District of Texas alleging patent infringement by us and other defendants. NPS is claiming unspecified damages, including treble damages for willful infringement, and requests an injunction against such alleged infringement. Currently the case is in the early stages, and we have determined that, as of this time, there is not a reasonable possibility that a loss may be incurred.

In April 2010, an individual, a former stockholder of Fortinet, filed a class action lawsuit against us in the Superior Court of the State of California for the County of Los Angeles alleging violation of various California Corporations' Code sections and related tort claims alleging misrepresentation and breach of fiduciary duty regarding the 2009 repurchase by Fortinet of shares of its stock while we were a privately-held company. The plaintiff is claiming unspecified damages. In September 2010, the Court granted our motion to transfer the case to the California Superior Court for Santa Clara County and the plaintiff has filed an amended complaint in the Superior Court to add individual defendants, among other amendments. Currently the case is in the early stages, and we have determined that, as of this time, there is not a reasonable possibility that a loss may be incurred.

Indemnification—Under the indemnification provisions of our standard sales contracts, we agree to defend our customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited to the total amount paid by our customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions.

- Definition

The entire disclosure for commitments and contingencies.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name FASB Interpretation (FIN)
-Number 14
-Paragraph 3
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 5
-Paragraph 9, 10, 11, 12
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 210
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.5-02.25)
-URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 450
-SubTopic 20
-Section 50
-Paragraph 4
-URI http://asc.fasb.org/extlink&oid=6952336&loc=d3e14435-108349

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 460
-SubTopic 10
-Section 50
-Paragraph 8
-URI http://asc.fasb.org/extlink&oid=6398077&loc=d3e12565-110249

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 440
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=6394976&loc=d3e25287-109308

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
-SubTopic 20
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6449706&loc=d3e16207-108621

+ Details

Property and Equipment - Net

9 Months Ended

Sep. 30, 2011

Property And Equipment Net [Abstract]

Property, Plant and Equipment Disclosure [Text Block]

PROPERTY AND EQUIPMENT—Net

Property and equipment consisted of the following ($ amounts in 000's):



	September 30, 2011		December 31, 2010
Evaluation units	12,834		10,607
Computer equipment and software	11,364		9,561
Furniture and fixtures	1,219		1,087
Leasehold improvements and tooling	4,294		4,548
Total property and equipment	29,711		25,803
Less: accumulated depreciation	(22,226	)	(18,747	)
Property and equipment—net	7,485		7,056

Depreciation expense was $1.8 million and $1.4 million for the three months ended September 30, 2011 and September 30, 2010, respectively. Depreciation expense was $5.1 million and $4.2 million for the nine months ended and September 30, 2011 and September 30, 2010, respectively.

- Definition

The entire disclosure for long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale. Examples include land, buildings, machinery and equipment, and other types of furniture and equipment including, but not limited to, office equipment, furniture and fixtures, and computer equipment and software. This disclosure may include property plant and equipment accounting policies and methodology, a schedule of property, plant and equipment gross, additions, deletions, transfers and other changes, depreciation, depletion and amortization expense, net, accumulated depreciation, depletion and amortization expense and useful lives, income statement disclosures, assets held for sale and public utility disclosures.

+ References + Details

Investments and Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Investments and Fair Value Measurements [Abstract]

Fair Value, Measurement Inputs, Disclosure [Text Block]

INVESTMENTS AND FAIR VALUE MEASUREMENTS

The following table summarizes our investments in available-for-sale securities ($ amounts in 000's):



	September 30, 2011
	Amortized Cost	Unrealized Gains	Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
U.S. government and agency securities	21,894	1	—		21,895
Corporate debt securities	327,919	—	(1,766	)	326,153
Commercial paper	60,774	5	—		60,779
Municipal bonds	13,410	21	—		13,431
Term deposits	14,079	—	—		14,079
Total available-for-sale securities	438,076	27	(1,766	)	436,337



	December 31, 2010
	Amortized Cost	Unrealized Gains	Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
U.S. government and agency securities	51,989	—	(46	)	51,943
Corporate debt securities	213,237	159	—		213,396
Commercial paper	38,914	5	—		38,919
Municipal bonds	11,069	11	—		11,080
Term deposits	5,263	—	—		5,263
Total available-for-sale securities	320,472	175	(46	)	320,601

The contractual maturities of our investments are as follows ($ amounts in 000's):



	September 30, 2011	December 31, 2010
Due within one year	322,536	246,651
Due within one to three years	113,801	73,950
Total	436,337	320,601

Available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders' equity and in total comprehensive income. Realized gains and losses on available-for-sale securities are included in other income (expense), net in our consolidated statements of operations.

Realized gains or losses from the sale of available-for-sale securities were not significant for any period presented.

Fair Value Accounting—We apply ASC 820 which establishes a valuation hierarchy for disclosure of the inputs to fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The valuation techniques we use to measure the fair value of money market funds and term deposits were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.

We classify investments within Level 1 if quoted prices are available in active markets.

We classify items in Level 2 if the investments are valued using quoted prices for identical assets in markets that are not active, using quoted prices for similar assets in an active market, or using model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

The following table presents the fair value of our financial assets as of September 30, 2011 and December 31, 2010 using the ASC 820 input categories ($ amounts in 000's):



	September 30, 2011			December 31, 2010
	Aggregate Fair Value	Quoted Prices in Active Markets For Identical Assets	Significant Other Observable Remaining Inputs	Aggregate Fair Value	Quoted Prices in Active Markets For Identical Assets	Significant Other Observable Remaining Inputs
		(Level 1)	(Level 2)		(Level 1)	(Level 2)
Assets:
U.S. government and agency securities	21,895	—	21,895	51,943	—	51,943
Corporate debt securities	326,153	—	326,153	213,396	—	213,396
Commercial paper	75,277	—	75,277	52,415	—	52,415
Municipal bonds	13,431	—	13,431	11,080	—	11,080
Term deposits	14,079	14,079	—	5,263	5,263	—
Money market funds	22,833	22,833	—	7,078	7,078	—
Foreign currency contracts	119	—	119	74	—	74
Total	473,787	36,912	436,875	341,249	12,341	328,908
Reported as:
Cash and cash equivalents	37,331			20,574
Short-term investments	322,536			246,651
Prepaid expenses and other current assets	119			74
Long-term investments	113,801			73,950
Total	473,787			341,249

We did not hold financial assets or liabilities which were recorded at fair value using inputs in the Level 3 category as of September 30, 2011 or December 31, 2010. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three or nine months ended September 30, 2011.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 133
-Paragraph 44A, 44B
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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+ Details