---

---

---

---

---

---

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

---

•	variability in sales in certain product categories from year to year and between quarters;

•	expected impact of certain acquisitions and investments in strategic relationships;

•	expected impact of sales of certain products;

•	the proportion of our revenue that consists of our product and service revenues, and the mix of billings between products and services;

•	the impact of our product innovation strategy;

•	expanding our reach into new high growth verticals and emerging markets and continuing to sell to large enterprises and service providers;

•	our ability to meet increasing customer expectations about the quality and functionality of our products;

•	trends in revenue, costs of revenue, and gross margin;

•	trends in our operating expenses, including personnel costs, research and development expense, sales and marketing expense and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;

•	continued investments in research and development to strengthen our technology leadership position and in sales and marketing and the impact of those investments;

•	expectations regarding uncertain tax benefits and our effective tax rate;

•	expectations regarding spending related to capital expenditures, including improvements and expansion of our new corporate headquarters and other offices and the implementation of our enterprise resource planning system;

•	competition in our market segment;

•	the sufficiency of our existing cash, cash equivalents and investments to meet our cash needs for at least the next 12 months;

•	as well as other statements regarding our future operations, financial condition and prospects and business strategies.

---

•

We recorded total revenue of $184.1 million and $353.0 million during the three and six months ended June 30, 2014, respectively. This represents an increase of 25% during each of these periods compared to the same periods last year. Product revenue was $85.4 million and $162.1 million, respectively, an increase of 28% and 30% during the three and six months ended June 30, 2014, respectively, compared to the same periods last year. Services and other revenue was $98.7 million and $190.9 million during the three and six months ended June 30, 2014, respectively, an increase of 22% and 20%, respectively, compared to the same periods last year.

•	Cash, cash equivalents and investments were $910.6 million as of June 30, 2014, an increase of $67.5 million from December 31, 2013.

•	Deferred revenue was $480.2 million as of June 30, 2014, an increase of $47.6 million from December 31, 2013.

•	We generated cash flows from operating activities of $104.7 million during the six months ended June 30, 2014, an increase of 39% compared to the same period last year.

•	We received $20.0 million pursuant to a six year mutual covenant-not-to-sue and release agreement with Palo Alto Networks, Inc. during the six months ended June 30, 2014.

•	We repurchased 1.0 million shares of common stock under our previously-announced Share Repurchase Program for an aggregate purchase price of $22.5 million during the six months ended June 30, 2014.

---

---

---

---

---

---

---

---

---

---

---

•	the level of demand for our products and services, which may render forecasts inaccurate;

•	the timing of channel partner and end-customer orders and our reliance on a concentration of shipments at the end of each quarter;

•	the timing of shipments, which may depend on many factors such as inventory levels and logistics, our ability to ship new products on schedule and to accurately forecast inventory requirements, and potential delays in the manufacturing process;

•	inventory imbalances, such as those related to new products and the end of life of existing products;

•	the mix of products sold, the mix of revenue between products and services and the degree to which products and services are bundled and sold together for a package price;

•	the budgeting cycles and purchasing practices of our channel partners and end-customers;

•	seasonal buying patterns of our end-customers;

•	the timing of revenue recognition for our sales, which may be affected by both the mix of sales by our “sell-in” versus our “sell-through” channel partners, and the accuracy and timing of point of sale reporting by our “sell-through” channel partners, which impacts our ability to recognize revenue;

•	the level of perceived threats to network security, which may fluctuate from period to period;

•	changes in end-customer, distributor or reseller requirements or market needs and buying practices and patterns;

•	changes in the growth rate of the network security or UTM markets;

---

•	the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape of our industry, including consolidation among our competitors or end-customers;

•	deferral of orders from end-customers in anticipation of new products or product enhancements announced by us or our competitors;

•	increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, as a significant portion of our expenses are incurred and paid in currencies other than the U.S. dollar;

•	decisions by potential end-customers to purchase network security solutions from newer technology providers, from larger, more established security vendors or from their primary network equipment vendors;

•	price competition, and increased competitiveness in general in our market;

•	changes in customer renewal rates for our services;

•	changes in the payment terms of services contracts or the length of services contracts sold;

•	changes in circumstances and challenges in business conditions, including decreased demand, which may negatively impact our channel partners’ ability to sell the current inventory they hold and negatively impact their future purchases of products from us;

•	increased expenses, unforeseen liabilities or write-downs and any impact on results of operations from any acquisition consummated;

•	our channel partners may have insufficient financial resources and may not be able to withstand changes and challenges in business conditions;

•	disruptions in our channel or termination of our relationship with important channel partners;

•	insolvency, credit, or other difficulties confronting our key suppliers or channel partners, affecting their ability to purchase or pay for our products and services, which could disrupt our supply or distribution chain;

•	general economic conditions, both in our domestic and foreign markets; and

•	future accounting pronouncements or changes in our accounting policies.

---

•	economic or political instability in foreign markets;

•	greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;

•	changes in regulatory requirements;

•	difficulties and costs of staffing and managing foreign operations;

•	the uncertainty of protection for intellectual property rights in some countries;

•	costs of compliance with foreign policies, laws and regulations and the risks and costs of non-compliance with such policies, laws and regulations;

•	costs of complying with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, and economic sanctions;

•	other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;

---

•

heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales or sales-related arrangements that could disrupt the sales team through terminations of employment or otherwise, and may adversely impact financial results as compared to those already reported or forecasted and result in restatements of financial statements and irregularities in financial statements;

•	our ability to effectively implement and maintain adequate internal controls to properly manage our international sales and operations;

•	the potential for political unrest, terrorism, hostilities, war, or natural disasters;

•	management communication and integration problems resulting from cultural differences and geographic dispersion; and

•	multiple and possibly overlapping tax structures.

•

increased competition from competitors, such as Cisco Systems, Inc. (“Cisco”), Sourcefire, Inc. (“Sourcefire”) (acquired by Cisco), Check Point Software Technologies Ltd. (“Check Point”), McAfee, Inc. (“McAfee”) (acquired by Intel Corporation (“Intel”)), Blue Coat Systems, Inc. (“Blue Coat”), FireEye, Inc. (“FireEye”), Palo Alto Networks, Inc. (“Palo Alto Networks”), SonicWALL, Inc. (“SonicWALL”) (acquired by Dell Inc. (“Dell”)), Juniper Networks, Inc. (“Juniper”), and Stonesoft Corporation (“Stonesoft”) (acquired by McAfee) that traditionally target enterprises, service providers and governmental entities and that may already have purchase commitments from those end-customers;

•	increased purchasing power and leverage held by large end-customers in negotiating contractual arrangements;

•	unanticipated changes in the capital resources of or purchasing behavior of large end-customers, including changes in the volume and frequency of their purchases;

•	more stringent support requirements in our support service contracts, including stricter support response times, more complex customer requirements, and increased penalties for any failure to meet support requirements; and

•	longer sales cycles and the associated risk that substantial time and resources may be spent on a potential end-customer that elects not to purchase our products and services.

---

---

---

•	expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work-around errors or defects or to address and eliminate vulnerabilities;

•	loss of existing or potential end-customers or channel partners;

•	delayed or lost revenue;

•	delay or failure to attain market acceptance;

•	negative publicity, which will harm our reputation; and

•	litigation, regulatory inquiries or investigations that may be costly and harm our reputation.

---

---

•	a potential inability to obtain an adequate supply of required parts or components when required;

•	financial or other difficulties faced by our suppliers;

•	infringement or misappropriation of our intellectual property;

•	price increases;

---

•	failure of a component to meet environmental or other regulatory requirements;

•	failure to meet delivery obligations in a timely fashion; and

•	failure in component quality.

---

•	public sector budgetary cycles,

•	funding authorizations and requirements unique to government agencies, with funding or purchasing reductions or delays adversely affecting public sector demand for our products,

•	geopolitical matters, and

•	rules and regulations applicable to certain government sales.

---

•	earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;

---

•	the mix of earnings in countries with differing statutory tax rates or withholding taxes;

•	changes in the valuation of our deferred tax assets and liabilities;

•	expiration of, or lapses in the research and development tax credit laws;

•	transfer pricing adjustments including the effect of acquisitions on our intercompany research and development and legal structure;

•	an increase in non-deductible expenses for tax purposes, including certain stock-based compensation expense, write-offs of acquired in-process research and development, and impairment of goodwill;

•	a decrease in the stock option exercises by our employees in some of our foreign subsidiaries that can cause an adverse transfer pricing adjustment;

•	tax costs related to intercompany realignments;

•	tax assessments resulting from income tax audits or any related tax interest or penalties that could significantly affect our provision for income taxes for the period in which the settlement takes place;

•	a change in our decision to indefinitely reinvest foreign earnings;

•	changes in accounting principles; or

•	changes in tax laws and regulations including possible changes in the United States to the taxation of earnings of our foreign subsidiaries, and the deductibility of expenses attributable to foreign income, or the foreign tax credit rules, or changes to the U.S. income tax rate, which would necessitate a revaluation of our deferred tax assets and liabilities.

---

---

---

•	delays in releasing our new products or enhancements to the market;

•	failure to accurately predict market demand in terms of product functionality and to supply products that meet this demand in a timely fashion;

•	failure of our sales force and partners to focus on selling new products;

•	inability to interoperate effectively with the networks or applications of our prospective end-customers;

•	inability to protect against new types of attacks or techniques used by hackers;

•	actual or perceived defects, vulnerabilities, errors or failures;

•	negative publicity about their performance or effectiveness;

•	introduction or anticipated introduction of competing products by our competitors;

•	poor business conditions for our end-customers, causing them to delay IT purchases;

•	easing of regulatory requirements around security; and

•	reluctance of customers to purchase products incorporating open source software.

---

•	greater name recognition and longer operating histories;

•	larger sales and marketing budgets and resources;

•	broader distribution and established relationships with distribution partners and end-customers;

•	access to larger customer bases;

•	greater customer support resources;

•	greater resources to make acquisitions;

•	lower labor and development costs; and

•	substantially greater financial, technical and other resources.

---

---

---

---

•	providing for a classified board of directors whose members serve staggered three-year terms;

•	authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

•	limiting the liability of, and providing indemnification to, our directors and officers;

•	limiting the ability of our stockholders to call and bring business before special meetings;

•	requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

•	controlling the procedures for the conduct and scheduling of board and stockholder meetings; and

•	providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.

---

---

---