In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements include, among other things, statements concerning our expectations regarding:

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

• expected impact of sales of certain products;

• continued sales into large enterprises and service providers;

• mix of billings between products and services;

• mix of service sales containing multi-year support and subscription contracts;

• the significance of stock-based compensation as an expense;

•            the proportion of our revenue that consists of our product and
             service revenues and future trends with respect to services revenue
             as we renew existing services contracts and expand our customer
             base;

• the impact of our product innovation strategy;

• 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;

• our effective tax rate; and

• the sufficiency of our existing cash 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. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K and, in particular, the risks discussed under the heading "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Business Overview

We provide network security solutions, which enable broad, integrated and high performance protection against dynamic security threats while simplifying the IT security infrastructure for enterprises, service providers and governmental entities worldwide. Since inception through December 31, 2012, we had shipped over 1,100,000 appliances via more than 10,000 channel partners to more than 150,000 end-customers worldwide, including a majority of the 2012 Fortune Global 100.

Our core UTM/NGFW product line of FortiGate physical and virtual appliances ships with a set of security and networking capabilities, including firewall, VPN, application control, antivirus, intrusion prevention, Web filtering, anti-spam and WAN acceleration functionality. We derive a substantial majority of product sales from our FortiGate appliances, which range from the FortiGate-20, designed for small businesses, to the FortiGate-5000 series for large enterprises, telecommunications carriers, and service providers. Our UTM/NGFW solution also includes our FortiGuard security subscription services, which end-customers can subscribe to in order to obtain access to dynamic updates to intrusion prevention, application control, antivirus, Web filtering, vulnerability management and anti-spam functionality included in our appliances. End-customers can also choose to purchase FortiCare technical support services for our products. End-customers also often use FortiManager and FortiAnalyzer products in conjunction with a FortiGate deployment to provide centralized management, analysis and reporting capabilities. We complement our core FortiGate product line with other appliances and software that offer additional protection from security threats to other critical areas of the enterprise, such as messaging, Web application firewalls, databases, protection against denial of service attacks (DDoS) and endpoint security for employee computers and mobile devices. Sales of these complementary products have grown in recent quarters, although these products still represent less than 10% of our total revenue. During fiscal 2012, we announced our new FortiOS 5.0 operating system. FortiOS 5.0 is our fifth generation security operating system, and this release brings more than 150 new features to our FortiGate product line. In addition, we announced version 5.0 operating systems for our FortiManager, FortiAnalyzer, and FortiClient products, to address the need for increasingly sophisticated management and analysis of the network infrastructure and endpoint devices in various environments. During fiscal 2012, we also announced our new FortiASIC-SoC2 processor. FortiASIC-SoC2 is our second-generation processor that combines general purpose processing power with Fortinet's custom technology to provide hardware-accelerated network security performance for our FortiGate appliances. It provides more than double the general processing capacity than its predecessor. During fiscal 2012, we expanded and enhanced our FortiGate UTM/NGFW and FortiAP secure wireless access product lines. We also introduced software-based virtual appliances for many

of our FortiGate and FortiManager product lines, which help secure the end-customer's cloud-based network infrastructures with the same functionality as the traditional physical appliance in their respective product lines.

Financial Highlights

• We recorded total revenue of $533.6 million in fiscal 2012. This represents an increase of 23% in fiscal 2012, compared to fiscal 2011. Revenue included $3.7 million and $2.6 million from the sales of previously-acquired patents in fiscal 2012 and 2011, respectively. Product revenue was $248.9 million, an increase of 26% in fiscal 2012, compared to fiscal 2011. Services revenue was $274.0 million in fiscal 2012, an increase of 24% in fiscal 2012, compared to fiscal 2011.

• We generated cash flows from operating activities of $183.9 million in fiscal 2012, an increase of 38% compared to fiscal 2011.

• Cash, cash equivalents and investments were $739.6 million as of December 31, 2012, an increase of $200.9 million from December 31, 2011.

• Deferred revenue was $363.2 million as of December 31, 2012, an increase of $68.4 million from December 31, 2011.

Fiscal 2012 was our third full year as a public company, following our initial public offering in November 2009. We believe the greater visibility and brand recognition derived from being a public company, combined with success in selling to enterprise and service provider customers and new product introductions, served as contributors to the growth in our business during fiscal 2012.

We continue to invest in research and development to strengthen our technology leadership position and believe continued product innovation has strengthened our technology advantage and resulted in market share gains, as evidenced by the recent introduction of several noteworthy new FortiGate appliance models, such as the FG-100D, FG-800C, FG-3240C and FG-5101C. During fiscal 2012, we also made a significant investment in sales and marketing to increase brand awareness and grow our global sales force and distribution channels to grow our global presence both geographically and by industry segment. As a result, we experienced increased deal volumes driven by traction in enterprise data center deployments and large enterprise deals, with particular strength in the retail, financial and telecommunication sectors.

The number of deals involving sales greater than $100,000 was 718 in fiscal 2012, compared to 560 in fiscal 2011. The number of deals involving sales greater than $250,000 was 241 in fiscal 2012, compared to 167 in fiscal 2011. The number of deals of involving sales greater than $500,000 was 81 in fiscal 2012, compared to 57 in fiscal 2011. We expect some variability in this metric, and remain focused on investing in our sales and research and development resources in order to expand our reach into new high-growth verticals and emerging markets, and meet increasing customer expectations about the quality and functionality of our products, as we continue to sell to large customers, such as enterprise and service providers. While we have experienced some success selling into certain vertical customer segments, such as service providers and enterprise, we have experienced less traction selling into other verticals such as the U.S. federal government and there can be no assurance we will be successful selling into certain vertical customer segments.

Sales of FortiGate products have generally been balanced across entry-level (FortiGate-20 to -100 series), mid-range (FortiGate-200 to -800 series) and high-end (FortiGate-1000 to -5000 series) models with each product category representing approximately one-third of FortiGate sales, with some degree of variability from year to year and between quarters over the three-year period ended December 31, 2012. The percentage of our FortiGate related billings from the mid-range category increased from 31% in fiscal 2011 to 33% in fiscal 2012, while the high-end category decreased from 37% to 35%, while the entry-level category remained flat year over year. See "-Key Metrics" below for more information on billings and "-Other Non-GAAP Financial Measures" for a discussion of the limitations of non-GAAP financial measures.

In fiscal 2012, operating expenses increased by 24% compared to fiscal 2011. The increase was primarily driven by additional headcount to support our growth as we continued to invest in the development of new products and expand our sales coverage. We also incurred $1.3 million of litigation settlement expense in fiscal 2012. Of this amount, we recorded $1.0 million as a general and administrative expense and $0.3 million as a sales and marketing expense. These increases were partially offset by favorable foreign currency exchange rates compared to fiscal 2011. We also experienced improvements in productivity and efficiencies in our overall headcount as our annualized fiscal 2012 revenue per employee, defined as annual revenue divided by average headcount, reached $303,000, up from $297,000 for fiscal 2011. Headcount increased to 1,954 as of December 31, 2012 from 1,583 as of December 31, 2011. Our accelerated pace of hiring continued in fiscal 2012, particularly in support, sales and marketing and research and development.

Our Business Model

Our sales strategy is based on a distribution model whereby we primarily sell our products and services directly to distributors who sell to resellers and service providers, who, in turn, sell to our end-customers. In certain cases, we sell directly to government-focused resellers, large service providers and major systems integrators, who have significant purchasing power and unique customer deployment requirements. Typically, FortiGuard security subscription services and FortiCare technical support services are purchased along with our physical and virtual appliances. We invoice at the time of our sale for the total price of the products and subscription and support services, and the invoice generally becomes payable within 30 to 90 days. We generally recognize product revenue up-front based on the allocated revenue value and defer revenue for the sale of new and renewal subscription and support services contracts. We recognize the related services revenue over the service period, which is typically one year from the date the end-customer registers for these services (the date on which the services can first be used by the customer), although it can be as long as five years. Sales of new and renewal services increase our deferred revenue balance, which contributes significantly to our positive cash flow from operations.

Key Metrics

We monitor the key financial metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. Our total deferred revenue increased by $68.4 million from $294.8 million as of December 31, 2011 to $363.2 million as of December 31, 2012. Revenue recognized plus the change in deferred revenue from the beginning to the end of the period is a useful metric that management identifies as billings. Billings for services drive deferred revenue, which is an important indicator of the health and visibility of our business, and has historically represented a majority of the revenue that we recognize in a typical quarter. We ended fiscal 2012 with $739.6 million in cash, cash equivalents and investments and have had positive cash flow from operations every fiscal year since 2005. We discuss revenue, gross margin, and the components of operating income and margin below under "-Components of Operating Results," and we discuss our cash, cash equivalents, and investments under "-Liquidity and Capital Resources." Deferred revenue and cash flow from operations are discussed immediately below the following table.

                                              Fiscal Year or as of Fiscal Year End
                                               2012              2011           2010
                                                      ($ amounts in 000's)
Revenue                                       533,639           433,576       324,696
Gross margin                                       72 %              74 %          74 %
Operating income (1)                          100,475            88,904        55,341
Operating margin                                   19 %              21 %          17 %
Total deferred revenue                        363,185           294,833       252,631
Increase in total deferred revenue             68,352            42,202        50,701
Cash, cash equivalents and investments        739,586           538,687       387,460
Cash provided by operating activities         183,866           132,842       103,383
Free cash flow (2)                            161,783           135,218        99,607
___________________
(1) Includes:
Stock-based compensation expense               30,690            19,015         9,315
Patent settlement income                        1,912             1,911             -

(2) See " -Cash flow from operations" below for a definition of free cash flow.

Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of services revenue from subscription and support service contracts. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. We define billings as revenue recognized during a period plus the change in deferred revenue from the beginning to the end of the period. The following table reflects the calculation of billings as discussed in the paragraph above. For a discussion of the limitations of non-GAAP financial measures, see "-Other Non-GAAP Financial Measures" below.

                                      Fiscal Year
                                2012       2011      2010
                                  ($ amounts in 000's)
Billings:
Revenue                      533,639    433,576    324,696
Increase in deferred revenue  68,352     42,202     50,701
Total billings (Non-GAAP)    601,991    475,778    375,397

Cash flow from operations. We monitor cash flow from operations as a measure of our overall business performance. Our cash flow from operations is driven in large part by advance payments for both new and renewal contracts for subscription and support services, consistent with our billings for the period. Monitoring cash flow from operations and free cash flow enables us to analyze our financial performance excluding the non-cash effects of certain items such as depreciation, amortization and stock-based compensation expenses, thereby allowing us to better understand and manage the cash needs of our business. Free cash flow, an alternative non-GAAP financial measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. For a discussion of the limitations of non-GAAP financial measures, see "-Other Non-GAAP Financial Measures" below.

                                                     Fiscal Year
                                             2012        2011       2010
                                                ($ amounts in 000's)
Free Cash Flow:
Net cash provided by operating activities 183,866     132,842     103,383
Less purchases of property and equipment  (22,083 )    (3,624 )    (3,776 )
Free cash flow (Non-GAAP)                 161,783     129,218      99,607

Other Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"), we consider certain financial measures that are not prepared in accordance with U.S. GAAP, including billings and free cash flow discussed above as well as non-GAAP gross margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP operating expenses, and non-GAAP net income. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies.

We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance, as they help illustrate underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in these non-GAAP financial measures. Furthermore, we use many of these measures to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry, many of which present similar non-GAAP financial measures to investors.

These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus the nearest GAAP equivalent of these financial measures. First, these non-GAAP financial measures exclude certain recurring, non-cash charges such as stock-based compensation expense, offset by patent settlement income. Stock-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and is an important part of our employees' overall compensation. Second, the expenses that we exclude in our calculation of these non-GAAP financial measures may differ from the expenses, if any, that our peer companies may exclude when they report their results of operations. We compensate for these limitations by providing the nearest GAAP equivalents of these non-GAAP financial measures and describing these GAAP equivalents in the section entitled "-Results of Operations" below.

Non-GAAP gross margin is gross margin as reported on our consolidated statements of operations, excluding the impact of stock-based compensation expense, which is a non-cash charge. Non-GAAP operating income is operating income, as reported on our consolidated statements of operations, excluding the impact of stock-based compensation expense and the income we received from a patent settlement. Non-GAAP operating margin is non-GAAP operating income divided by revenue. The following tables reconcile GAAP gross margin, operating income, and operating margin to non-GAAP gross margin, non-GAAP operating income, and non-GAAP operating margin for fiscal 2012, 2011 and 2010.

                                                              Fiscal Year
                                      2012                       2011                       2010
                                             % of                       % of                        % of
                             Amount ($)     Revenue    Amount ($)      Revenue      Amount ($)    Revenue
                                                         ($ amounts in 000's)
Total revenue                  533,639                   433,576                      324,696
GAAP gross profit and margin   386,219          72       319,978          74          239,490           74
Stock-based compensation
expense                          4,069           1         1,973           -            1,030            -
Non-GAAP gross profit and
margin                         390,288          73       321,951          74          240,520           74
GAAP operating income and
margin                         100,475          19        88,904          21           55,341           17
Stock-based compensation
expense:
Cost of revenue                  4,069           1         1,973           -            1,030            -
Research and development         9,226           1         4,691           1            2,339            1
Sales and marketing             12,793           2         9,325           3            3,810            1
General and administrative       4,602           1         3,026           -            2,136            1
Total stock-based
compensation expense            30,690           5        19,015           4            9,315            3
Patent settlement income        (1,912 )         -        (1,911 )        (1 )              -            -
Non-GAAP operating income
and margin                     129,253          24       106,008          24           64,656           20

Non-GAAP operating expenses exclude the impact of stock-based compensation expense and the income from a patent settlement. The following tables reconcile GAAP operating expenses to non-GAAP operating expenses for fiscal 2012, 2011 and 2010.

                                                                Fiscal Year
                                       2012                        2011                        2010
                                              % of                        % of                        % of
                             Amount ($)      Revenue     Amount ($)      Revenue     Amount ($)      Revenue
                                                           ($ amounts in 000's)
Operating Expenses:
Research and development
expenses:
GAAP research and
development expenses            81,078          15          63,577          15          49,801          15
Stock-based compensation
expense                         (9,226 )        (1 )        (4,691 )        (1 )        (2,339 )        (1 )
Non-GAAP research and
development expenses            71,852          14          58,886          14          47,462          14
Sales and marketing
expenses:
GAAP sales and marketing
expenses                       179,155          33         145,532          34         111,968          34
Stock-based compensation
expense                        (12,793 )        (2 )        (9,325 )        (3 )        (3,810 )        (1 )
Non-GAAP sales and marketing
expenses                       166,362          31         136,207          31         108,158          33
General and administrative
expenses:
GAAP general and
administrative expenses         25,511           5          21,965           4          22,380           8
Stock-based compensation
expense                         (4,602 )        (1 )        (3,026 )         -          (2,136 )        (1 )
Patent settlement income         1,912           -           1,911           1               -           -
Non-GAAP general and
administrative expenses         22,821           4          20,850           5          20,244           7
Total operating expenses:
GAAP operating expenses        285,744          53         231,074          53         184,149          57
Stock-based compensation
expense                        (26,621 )        (4 )       (17,042 )        (4 )        (8,285 )        (3 )
Patent settlement income         1,912           -           1,911           1               -           -
Non-GAAP operating expenses    261,035          49         215,943          50         175,864          54

Non-GAAP net income is net income, as reported in our consolidated statements of operations, excluding the impact of stock-based compensation expense and income from a patent settlement. The following tables reconcile GAAP net income as reported on our consolidated statements of operations to non-GAAP net income for fiscal 2012, 2011 and 2010.

                                                                       Fiscal Year
                                                     2012                     2011                  2010
                                                 ($ and share amounts in 000's, except per share amounts)
Net Income:
GAAP net income                                      66,836                   62,492                   41,245
Stock-based compensation expense (1)                 30,690                   19,015                    9,315
Patent settlement income (2)                         (1,912 )                 (1,911 )                      -
Provision for income taxes (3)                       38,160                   29,581                   15,096
Non-GAAP income before provision for
income taxes                                        133,774                  109,177                   65,656
Tax adjustment (4)                                  (45,483 )                (36,028 )                (21,010 )
Non-GAAP net income                                  88,291                   73,149                   44,646
Non-GAAP net income per share-diluted                  0.53                     0.45                     0.29
Shares used in per share
calculation-diluted                                 166,329                  163,781                  156,406


____________________

(2) The patent settlement income is removed from GAAP net income to reconcile to non-GAAP income before taxes.

(3) Provision for income taxes is our GAAP provision that must be added to GAAP net income to reconcile to non-GAAP income before taxes.

. . .