<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

              Quarterly Report Pursuant to Section 13 or 15 (d)
                  of the Securities Exchange Act of 1934

     For the quarterly period ended               Commission File Number
         March 31, 2002                                000-26819
         --------------                                ---------
                        WATCHGUARD TECHNOLOGIES, INC.
                        ----------------------------
            (Exact Name of Registrant as Specified in Its Charter)

               Delaware                                91-1712427
-------------------------------------     --------------------------------------
   (State or Other Jurisdiction of         (I.R.S. Employer Identification No.)
    Incorporation or Organization)

                         505 Fifth Ave. South, Suite 500
                         -------------------------------
                              Seattle WA 98104-3892
                              ---------------------
               (Address of Principal Executive Offices) (Zip Code)

     Registrant's telephone number, including area code: (206) 521-8340
                                                         --------------

                           Not Applicable
  ------------------------------------------------------------------------------
     (Former name, former address and former fiscal year, if changed since
                               last report.)

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

32,210,117 shares of WatchGuard common stock were outstanding as of May 6, 2002.

<PAGE>

                          WATCHGUARD TECHNOLOGIES, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED MARCH 31, 2002

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                                             <C>
PART I.  FINANCIAL INFORMATION...................................................................................3

         ITEM 1.  FINANCIAL STATEMENTS...........................................................................3

         ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........11

         ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................34

PART II.  OTHER INFORMATION.....................................................................................36

         ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS....................................................36

         ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.............................................................36
</TABLE>

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS


                          WATCHGUARD TECHNOLOGIES, INC.

                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                                                         March 31,         December 31,
                                                                                            2002               2001
                                                                                       ---------------    ----------------
                                                                                         (unaudited)
                                                         ASSETS

<S>                                                                                    <C>                <C>
Current assets:
   Cash and cash equivalents.......................................................    $      13,521      $       13,958
   Securities available for sale...................................................           96,867              99,785
   Trade accounts receivable, net..................................................            8,944               6,363
   Inventories, net................................................................            2,965               4,413
   Prepaid expenses and other......................................................            3,125               4,000
                                                                                       ---------------    ----------------

     Total current assets..........................................................          125,422             128,519
Property and equipment, net........................................................            6,779               7,383
Goodwill, net......................................................................           26,991              26,991
Other intangibles, net and other assets............................................            9,410              10,138
                                                                                       ---------------    ----------------

Total assets.......................................................................    $     168,602      $      173,031
                                                                                       ===============    ================

                                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable ...............................................................    $       1,919      $        4,032
   Accrued expenses................................................................            5,940               4,986
   Deferred revenue ...............................................................           16,602              15,709
                                                                                       ---------------    ----------------

Total current liabilities..........................................................           24,461              24,727

Stockholders' equity:
   Preferred stock, $0.001 par value:
      Authorized shares:  10,000,000
      No shares issued and outstanding.............................................               --                  --
   Common stock, $0.001 par value:
      Authorized shares:  80,000,000
      Shares issued and outstanding:  27,258,070 at March 31, 2002 and
         27,123,260 at December 31, 2001...........................................               27                  27
   Additional paid-in capital......................................................          231,901             231,533
   Deferred stock-based compensation ..............................................             (742)             (1,357)
   Accumulated other comprehensive income..........................................              169                 681
   Accumulated deficit ............................................................          (87,214)            (82,580)
                                                                                       ---------------    ----------------

Total stockholders' equity ........................................................          144,141             148,304
                                                                                       ---------------    ----------------

Total liabilities and stockholders' equity ........................................    $     168,602      $      173,031
                                                                                       ===============    ================
</TABLE>

                             See accompanying notes.

                                      -3-

<PAGE>

                        WATCHGUARD TECHNOLOGIES, INC.
                       ------------------------------
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                  -------------------------------------
                  (In thousands, except per share data)
                          (unaudited)

<TABLE>
<CAPTION>
                                                                                 Three Months Ended
                                                                                     March 31,
                                                                        -----------------------------------
                                                                             2002                 2001
                                                                        ---------------     ---------------
<S>                                                                     <C>                 <C>
Revenues:
  Product..........................................................     $    10,558         $     13,284
  Service..........................................................           4,954                3,818
                                                                        ---------------     ---------------

        Total revenues.............................................          15,512               17,102

Cost of revenues:
  Product..........................................................           4,297                5,267
  Service..........................................................           1,516                1,376
                                                                        ---------------     ---------------
        Total cost of revenues.....................................           5,813                6,643
                                                                        ---------------     ---------------

Gross margin.......................................................           9,699               10,459

Operating expenses:
  Sales and marketing (1)..........................................           7,438                8,171
  Research and development (2).....................................           4,668                5,271
  General and administrative (3)...................................           2,000                1,870
  Stock-based compensation ........................................             613                4,520
  Amortization of goodwill, purchased technology and other
      intangible assets acquired...................................             721                2,724
                                                                        ---------------     ---------------

        Total operating expenses...................................          15,440               22,556
                                                                        ---------------     ---------------

Operating loss.....................................................          (5,741)             (12,097)

Interest income, net...............................................           1,120                1,701
                                                                        ---------------     ---------------

Loss before income taxes...........................................          (4,621)             (10,396)
                                                                        ---------------     ---------------

Provision for income taxes.........................................              13                   84
                                                                        ---------------     ---------------

Net loss...........................................................     $    (4,634)        $    (10,480)
                                                                        ===============    ================

Basic and diluted net loss per share...............................     $     (0.17)        $      (0.40)
                                                                        ===============     ===============

Shares used in calculation of basic and diluted
    net loss per share...............................................          27,117               26,348
                                                                        ===============     ===============
</TABLE>

------------------------

(1)  Sales and marketing expenses exclude amortization of stock-based
     compensation of approximately $12 and $67 for the three months ended March
     31, 2002 and 2001, respectively.
(2)  Research and development expenses exclude amortization of stock-based
     compensation of approximately $596 and $4,441 for the three months ended
     March 31, 2002 and 2001, respectively.
(3)  General and administrative expenses exclude amortization of stock-based
     compensation of approximately $5 and $12 for the three months ended March
     31, 2002 and 2001, respectively.

                           See accompanying notes.

                                      -4-

<PAGE>

                          WATCHGUARD TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                Three Months Ended
                                                                                                     March 31,
                                                                                       --------------------------------------
                                                                                            2002                 2001
                                                                                       ----------------     ----------------
<S>                                                                                    <C>                  <C>
OPERATING ACTIVITIES:
   Net loss.......................................................................     $       (4,634)      $      (10,480)
   Adjustments to reconcile net loss to net cash used in operating activities:
       Depreciation and amortization of property and equipment....................                623                  514
       Amortization of goodwill, purchased technology and other intangible assets.                723                2,724
       Amortization of stock-based compensation...................................                613                4,520
       Provision for bad debt expense.............................................                 --                  276
       Changes in operating assets and liabilities:
         Trade accounts receivable, net...........................................             (2,581)               2,665
         Inventories, net ........................................................              1,448                  916
         Prepaid expenses and other...............................................                875                 (366)
         Other assets.............................................................                  5                   (6)
         Accounts payable and accrued expenses....................................             (1,159)              (3,145)
         Deferred revenue ........................................................                893                  981
                                                                                       ----------------     ----------------

NET CASH USED IN OPERATING ACTIVITIES                                                          (3,194)              (1,401)

INVESTING ACTIVITIES:
   Purchases of property and equipment............................................                (19)                (621)
   Proceeds from sales and maturities of marketable securities....................             35,181               70,524
   Purchases of marketable securities.............................................            (32,775)             (64,702)
                                                                                       ----------------     ----------------

NET CASH PROVIDED BY INVESTING ACTIVITIES.........................................              2,387                5,201

FINANCING ACTIVITIES:
   Proceeds from the exercise of common stock options and warrants and the sale
       of common stock through the employee stock purchase plan...................                370                1,241
                                                                                       ----------------     ----------------

CASH PROVIDED BY FINANCING ACTIVITIES.............................................                370                1,241
                                                                                       ----------------     ----------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..............................               (437)               5,041

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................             13,958               13,837
                                                                                                            ----------------
                                                                                       ----------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................     $       13,521       $       18,878
                                                                                       ================     ================
</TABLE>

                            See accompanying notes.

                                      -5-

<PAGE>

                          WATCHGUARD TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     Description of Business

     WatchGuard Technologies, Inc. (WatchGuard) is a leading provider of
Internet security solutions designed to protect enterprises that use the
Internet for electronic commerce and secure communications.

     Interim Financial Information

     The accompanying unaudited consolidated financial statements of WatchGuard,
which include the December 31, 2001 balance sheet that was derived from audited
consolidated financial statements, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
include all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation. Operating results for the three-month period ended March
31, 2002 are not necessarily indicative of the results that may be expected for
future quarters or for the year ending December 31, 2002. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes for the year ended December
31, 2001 included in WatchGuard's annual report on Form 10-K, filed with the
Securities and Exchange Commission (SEC) on March 28, 2002.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Revenue Recognition

     WatchGuard recognizes revenue in accordance with accounting standards for
software companies, including Statement of Position (SOP) 97-2, "Software
Revenue Recognition," as amended by SOP 98-9, and related interpretations,
including Technical Practice Aids. In December 1999, the SEC issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements.
WatchGuard believes its current revenue recognition policies and practices are
consistent with the current accounting standards.

     WatchGuard generates revenues primarily through sales of its Firebox and
ServerLock products, including related software licenses, and subscriptions for
its LiveSecurity Service, which includes access to technical support, software
updates, threat responses, expert editorials, support flashes, virus alerts and
interactive training. Software license revenues are generated from licensing
the rights to use WatchGuard's products directly to end-users, from sublicense
fees from resellers and distributors and from sales of its managed security
solution products to Internet service providers and other service providers
that utilize WatchGuard's products to provide managed security services to
their customers.

     Revenues from software license agreements are generally recognized upon
delivery of software if persuasive evidence of an arrangement exists,
collection is probable, the fee is fixed and determinable, and vendor-specific
objective evidence of fair value for undelivered elements of the arrangement
has been established. Vendor-specific objective evidence is typically based on
the price charged when an element is sold separately or, if an element is not
sold separately, on the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. WatchGuard uses the residual method, as defined in SOP 98-9, to
allocate revenues to delivered elements once it has established vendor-specific
objective evidence for all undelivered elements. Under the residual method, any
discount in the arrangement is allocated to the delivered element.

     WatchGuard provides an estimated returns and allowances reserve for
return rights, pricing protection rights and promotional rebates for some of
its customers. A customer's return rights are generally limited to a percentage
of the customer's purchases for the previous quarter. Pricing protection
rights, offered to many of WatchGuard's customers, are generally limited to 60
to 90 days after notification of a price change. The promotional rebates vary

                                      -6-

<PAGE>

by type and term and are earned by customers in accordance with various
conditions. Revenues are reduced by the provision for estimated returns and
allowances at the time the sales are made. Some of WatchGuard's distributors
have unlimited stock return and rotation rights. Revenues from these
distribution arrangements are not recognized until the distributors sell the
products to their customers. Revenues from LiveSecurity Service subscriptions
are recognized ratably over the term of the contract, typically one to two
years. WatchGuard's payment terms typically range from 30 to 60 days.

     Principles of Consolidation

     The consolidated financial statements include the accounts of WatchGuard
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.

     Net Loss Per Share

     Basic and diluted net loss per share is calculated using the average number
of common stock outstanding. Other common stock equivalents, including preferred
stock, stock options and warrants, are excluded from the computations because
their effect is antidilutive.

     Comprehensive Loss

     WatchGuard's investments consist of corporate and government debt
securities, are considered available-for-sale and are stated at fair value, with
unrealized gains and losses included as a component of stockholders' equity.
During the three-month period ended March 31, 2002, there were no material
realized gains or losses on WatchGuard's securities available-for-sale. All such
investments mature within two years, with the weighted average life of the
investment portfolio being approximately one year. The following table sets
forth the components of comprehensive loss (in thousands):

<TABLE>
<CAPTION>
                                                         Three Months Ended March 31,
                                                  --------------------------------------------
                                                          2002                   2001
                                                  ---------------------  ---------------------
<S>                                              <C>                    <C>
Net loss........................................ $        (4,634)       $       (10,480)

Unrealized (loss) gain on investments...........            (513)                   490
                                                  ---------------------  ---------------------

Comprehensive loss..............................  $       (5,147)               $(9,990)
                                                  =====================  =====================
</TABLE>

     Recent Accounting Pronouncements

     In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." WatchGuard adopted SFAS No. 144
on January 1, 2002. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," and
the accounting and reporting provisions relating to the disposal of a segment
of a business in Accounting Principles Board Opinion No. 30. In accordance with
SFAS No. 144, the carrying value of intangible assets, other than goodwill, and
other long-lived assets is reviewed on a regular basis for the existence of
facts or circumstances, both internal and external, that may suggest
impairment. To date, no such impairment has been indicated. As a result, the
adoption of SFAS No. 144 had no material effect on WatchGuard's operating
results during the three-month period ended March 31, 2002. Should there be an
impairment in the future, WatchGuard will measure the amount of the impairment
based on discounted expected future cash flows from the impaired assets.

     In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations completed after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. SFAS No.
142 requires that goodwill and other indefinite lived intangibles no longer be
amortized to earnings, but instead be reviewed for impairment on an annual
basis or on an interim basis if circumstances change or if events occur that
would reduce the fair value of a reporting unit below its carrying value.
Impairment losses will be charged to earnings in the period they are
determined. Separable intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives.

     Effective January 1, 2002, WatchGuard adopted SFAS No. 141 and SFAS No.
142. Application of the new standards resulted in a reclassification of the
unamortized balance of an assembled workforce intangible in the amount of
$390,000 to goodwill on January 1, 2002. This resulted in a net goodwill
balance of $27.0 million (which will no longer be subject to amortization but
will be subject to evaluation for impairment) and a net balance of other
intangibles of $9.8 million (which will continue to be amortized over their
estimated useful lives of three to five

                                      -7-

<PAGE>

years). The following table summarizes the effect SFAS No. 142 would have had
on net loss and basic and diluted net loss per share, had the statement been
applied retroactively to the three-month period ended March 31, 2001 (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                       Three Months Ended March 31,
                                                                 -----------------------------------------
                                                                        2002                 2001
                                                                 -----------------------------------------
<S>                                                              <C>                 <C>
Net loss
  Net loss - as reported.........................................$        (4,634)    $       (10,480)
  Adjustment for amortization of goodwill and other
   indefinite-lived intangibles..................................             --               1,899
                                                                 ------------------- ---------------------
  Net loss - as adjusted.........................................$        (4,634)            $(8,581)
                                                                 =================== =====================
Basic and diluted net loss per share
  Basic and diluted net loss per share - as reported.............$         (0.17)    $         (0.40)
  Amortization of goodwill and other indefinite lived
   intangibles, per share........................................             --                0.07
                                                                 ------------------- ---------------------
  Basic and diluted net loss per share - as adjusted............. $        (0.17)             $(0.33)
                                                                 =================== =====================
</TABLE>

     The following table summarizes other intangibles, net and other assets as
of March 31, 2002 and December 31, 2001 (in thousands):

<TABLE>
<CAPTION>
                                                                        March 31,         December 31,
                                                                           2002               2001
                                                               ------------------- ---------------------
<S>                                                            <C>                 <C>
Other intangibles............................................. $        13,376     $        13,376
Accumulated amortization......................................          (4,337)             (3,614)
                                                               ------------------- ---------------------

                                                                         9,039               9,762
Other assets..................................................             371                 376
                                                               ------------------- ---------------------

                                                               $         9,410     $        10,138
                                                               =================== =====================
</TABLE>

     Other intangibles will be amortized over their remaining useful lives
through 2005. The remaining amortization is expected to be $2.2 million for the
remainder of 2002 and $2.7 million, $2.3 million and $1.8 million for the years
2003, 2004 and 2005, respectively.

     Reclassifications

     Certain prior-period items have been reclassified to conform to the
current-period presentation.

NOTE 3 - BALANCE SHEET ACCOUNT DETAIL (in thousands)

     Trade Accounts Receivable, Net

     Trade accounts receivable, net consisted of the following:

<TABLE>
<CAPTION>
                                                                   March 31,            December 31,
                                                                     2002                   2001
                                                             ---------------------- ---------------------

<S>                                                          <C>                    <C>
Trade accounts receivable................................... $        11,481        $         9,202
Reserve for returns and allowances..........................          (1,744)                (2,046)
Allowance for uncollectible accounts........................            (793)                  (793)
                                                             ---------------------- ---------------------

                                                             $         8,944        $         6,363
                                                             ====================== =====================
</TABLE>

                                      -8-

<PAGE>

     Inventories, Net


     Inventories, net consisted of the following:

<TABLE>
<CAPTION>
                                                                    March 31,            December 31,
                                                                      2002                   2001
                                                             ---------------------- ---------------------
<S>                                                          <C>                    <C>
Finished goods.............................................. $         3,045        $         4,015
Components..................................................             562                    746
                                                             ---------------------- ---------------------

                                                                       3,607                  4,761
Inventory reserves..........................................            (642)                  (348)
                                                             ---------------------- ---------------------

                                                             $         2,965        $         4,413
                                                             ====================== =====================
</TABLE>

NOTE 4- BUSINESS RESTRUCTURING

     In April 2001, WatchGuard announced a restructuring plan designed to
streamline operations and reduce operating costs. This restructuring plan
included a reduction in workforce and a consolidation of excess facilities, in
addition to other cost-saving strategies. As part of the restructuring plan,
WatchGuard exited the consumer security market and terminated various original
equipment manufacturer agreements to develop product and services for that
market, and streamlined operations in support of new products and services aimed
at business customers. As a result of this restructuring, WatchGuard recorded a
$3.7 million restructuring charge in 2001. The accrued restructuring charge
balance as of March 31, 2002 consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                           March 31, 2002
                                                                                              accrued
                                                 Restructuring        Amounts paid or      restructuring
                                                charges in 2001           charged             balance
                                             ----------------------  ------------------  -------------------
<S>                                          <C>                     <C>                 <C>
Severance and termination benefits.........  $        1,015          $        1,015      $           --

Stock-based compensation...................             579                     579                  --

Abandoned facilities and other.............           2,126                     969               1,157
                                             ----------------------  ------------------  -------------------

Total......................................  $        3,720          $        2,563      $       1,157
                                             ======================  ==================  ===================
</TABLE>

     As part of the reorganization, WatchGuard implemented a workforce
reduction of 50 employees, which represented approximately 16% of WatchGuard's
employee base at that time and included employees from all of WatchGuard's
functional areas. All such employees were terminated prior to June 30, 2001.
Other expenses associated with the reorganization consisted of stock-based
compensation expense associated with the acceleration of vesting of stock
subject to repurchase and stock options held by terminated employees, the
discontinuation of the consumer security market products and the abandonment of
facilities and equipment. Costs that related to ongoing operations were not
included as restructuring charges. All restructuring charges have been paid as
of March 31, 2002, except accrued amounts related to losses for the lease
buyout or sublease of abandoned facilities of approximately $1.2 million at
March 31, 2002, which are expected to be realized through September 2006.
Revenues recorded from the consumer security market were insignificant prior to
the restructuring.

NOTE 5 - ACQUISITION OF BUSINESS

     On April 2, 2002, WatchGuard acquired RapidStream, Inc. (RapidStream), a
privately held provider of high-performance, ASIC (application specific
integrated circuit)-based firewall and virtual private networking (VPN)
appliances. The acquisition of RapidStream brings advanced ASIC technology and
a family of high-performance systems that will allow WatchGuard to address a
new class of customer that requires a high-performance security solution with
enterprise-level networking functionality and VPN scalability. The acquisition
was completed pursuant to an Agreement and Plan of Merger dated as of February
6, 2002, as amended as of March 1, 2002. A

                                      -9-

<PAGE>

valuation of the assets and liabilities acquired has not yet been completed.
The merger will be accounted for as a purchase. Accordingly, the operating
results of RapidStream will be included with the operating results of
WatchGuard beginning on April 2, 2002.

     At the effective time of the merger, all outstanding shares of RapidStream
capital stock were converted into the right to receive aggregate merger
consideration consisting of approximately $16.5 million in cash and
approximately 4.92 million shares of WatchGuard common stock. The shares of
WatchGuard common stock issuable as merger consideration are valued at
approximately $31.1 million, based on the average of the high and low sales
prices of WatchGuard common stock on April 2, 2002, the closing date of the
merger. In addition, WatchGuard assumed all outstanding options to purchase
RapidStream common stock, which were converted into options to purchase 318,251
shares of WatchGuard common stock at a weighted average exercise price of $3.64
per share. An aggregate of approximately 1.20 million shares of the WatchGuard
common stock issuable as merger consideration will be held in escrow for one
year, to secure the indemnification obligations of the RapidStream shareholders
under the merger agreement. WatchGuard funded the acquisition from its working
capital. In the event that the average of the high and low sales prices of
WatchGuard common stock on the first anniversary of the closing date is less
than the average of the high and low sales prices of WatchGuard common stock on
the closing date of the merger, WatchGuard will make an aggregate cash payment
to the former holders of RapidStream common stock equal to the product of 0.42
multiplied by the difference between (i) the average trading price on the
closing date, discounted to reflect the effect on fair market value of certain
lockup restrictions on common stock received as merger consideration and (ii)
the average trading price on the first anniversary of the closing date,
multiplied by the number of shares of WatchGuard common stock issued to the
former holders of RapidStream common stock.

     The WatchGuard shares issued to the RapidStream shareholders were issued
pursuant to the exemption from registration provided by Section 3(a)(10) of the
Securities Act of 1933.

NOTE 6 - SUBSEQUENT EVENTS

     In the second quarter of 2002, we are implementing a restructuring plan
primarily designed to eliminate redundancies and excess headcount resulting from
the acquisition of RapidStream, which plan includes a reduction in workforce,
consolidation of excess facilities and elimination of technology related
contracts that are no longer required or part of our strategy. As a result of
this restructuring, WatchGuard expects to incur a charge of approximately $2.5
million to $4.0 million.

                                      -10-

<PAGE>

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

     The following discussion and analysis provides information that we believe
is relevant to an assessment and understanding of WatchGuard's financial
condition and results of operations. The discussion should be read in
conjunction with the consolidated financial statements and the notes to the
financial statements. References to "we," "our" and "us" in this quarterly
report refer to WatchGuard Technologies, Inc.

FORWARD-LOOKING STATEMENTS

     Our disclosure and analysis throughout this quarterly report on Form 10-Q
contain forward-looking statements, which disclose our current plans,
objectives, expectations or beliefs regarding future events. Forward-looking
statements in this quarterly report include, without limitation, statements
regarding

     .   possible or assumed future operating results, trends in financial
         results and our business plans, including those relating to earnings
         growth and revenue growth;

     .   the integration of RapidStream, Inc. or the benefits we may realize
         from that acquisition;

     .   our costs and operating expenses relative to our revenues and the
         expected composition of our revenues and expenses;

     .   statements about our future capital requirements and the sufficiency of
         financial resources;

     .   the anticipated timing of new product releases;

     .   our plans, objectives, expectations and intentions; and

     .   other information that is not historical fact.

     We use words such as "may," "will," "should," "believe," "expect,"
"intend," "plan" and "future," and similar expressions, to identify
forward-looking statements, but the absence of these words does not mean that
the statement is not forward-looking. Forward-looking statements are subject to
known and unknown risks and uncertainties and are based on inaccurate
assumptions that could cause our actual results to differ materially from those
expressed or implied by the forward-looking statements. Our actual results could
differ materially from those anticipated in the forward-looking statements for
many reasons, including the risk factors described under the heading "Factors
Affecting Our Operating Results, Our Business and Our Stock Price." You should
carefully consider those risk factors in evaluating our forward-looking
statements.

     We do not assume responsibility for the accuracy and completeness of any
forward-looking statement. You should not unduly rely on these forward-looking
statements, which apply only as of the date of this quarterly report. We do not
intend to update any forward-looking statement after the date of this report to
conform the statement to actual results or to reflect new information,
circumstances or events, except as required by law. You should, however, review
the factors and risks we describe in the reports we file from time to time with
the Securities and Exchange Commission, or SEC.

OVERVIEW

     WatchGuard is a leading provider of Internet security solutions designed to
protect enterprises that use the Internet for electronic commerce and secure
communications. Our award-winning products and services include Firebox firewall
and VPN appliances for access control and secure communications and our
ServerLock technology and anti-virus solution for content and application
security for servers and desktops. Our innovative subscription-based
LiveSecurity Service delivers threat responses, software updates, expert
editorials, support flashes and virus alerts over the Internet, which enables
enterprises to protect their data and communications in a continuously changing
environment, with minimal effort. Our core market includes small to medium-sized
enterprises, or SMEs and large Internet-distributed enterprises, or IDEs, with
ultra-high-speed connections supporting VPNs between the IDEs and their
geographically

                                      -11-

<PAGE>

dispersed branch offices. Our acquisition of RapidStream, Inc. in April 2002
provides us with advanced ASIC-based technology and a family of
high-performance systems that will allow us to address a new class of customer
that requires a high-performance security solution with enterprise-level
networking functionality and VPN scalability.

CRITICAL ACCOUNTING POLICIES

     Our discussion and analysis of financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. On an ongoing basis, we evaluate significant
estimates used in preparing our financial statements, including sales returns
and allowances, bad debt, inventory reserves, restructuring reserves relating
to abandoned facilities, intangible assets and deferred taxes. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates if our assumptions change or if actual circumstances
differ from those in our assumptions.

     We believe the following critical accounting policies affect the more
significant judgments and estimates used in preparing our consolidated
financial statements.

Revenue Recognition

     Revenue recognition rules for software companies are very complex. We
follow very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue policy. The discretion
involved in this process makes revenue results difficult to predict, and any
shortfall in revenue or delay in recognizing revenues could cause our operating
results to vary significantly from quarter to quarter and could result in
future operating losses.

     We generate revenues through:

      .   sales of products and service subscriptions indirectly through our
          distribution network at a discount from list price; and

     .    sales of products and service subscriptions directly and, from time to
          time, indirectly through our distributors, to our service provider
          customers at volume pricing rates.

     Product revenues include:

     .    the perpetual software license fees for our Firebox System that are
          bundled with the sale of our security appliance as part of our
          security solutions;

     .    revenues from sales of software options, such as user expansion and
          software management modules;

     .    revenues from sales of our NOC security suite software license as part
          of our managed security solution; and

     .    sales of our ServerLock products for server content and application
          security.

     Service revenues primarily include the annual fees for our LiveSecurity
Service, which is sold as part of our security solutions, and for LiveSecurity
Service subscription renewals from our enterprise customers and end-users.
These service fees provide our customers access to our LiveSecurity Service for
product updates, security threat responses, general security information and
technical support. These service fees also enable our service provider

                                      -12-

<PAGE>

customers access to the LiveSecurity Service and the ability to manage and
update a specific number of their customers' security appliances.

     We recognize revenues only when a contract or agreement has been executed,
delivery has occurred, the fee is fixed and determinable and we believe
collection is probable. While we generally recognize product revenues upon
shipment, revenues on product sales for some of our major distributors are
recorded when these distributors have sold the product to their customers.
Service subscription revenues are recognized ratably on a monthly basis,
generally over periods ranging from one to two years.

     We have established a sales returns and allowances reserve to address the
return rights, pricing protection rights, and promotional rebates that may be
earned by, some of our customers. We estimate these reserves and adjust them
periodically based on historical rates of returns and allowances, as well as
the expected effect of current promotional programs and new product
introductions. If new or expanded promotional programs are introduced, or new
products are announced, additional allowances may be required.

Bad Debts

     We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
Significant judgment is required when we assess the ultimate realization of
receivables, including the probability of collection and the creditworthiness
of each customer. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances might be required.

Inventory Valuation

     Our inventories are stated at the lower of cost or market, with cost being
determined on a first-in, first-out basis. We write our inventories down to
estimated market value based on assumptions about future demand and market
conditions. Variation in market trends, customer preferences, introduction of
new products (replacing existing products) or technological advances could,
however, significantly affect these estimates and result in additional
inventory write-downs.

Restructuring

     In 2001, we recorded significant accruals related to our restructuring
plan. These accruals included an estimate related to the abandonment of excess
facilities. Although we do not anticipate significant changes, the actual costs
related to the abandonment of the excess facilities may differ from the estimate
if it takes us longer than expected to find suitable tenants, or if we are
unable to negotiate affordable termination fees. Any changes in these factors
could have a material effect on our financial position and operating results.

Asset Impairment

     Our business acquisitions have resulted in, and future acquisitions
typically will result in, the recording of goodwill and other intangibles,
which represent the excess of the purchase price over the fair value of net
tangible assets acquired. The goodwill and other intangible assets associated
with acquisitions are periodically reviewed for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of the
acquired business. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss could have a material adverse effect on
our financial position and operating results.

     Before 2002, in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," we
reviewed long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicated that the carrying amount
of an asset might not be recoverable. Under SFAS No. 121, measurement of such
an impairment was based on the fair value of the asset in comparison to an
estimate of the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) was less than

                                      -13-

<PAGE>

the carrying amount of the asset, an impairment loss was recognized. Otherwise,
an impairment loss was not recognized.

     Goodwill and other intangibles, including purchased technology, represent
the excess of the purchase price over the fair value of net tangible assets
acquired. Before 2002, we amortized goodwill and other intangibles on a
straight-line basis over lives ranging from two to five years. With the
required adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
beginning January 1, 2002, we no longer amortize goodwill and other intangibles
with indefinite lives to earnings. Instead goodwill will be reviewed for
impairment on an annual basis or on an interim basis if circumstances change or
if events occur that reduce the fair value of a reporting unit below its
carrying value. Impairment losses will be charged to earnings in the period in
which they are identified. Separable intangible assets that do not have
indefinite lives will continue to be amortized over their useful lives.

Deferred Taxes

     We provide a valuation allowance for deferred tax assets that cannot be
currently recognized due to our cumulative losses and the uncertainty as to
future recoverability. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event we were to determine that we would be
able to realize the deferred tax assets in the future, an adjustment to the
deferred tax asset would increase income in the period that determination was
made.

ACQUISITION OF RAPIDSTREAM, INC.

     On April 2, 2002, we acquired RapidStream, a privately held provider of
high-performance, ASIC-based firewall and VPN appliances. The acquisition of
RapidStream brings advanced ASIC technology and a family of high-performance
systems that will allow us to address a new class of customer that requires a
high-performance security solution with enterprise-level networking
functionality and VPN scalability. Pursuant to an Agreement and Plan of Merger
dated as of February 6, 2002, as amended as of March 1, 2002, among WatchGuard,
RapidStream, River Acquisition Corp., a wholly owned subsidiary of WatchGuard,
and, for purposes of the noncompetition and nonsolicitation provisions of the
merger agreement only, three management shareholders of RapidStream, River
Acquisition Corp. merged with and into RapidStream, with RapidStream surviving
as a wholly owned subsidiary of WatchGuard. The merger will be accounted for as
a purchase.

     At the effective time of the merger, all outstanding shares of RapidStream
capital stock were converted into the right to receive aggregate merger
consideration consisting of approximately $16.5 million in cash and
approximately 4.92 million shares of our common stock. The shares of common
stock issuable as merger consideration are valued at approximately $31.1
million, based on the average of the high and low sales prices of our common
stock on April 2, 2002, the closing date of the merger. In addition, we assumed
all outstanding options to purchase RapidStream common stock, which were
converted into options to purchase 318,251 shares of our common stock at a
weighted average exercise price of $3.64 per share. An aggregate of
approximately 1.20 million shares of the WatchGuard common stock issuable as
merger consideration will be held in escrow for one year, to secure the
indemnification obligations of the RapidStream shareholders under the merger
agreement. We funded the acquisition from our working capital.

     We expect the acquisition of RapidStream to have a significant effect on
our financial position and operating results in 2002. Specifically, we expect
that:

     .    product revenues will increase in 2002 due to sales of RapidStream
          ASIC-based products;

     .    gross margins will temporarily decrease slightly in the first few
          quarters after the acquisition is completed as we sell the inventory
          acquired in the acquisition, because this inventory will be valued at
          fair market value, which may be significantly higher than
          RapidStream's cost for the inventory;

     .    product returns may increase in 2002 due to sales of a new product
          resulting from the acquisition;

                                      -14-

<PAGE>

     .    operating expenses will increase in all areas due to the additional
          employee-related and other costs associated with the acquisition,
          especially during the first two quarters of operations as we integrate
          RapidStream with our operations;

     .    we will incur a restructuring charge of approximately $2.5 million to
          $4.0 million in the second quarter of 2002 as we implement a plan
          primarily designed to eliminate redundancies and excess headcount
          resulting from the acquisition, which plan includes a reduction in
          workforce, consolidation of excess facilities and elimination of
          technology related contracts that are no longer required or part of
          our strategy;

     .    stock-based compensation will increase due to deferred stock-based
          compensation associated with the acquisition;

     .    we will record additional amounts for goodwill and other intangibles
          and amortization expense on definite lived intangibles will increase;
          and

     .    we will expend approximately $18.0 million to $20.0 million in cash in
          May 2002 including; consideration paid as part of the purchase price,
          acquisition-related costs and additional costs of closing.

                                      -15-

<PAGE>

RESULTS OF OPERATIONS

The following table provides financial data for the periods indicated as a
percentage of total revenues:

<TABLE>
<CAPTION>
                                                                                         Three Months Ended
                                                                                              March 31,
                                                                                  ----------------------------------
                                                                                      2001               2002
                                                                                  ----------------  ----------------
<S>                                                                                     <C>                <C>
Revenues:
  Product...................................................................             77.7%             68.1%
  Service...................................................................             22.3              31.9
                                                                                  ----------------  ----------------

        Total revenues......................................................            100.0             100.0

Cost of revenues:
  Product...................................................................             30.8              27.7
  Service...................................................................              8.0               9.8
                                                                                  ----------------  ----------------

        Total cost of revenues..............................................             38.8              37.5
                                                                                  ----------------  ----------------

Gross margin................................................................             61.2              62.5

Operating expenses:
  Sales and marketing.......................................................             47.8              47.9
  Research and development..................................................             30.8              30.1
  General and administrative................................................             10.9              12.9
  Stock-based compensation .................................................             26.5               4.0
  Amortization of goodwill, purchased technology and other
      intangible assets acquired............................................             15.9               4.6
                                                                                  ----------------  ----------------

        Total operating expenses............................................            131.9              99.5
                                                                                  ----------------  ----------------

Operating loss..............................................................            (70.7)            (37.0)

Interest income, net........................................................              9.9               7.2
                                                                                  ----------------  ----------------

Loss before income taxes....................................................            (60.8)            (29.8)

Provision for income taxes..................................................              0.5               0.1
                                                                                  ----------------  ----------------

Net loss ...................................................................            (61.3)%           (29.9)%
                                                                                  ================  ================
</TABLE>

     Beginning late in the fourth quarter of 2000 and continuing through the
first quarter of 2002 we saw a general global downturn in spending by businesses
on information technology. We believe that this downturn has affected the demand
for our products and services. Revenues decreased from $17.1 million in the
three months ended March 31, 2001 to $15.5 million in the three months ended
March 31, 2002. Our net loss improved from $10.4 million, or $0.40 per share, in
the three months ended March 31, 2001 to $4.6 million, or $0.17 per share, the
three months ended March 31, 2002. The improvement in our net loss in the three
months ended March 31, 2002 as compared to the three months ended March 31, 2001
is due mainly to reduced noncash stock-based compensation charges, reduced
amortization of goodwill in conjunction with the adoption of SFAS No. 142, and
reduced amortization of purchased technology and other intangible assets
acquired in our acquisitions of Qiave in October 2000 and BeadleNet, LLC in
October 1999. Net losses for the three months ended March 31, 2001 included $7.2
million of these noncash charges related to stock-based compensation and
amortization of goodwill, purchased technology and other intangible assets
acquired, and net losses for the three months ended March 31, 2002 included $1.3
million of these noncash charges.

                                      -16-

<PAGE>

THREE MONTHS ENDED MARCH 31, 2002 AND 2001

Revenues

     Total revenues, which consist of product revenues and service revenues,
decreased from $17.1 million in the three months ended March 31, 2001 to $15.5
million in the three months ended March 31, 2002, a decrease of 9%. The decrease
in total revenues was primarily due to a change in product mix resulting in
lower product revenues, offset by an increase in service revenues. We believe
the decrease in product revenues can also be attributed to slowing economic
conditions that resulted in delays or deferral of customer spending. The
increase in service revenues resulted from previous deferrals attributable to
bundled product revenues and renewals of LiveSecurity Service subscriptions by
our existing customer base.

     Revenues in the Americas and the rest of the world as a percentage of total
revenues were approximately 47% and 53% in the three months ended March 31, 2001
and 40% and 60% in the three months ended March 31, 2002, respectively. In the
three months ended March 31, 2001, global revenues from one of our distributors,
Ingram Micro, Inc., accounted for $2.4 million, or approximately 14%, of total
revenues and in the three months ended March 31, 2002, global revenues from
another distributor, Tech Data, accounted for $2.3 million, or approximately
15%, of total revenues.

     Product revenues include: (1) perpetual software license fees for our
Firebox System that are bundled with the sale of our security appliance as part
of our security solutions; (2) sales of software options, such as user expansion
and software management modules; (3) sales of our NOC security suite software
license as part of our managed security solution; and (4) sales of our
ServerLock products for server content and application security. Product
revenues decreased from $13.3 million in the three months ended March 31, 2001
to $10.6 in the three months ended March 31, 2002, a decrease of 21%. Product
revenues as a percentage of total revenues decreased from 78% in the three
months ended March 31, 2001 to 68% in the three months ended March 31, 2002. We
believe the decreases were primarily due to a lower growth rate associated with
slowing economic conditions and to an increase in service revenues from an
increased base of customers renewing their LiveSecurity Service subscriptions.
Given the current economic uncertainty and slowdown in capital spending, it is
difficult to predict revenue levels in future quarters, which may be more
variable than historically.

     Service revenues include the annual fees for our LiveSecurity Service,
which is sold as part of the Firebox System and LiveSecurity for MSS. Service
revenues increased from $3.8 million in the three months ended March 31, 2001 to
$5.0 million in the three months ended March 31, 2002, an increase of 30%. As a
percentage of total revenues, service revenues increased from 22% in the three
months ended March 31, 2001 to 32% in the three months ended March 31, 2002. The
increase reflects an increased base of customers renewing their LiveSecurity
Service subscriptions and a reduced growth rate for product sales. We expect
that the lower product sales in 2001 will lead to slower growth in service
revenues in the remainder of 2002.

     We have established a returns and allowances reserve to address the return
rights and pricing protection rights of, and promotional rebates that may be
earned by, some of our customers. The provision for sales returns and allowances
was $1.3 million, or 7% of total revenues before returns and allowances, in the
three months ended March 31, 2001 and $1.1 million, or 7% of total revenues
before returns and allowances, in the three months ended March 31, 2002. The
provision as a percentage of total revenues remained flat based on historical
trends. The provision also reflects rebates relating to promotional programs
that were introduced during 2001. We expect to continue to introduce new
products and promotional programs each year, which may impact our reserve for
sales returns and allowances.

Cost of Revenues and Gross Margin

     Total cost of revenues, which includes product and service costs, decreased
from $6.6 million in the three months ended March 31, 2001 to $5.8 million in
the three months ended March 31, 2002, a decrease of 12%. As a

                                      -17-

<PAGE>

percentage of total revenues, cost of revenues decreased from 39% in the three
months ended March 31, 2001 to 37% in the three months ended March 31, 2002.
Gross margins are impacted by various factors, including the volume discount
level contained in our channel partner agreements, the cost of our Firebox
appliances, the mix of product and service sales, which may include hardware
and software products and service subscriptions or both, the cost of royalties
associated with our products, and the costs of our technical support
organization and LiveSecurity Service.

     Cost of product revenues, which includes the cost of manufacturing our
security appliance, the cost of our distribution operations, product packaging
and third-party product licensing fees, decreased from $5.3 million in the three
months ended March 31, 2001 to $4.3 million in the three months ended March 31,
2002, a decrease of 18%. The decrease was primarily due to lower sales volume.
Cost of product revenues as a percentage of total product revenues increased
from 40% in the three months ended March 31, 2001 to 41% in the three months
ended March 31, 2002. The increase in cost of product revenues as a percentage
of product revenues primarily reflects lower sales volume, sales discounts and
sales returns and a change in product mix, in which the sales volume of some of
our lower-margin products increased on a relative basis from the first quarter
of 2001 as compared to the first quarter of 2002. We expect product mix changes,
which would result from increased sales of higher-margin, enterprise-class
Firebox products and software products such as ServerLock, to have a positive
effect on gross margins. We therefore expect that gross margins will gradually
improve during 2002, primarily as a result of reductions in hardware
manufacturing costs. These improvements may be partially offset by lower margins
on sales of the RapidStream inventory acquired at the time of the RapidStream
acquisition.

     Cost of service revenues, which includes the costs of our technical support
organization and costs associated with our LiveSecurity Service, increased from
$1.4 million in the three months ended March 31, 2001 to $1.5 million in the
three months ended March 31, 2002, an increase of 10%. As a percentage of total
service revenues, cost of service revenues decreased from 36% in the three
months ended March 31, 2001 to 31% in the three months ended March 31, 2002,
reflecting relatively flat costs concurrent with an expanded user base. We
expect service costs to continue to increase in total dollar amount as our user
base expands. In the longer term, as revenues from LiveSecurity Service
subscriptions increase and account for a greater percentage of total revenues,
we expect our service margins to increase slightly.

Operating Expenses

     Sales and Marketing. Sales and marketing expenses include salaries,
commissions and employee-related expenses and certain variable marketing
expenses, including distributor promotional costs, public relations costs,
marketing collateral and trade show expenses. Sales and marketing expenses
decreased from $8.2 million in the three months ended March 31, 2001 to $7.4
million in the three months ended March 31, 2002, a decrease of 9%. As a
percentage of total revenues, sales and marketing expenses remained flat at 48%
of total revenues in the three months ended March 31, 2001 and 2002. The dollar
decrease in sales and marketing expenses was primarily due to decreases in
variable marketing costs resulting from a delay in planned marketing programs to
coincide with the acquisition of RapidStream, offset by increases in payroll and
related costs. Specifically, major components of the increase included:

     .   an increase in salaries, commissions, recruiting, consulting and
         related expenses from $3.2 million to $4.1 million; and

     .   a decrease in variable marketing costs from $3.7 million to $2.4
         million related to a delay in certain planned marketing programs.

     As mentioned above, we expect that sales and marketing expenses will
increase during future quarters of 2002 as a result of expenses related to the
acquisition of RapidStream and expenditures related to marketing programs
delayed from the first quarter of 2002, as well as to our continued investment
in sales and marketing programs designed to increase distribution through our
reseller network.

     Research and Development. Research and development expenses include
salaries, costs of noncapitalized equipment and software tools, depreciation of
capital equipment and software, nonrecurring costs associated with our security
appliance prototypes and payments to designers and contractors. Research and
development expenses

                                      -18-

<PAGE>

decreased from $5.3 million in the three months ended March 31, 2001 to $4.7
million in the three months ended March 31, 2002, a decrease of 11%. As a
percentage of total revenues, research and development expenses decreased from
31% in the three months ended March 31, 2001 to 30% in the three months ended
March 31, 2002. The dollar decrease in research and development expenses
reflects a delay in hardware initiatives in anticipation of the RapidStream
acquisition, as well as the elimination of research and development efforts not
related to our core business, in conjunction with our April 2001 restructuring
plan. Specifically, the decrease in research and development expenses was due
to slight decreases in consulting and security appliance prototype engineering
costs, payroll and related costs and facilities-related costs.

     As mentioned above, we expect research and development expenses to increase
during future quarters of 2002 as a result of the acquisition of RapidStream. We
also expect to continue to increase our research and development expenses in
total dollar amounts to enhance and expand our current product offerings and
integrate the new RapidStream product offerings, develop new products and
enhance our rapid response team, which analyzes and addresses Internet security
threats.

     General and Administrative. General and administrative expenses include
costs of executive, human resource, finance and administrative support
functions, provisions for uncollectible accounts and costs of legal and
accounting professional services. General and administrative expenses increased
from $1.9 million in the three months ended March 31, 2001 to $2.0 million in
the three months ended March 31, 2002, an increase of 7%. As a percentage of
total revenues, general and administrative expenses increased from 11% in the
three months ended March 31, 2001 to 13% in the three months ended March 31,
2002. The dollar increase in general and administrative expenses reflect the
change in our infrastructure designed to manage the growth of our operations,
including increases in payroll and related expenses and increases in other
general and administrative areas, such as professional service fees, offset by
decreases in bad debt.

     As mentioned above, we expect the acquisition of RapidStream to cause
general and administrative expenses to increase during future quarters of 2002.

     Stock-Based Compensation. Stock-based compensation expenses arise from
amortization of previously deferred stock-based compensation over the vesting
periods of common stock subject to repurchase and stock options. Amortization of
deferred stock-based compensation expenses was $4.5 million in the three months
ended March 31, 2001 and $613,000 in the three months ended March 31, 2002. In
the three months ended March 31, 2001, the allocation of the stock-based
compensation expense associated with functional operating expense categories was
$67,000 for sales and marketing, $4.4 million for research and development, and
$12,000 for general and administrative. In the three months ended March 31, 2002
the allocation of the stock-based compensation expense associated with
functional operating expense categories was $12,000 for sales and marketing,
$596,000 for research and development, and $5,000 for general and
administrative.

     Deferred stock-based compensation is recorded as a component of
stockholders' equity as the difference between the exercise price of options and
the fair value of our common stock on the date of grant, and for the value of
common stock subject to repurchase that we issued in connection with our October
1999 acquisition of BeadleNet and our October 2000 acquisition of Qiave. In
addition, deferred stock-based compensation is recorded for the fair value of
stock options granted to consultants. We recorded $19.3 million of deferred
stock-based compensation in 2000 in connection with the Qiave acquisition, which
included charges related to the issuance of common stock subject to repurchase
and the assumption of unvested Qiave employee stock options outstanding at the
time of the merger. In 2001, we recorded $213,000 in deferred stock-based
compensation related to options issued to consultants.

     As mentioned above, we expect stock-based compensation expenses to increase
due to amortization of deferred stock-based compensation associated with the
acquisition of RapidStream.

     Amortization of Goodwill, Purchased Technology and Other Intangible Assets
Acquired. Amortization of goodwill, purchased technology and other intangible
assets acquired consists of amortization of goodwill and other intangibles
related to our acquisitions of BeadleNet and Qiave. Amortization of goodwill and
other intangible assets acquired was $2.7 million in the three months ended
March 31, 2001 and $721,000 in the three months ended March 31, 2002. The
decrease in amortization of goodwill and other intangible assets acquired
primarily results from our adoption of SFAS No. 141, "Business Combinations,"
which resulted in $390,000 of intangible assets being subsumed into goodwill as
of January 1, 2002, and our adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets."

                                      -19-

<PAGE>

reporting unit below its carrying value. We will charge impairment losses to
earnings in the period they are determined. The adoption of SFAS No. 141 on
January 1, 2002 resulted in a net goodwill balance of $27.0 million, which is
no longer amortized but is subject to evaluation for impairment, and a net
balance of other intangibles of $9.8 million, which will continue to be
amortized over their estimated useful lives of three to five years. We will
perform the required transitional impairment tests of goodwill before June 30,
2002, as required by SFAS No. 142. We have not yet determined the effect of
these tests on our earnings and financial position.

     As mentioned above, we expect amortization of purchased technology and
other intangible assets acquired to increase during future quarters of 2002 due
to the amortization of definite-lived intangibles associated with the
acquisition of RapidStream.

Interest Income

     Interest income is generated from our investment of proceeds from the sale
of common stock in our initial public offering in 1999 and our follow-on public
offering in February 2000. Interest income decreased from $1.7 million in the
three months ended March 31, 2001 to $1.1 million in the three months ended
March 31, 2002. This decrease resulted from both a decrease in the average
balance of invested funds as well as a decrease in the average rates of return.

Income Taxes

     Income tax expenses of $84,000 in the three months ended March 31, 2001 and
$13,000 in the three months ended March 31, 2002 primarily relates to our
provision for foreign income taxes associated with our international operations.
We have experienced losses since inception, resulting in a net operating loss
carryforward position for federal income tax purposes of approximately $147.6
million as of March 31, 2002. These carryforwards, if not utilized, will begin
to expire in 2011, and may be subject to limitations under Section 382 of the
Internal Revenue Code.

                                      -20-

<PAGE>

QUARTERLY RESULTS OF OPERATIONS

     The following tables provide our unaudited results of operations both in
dollar amounts and expressed as a percentage of total revenues for each quarter
in the five-quarter period ended March 31, 2002. In our opinion, this unaudited
information has been prepared on the same basis as our audited consolidated
financial statements. This information includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented, when read in conjunction with our
consolidated financial statements and the notes to the consolidated financial
statements. The results of operations for any quarter are not necessarily
indicative of our future results.

<TABLE>
<CAPTION>
                                                                              Three Months Ended
                                                      --------------------------------------------------------------------
                                                        Mar. 31,      June 30,    Sept. 30,     Dec. 31,      Mar. 31,
                                                         2001           2001        2001          2001         2002
                                                      ------------ -------------- ----------- ------------ ----------------
                                                                                (In thousands)

Consolidated Statement of Operations Data:

<S>                                                     <C>            <C>         <C>          <C>           <C>
Revenues:
   Product..........................................    $ 13,284       $ 13,255    $ 12,806     $  7,548      $ 10,558
   Service..........................................       3,818          4,253       4,462        4,857         4,954
                                                      ------------ -------------- ----------- ------------ ---------------
     Total revenues.................................      17,102         17,508      17,268       12,405        15,512

Cost of revenues:
   Product..........................................       5,267          5,425       5,214        4,752         4,297
   Service..........................................       1,376          1,558       1,450        1,440         1,516
                                                      ------------ -------------- ----------- ------------ ---------------
     Total cost of revenues.........................       6,643          6,983       6,664        6,192         5,813
                                                      ------------ -------------- ----------- ------------ ---------------
Gross margin........................................      10,459         10,525      10,604        6,213         9,699

Operating expenses:
   Sales and marketing..............................       8,171          7,690       7,380        6,476         7,438
   Research and development.........................       5,271          4,740       4,129        4,714         4,668
   General and administrative.......................       1,870          1,865       2,060        1,931         2,000
   Stock-based compensation.........................       4,520          2,546       1,468          899           613
   Amortization of goodwill, purchased technology
       and other intangible assets acquired.........       2,724          2,724       2,724        2,770           721
   Restructuring charges............................          --          2,900          --          820            --
                                                      ------------ -------------- ----------- ------------ ---------------
     Total operating expenses.......................      22,556         22,465      17,761       17,610        15,440
                                                      ------------ -------------- ----------- ------------ ---------------
Operating loss......................................     (12,097)       (11,940)     (7,157)     (11,397)       (5,741)

Interest income, net................................       1,701          1,622       1,292        1,156         1,120
                                                      ------------ -------------- ----------- ------------ ---------------
Loss before income taxes............................     (10,396)       (10,318)     (5,865)     (10,241)       (4,621)

Provision (benefit) for income taxes................          84             84          28          (39)           13
                                                      ------------ -------------- ----------- ------------ ---------------
Net loss............................................    $(10,480)      $(10,402)   $ (5,893)    $(10,202)     $ (4,634)
                                                      ============ ============== =========== ============ ===============

                                                        $  (0.40)      $  (0.39)   $  (0.22)    $  (0.38)     $  (0.17)
Basic and diluted net loss per share................
                                                      ============ ============== =========== ============ ===============
Shares used in calculation of basic and diluted net
   loss per share...................................      26,348         26,673      26,839       27,011        27,117
                                                      ============ ============== =========== ============ ===============
</TABLE>

                                      -21-

<PAGE>

<TABLE>
<CAPTION>
                                                                              Three Months Ended
                                                      --------------------------------------------------------------------
                                                        Mar. 31,      June 30,    Sept. 30,     Dec. 31,      Mar. 31,
                                                          2001          2001         2001         2001          2002
                                                      ------------ -------------- ------------------------ ---------------

Consolidated Statement of Operations Data:

<S>                                                       <C>            <C>          <C>          <C>          <C>
Revenues:
   Product..........................................       77.7 %         75.7 %       74.2 %       60.8 %       68.1 %
   Service..........................................       22.3           24.3         25.8         39.2         31.9
                                                      ------------ -------------- ----------- ------------ ---------------
     Total revenues.................................      100.0          100.0        100.0        100.0        100.0

Cost of revenues:
   Product..........................................       30.8           31.0         30.2         38.3         27.7
   Service..........................................        8.0            8.9          8.4         11.6          9.8
                                                      ------------ -------------- ----------- ------------ ---------------
     Total cost of revenues.........................       38.8           39.9         38.6         49.9         37.5
                                                      ------------ -------------- ----------- ------------ ---------------
Gross margin........................................       61.2           60.1         61.4         50.1         62.5

Operating expenses:
   Sales and marketing..............................       47.8           43.9         42.7         52.2         47.9
   Research and development.........................       30.8           27.1         23.9         38.0         30.1
   General and administrative.......................       10.9           10.7         11.9         15.6         12.9
   Stock-based compensation.........................       26.5           14.5          8.5          7.2          4.0
   Amortization of goodwill, purchased technology
       and other intangible assets acquired.........       15.9           15.6         15.8         22.3          4.6
   Restructuring charges............................        0.0           16.6          0.0          6.6          --
                                                      ------------ -------------- ----------- ------------ ---------------
     Total operating expenses.......................      131.9          128.3        102.9        142.0         99.5
                                                      ------------ -------------- ----------- ------------ ---------------
Operating loss......................................      (70.7)         (68.2)       (41.4)       (91.9)       (37.0)

Interest income, net................................        9.9            9.3          7.5          9.3          7.2
                                                      ------------ -------------- ----------- ------------ ---------------
Loss before income taxes............................      (60.8)         (58.9)       (34.0)       (82.6)       (29.8)

Provision (benefit) for income taxes................        0.5            0.5          0.2         (0.3)         0.1

                                                      ------------ -------------- ----------- ------------ ---------------
Net loss ............................................     (61.3)%        (59.4)%      (34.1)%      (82.2)%      (29.9)%
                                                      ============ ============== =========== ============ ===============
</TABLE>

     During 2001, global economic, political and other uncertainties, as well
as constrained corporate information technology spending, appeared to slow the
demand for our products and services. Like most companies in the technology
sector, we experienced a downturn in the growth rate of revenues beginning in
the fourth quarter of 2000 through the first quarter of 2002. We believe that
both revenues and our operating results for the five-quarter period ended March
31, 2002 were negatively affected by the economic slowdown worldwide and an
overall reduction in capital spending. We expect our negative product sales
growth rate for 2001 will result in a lower service revenue growth rate in 2002
than that in 2001. Additionally, revenues and operating results for the fourth
quarter of 2001 were also negatively affected by changes in our sales and
marketing organizations and a realignment of our distribution and channel
partner strategy. Specifically, we hired a Senior Vice President, Worldwide
Sales and a Senior Vice President, Marketing, and subsequently upgraded our
sales force and established strategies emphasizing closer ties to our VARs and
end-users. These changes in our organization, as well as decreases in both sales
returns and sales discounts, resulted in greater revenues for the first quarter
of 2002, with revenues increasing $3.1 million in the fourth quarter of 2001 to
$15.5 million in the first quarter of 2002. While the changes in our sales and
marketing organizations and the realignment of our distribution and channel
partner strategy negatively affected revenues and operating results in the
fourth quarter of 2001, we believe they were required to effectively compete in
the global Internet security market.

     Our gross margins in 2001, both in dollars and as a percentage of total
revenues, remained relatively flat until the fourth quarter of 2001, when we
experienced a sharp decline in gross margins. Gross margins in the fourth
quarter of 2001 were affected by the factors described above as well as by a
change in product mix that resulted in a higher concentration of lower-priced,
lower-margin products being sold, fixed manufacturing overhead and

                                      -22-

<PAGE>

customer support costs spread over a smaller revenue base, and the write-down of
existing Firebox II products and related assets. Gross margins during 2001 were
also negatively affected by promotional programs on certain existing Firebox II
products established to facilitate the introduction of the new Firebox III
product line. We have also continued to make significant investments in our
customer support organization as our LiveSecurity Service subscription base has
expanded. Competitive selling pressures in future quarters could adversely
affect our gross margins. Our gross margins, in dollars, increased in the first
quarter of 2002 as compared to the fourth quarter of 2001 primarily due to
higher revenues. Gross margins, as a percentage of total revenues, increased in
the first quarter of 2002 as compared to the fourth quarter of 2001 due to
change in product mix in the first quarter of 2002 and due to the write-down of
existing Firebox II products in the fourth quarter of 2001.

     Overall, our operating expenses have decreased, in dollars, in each
quarter in the five-quarter period ended March 31, 2002, primarily due to
decreasing amortization of stock-based compensation charges associated with the
acquisition of Qiave in October 2000. Also, operating expenses decreased in the
first quarter of 2002 due to the required adoption of SFAS No. 142 on January 1,
2002. In addition, our second quarter and fourth quarter 2001 operating expenses
included significant restructuring charges associated with our April 2001
restructuring plan. Excluding amortization of goodwill, intangibles and
stock-based compensation and restructuring charges, our operating expenses
decreased in dollar amounts through the fourth quarter of 2001 and then
increased in the first quarter of 2002. These expenses decreased by
approximately $1.0 million in the second quarter of 2001, $700,000 in the third
quarter of 2001 and $400,000 in the fourth quarter of 2001, and increased by
approximately $1.0 million in the first quarter of 2002 as compared to the prior
quarter. Our operating expenses increased in the first quarter of 2002 as
compared to the prior quarter primarily due to costs associated with the changes
in our sales and marketing organizations and the realignment of our distribution
and channel partner strategy, as well to as increased sales commissions
associated with increased revenues

     To the extent that the economic and political uncertainties discussed
above continue to occur, spread to other geographic regions in which we conduct
business, or both, our future operating results are likely to be adversely
affected. As noted above, we also expect the RapidStream acquisition to have a
significant effect on future operating results.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2002, we had $110.4 million in cash, cash equivalents and
short-term investments, invested primarily in high-quality money market accounts
and marketable securities. We believe that the market risk arising from our
holdings of these financial instruments is not material. We currently have
outstanding a $3.0 million unconditional letter of credit that we issued in
September 2000 to our landlord in conjunction with the building lease for our
corporate headquarters. Currently, our letter of credit is collateralized by
short-term investments with our bank. Our working capital as of December 31,
2001 was $101.0 million.

     Operating activities

     Our operating activities resulted in net cash outflows of $3.2 million in
the three months ended March 31, 2002, as compared to $1.4 million in the three
months ended March 31, 2001. The operating cash outflows during these periods
primarily resulted from significant investments in sales and marketing and
research and development, all of which led to operating losses. Cash used in
operating activities was net of noncash charges totaling $2.0 million in the
three months ended March 31, 2002 and $8.0 million in the three months ended
March 31, 2001. These noncash charges were primarily associated with the
amortization of goodwill and other intangibles, depreciation and amortization of
capital assets, provisions for bad debts and compensation charges resulting from
the issuance of stock options and common stock subject to repurchase by
WatchGuard. Cash used by operating assets and liabilities for operating
activities was $519,000 in the three months ended March 31, 2002 and cash
provided by operating assets and liabilities for operating activities was $1.0
million in the three months ended March 31, 2001. In the three-month period
ended March 31, 2002, there were large fluctuations within some major working
capital components, as described below:

    (a)  Net receivables increased from $6.4 million at December 31, 2001 to
         $8.9 million at March 31, 2002, reflecting the increase in revenues
         from $12.4 million in the three months ended December 31, 2001 to
         $15.5 million in the three months ended March 31, 2002. Days sales
         outstanding, or DSOs, were 46 days

                                      -23-

<PAGE>

         at December 31, 2001 and 52 days at March 31, 2002, calculated on a
         quarterly basis. The increase in DSOs for the first quarter of 2002
         as compared to the fourth quarter of 2001 primarily reflects changes
         in our customer sales mix during the first quarter, as well as the
         increased revenues during the three months ended March 31, 2002 as
         compared to the three months ended December 31, 2001. DSOs are
         affected by the payment terms contained in our customer contracts,
         risks associated with the uncertain economy, linearity in revenues for
         a particular quarter and the amount of deferred revenue contained in
         the receivable balance that has not been recognized as revenue. Based
         on our current sales mix, the resulting timing differences arising
         from the varying payment terms in our customer agreements, the
         linearity of revenues in past quarters and the growth of deferred
         revenue, we expect our DSOs to generally range from 55 to 70 days in
         the future. Any change in these factors, however, could negatively
         affect expected DSO results.

    (b)  Sales reserves for returns and allowance reserves were $2.0 million at
         December 31, 2001 and $1.7 million at March 31, 2002, reflecting our
         estimate of returns and allowances associated with the return rights,
         price protection rights and promotional rebates of some of our
         customers. We decreased the sales reserve for the three months ended
         March 31, 2002, reflecting historical trends for returns and pricing
         programs. The reserve will continue to fluctuate from time to time
         depending on the timing of product introductions and pricing program
         changes.

    (c)  Net inventories decreased from $4.4 million at December 31, 2001 to
         $3.0 million at March 31, 2002. The overall decrease reflects inventory
         balancing and consumption of component inventory as we transition to
         turnkey production. Inventory balances in future quarters are expected
         to increase due to two new product lines from the acquisition of
         RapidStream. We maintain a reserve for inventory obsolescence and will
         continue to review inventory on a periodic basis to ensure our reserves
         are adequate.

    (d)  Prepaid expenses and other decreased from $4.0 million at December 31,
         2001 to $3.1 million at March 31, 2002, primarily due to amortization
         and timing differences occurring in the normal course of business.

    (e)  Accounts payable and accrued expenses decreased from $9.0 million at
         December 31, 2001 to $7.9 million at March 31, 2002. The decrease
         resulted primarily from the timing of inventory purchases and other
         expenditures in the three months ended December 31, 2001 as compared to
         the three months ended March 31, 2002.

    (f)  Deferred revenue increased from $15.7 million at December 31, 2001 to
         $16.6 million at March 31, 2002, an increase of 5%. This increase
         reflects the deferral of revenue from bundled LiveSecurity Service
         subscriptions included in new product revenues and renewals of
         LiveSecurity Service subscriptions from a growing customer base.

     Investing activities

     Cash provided by investing activities was $5.2 million in the three months
ended March 31, 2001 and $2.4 million in the three months ended March 31, 2002.
These activities primarily relate to short-term investing activity of the
proceeds received from our public offerings, and capital expenditures for
equipment and furniture.

     Financing activities

     Cash provided by financing activities totaled $1.2 million in the three
months ended March 31, 2001 and $370,000 in the three months ended March 31,
2002. Cash provided by financing activities in both periods reflects the
exercise of employee stock options and the purchase of common stock through our
employee stock purchase plan.

     As mentioned above, to complete the acquisition of RapidStream we will
expend approximately $18.0 million to $20.0 million in cash in May 2002
including; consideration paid as part of the purchase price, acquisition-related
costs and additional costs of closing. We believe that our existing cash and
securities balances will be sufficient to meet our anticipated cash needs for
the increased operating expenses associated with the acquisition of RapidStream,
for other potential acquisitions or technology investments, and for our working
capital and capital expenditures for at least the next 12 months. We may need to
seek additional funding before that

                                      -24-

<PAGE>

time through public or private financings or other arrangements, however, if
the underlying assumed levels of spending for other potential acquisitions of
or investments in complementary businesses or technologies prove to be
inaccurate.

                                      -25-

<PAGE>

UNAUDITED PRO FORMA OPERATING RESULTS

      Our management reviews our operating results on a pro forma basis in
making operating decisions, and we believe pro forma results provide additional
meaningful information. The following table provides our unaudited pro forma
results for the three-month periods ended March 31, 2001 and 2002 (in thousands,
except per share data).

<TABLE>
<CAPTION>
                                                                                Three months ended March 31,
                                                                            ---------------- -- ----------------
                                                                                 2001                2002
                                                                            ----------------    ----------------
<S>                                                                         <C>                 <C>

Net loss ...........................................................        $      (10,480)     $       (4,634)
Adjustments to reconcile net loss in the financial statements to
   pro forma net loss:
     Stock-based compensation.......................................                 4,520                 613
     Amortization of goodwill, purchased technology and other
         intangibles ...............................................                 2,724                 721
                                                                            ----------------    ----------------

Pro forma net loss..................................................        $       (3,236)     $       (3,300)
                                                                            ----------------    ----------------
Pro forma basic and diluted net loss per share......................        $        (0.12)     $        (0.12)
                                                                            ================    ================

Shares used in calculating pro forma basic and diluted
   net loss per share...............................................                26,348              27,117
                                                                            ================    ================
</TABLE>

Pro forma information is presented for informational purposes only and is not
prepared in accordance with generally accepted accounting principles. Pro forma
results

..    exclude the amortization of goodwill, purchased technology and other
     intangibles arising from our acquisitions of BeadleNet and Qiave; and

..    exclude noncash stock-based compensation expenses originating from employee
     stock options granted at less than fair market value, stock options granted
     to consultants, and certain stock options, restricted common stock and
     common stock subject to repurchase issued in connection with the BeadleNet
     and Qiave acquisitions.

IMPORTANT FACTORS THAT MAY AFFECT OUR OPERATING RESULTS, OUR BUSINESS AND OUR
STOCK PRICE

     In addition to the other information contained in this quarterly report,
you should carefully read and consider the following risk factors. If any of
these risks actually occur, our business, financial condition or operating
results could be adversely affected and the trading price of our common stock
could decline.

We have incurred losses in the past and may not achieve or sustain consistent
profitability, which could result in a decline in the value of our common stock.

     Since inception through the end of the first quarter of 2002, we have
incurred net losses and experienced negative cash flows from operations in each
quarter, except that we had net income and a positive cash flow in the third
quarter of 2000 and a positive cash flow in the third quarter of 2001. As of
March 31, 2002, we had an accumulated deficit of approximately $87.2 million.
Although our revenues have increased each year since we began operations, we do
not believe that the historical percentage growth rate of our revenues will be
sustainable as our revenue base increases and we may not achieve or sustain
profitability in future periods. Although we introduced certain cost-saving
measures in the second quarter of 2001 in response to the current economic
downturn, we expect that over time we will have to increase our operating
expenses in connection with

         .        continuing to develop our technology;

                                      -26-

<PAGE>

         .        integrating RapidStream's business, products and technologies
                  with our own and pursuing additional strategic acquisitions in
                  the future;

         .        expanding into new product markets;

         .        expanding into new geographic markets;

         .        hiring additional personnel; and

         .        upgrading our information and internal control systems.

     If we are unable to achieve or sustain profitability in future quarters,
the trading price of our common stock could decline.

Our operating results fluctuate and could fall below expectations of securities
analysts and investors, resulting in a decline in our stock price.

     Our quarterly and yearly operating results have varied widely in the past
and will probably continue to fluctuate. For this reason, we believe that
period-to-period comparisons of our operating results may not be meaningful. In
addition, our limited operating history makes predicting our future performance
difficult. In the fourth quarter of 2000, the first quarter of 2001 and the
fourth quarter of 2001, our operating results fell below the expectations of
securities analysts and investors and our operating results for a future quarter
or year may again fail to meet market expectations. This could result in a
decline in our stock price.

     Beginning late in the fourth quarter of 2000 and continuing past the end of
2001, we saw a general economic downturn in the U.S. economy and, more recently,
the worldwide economy. The events of September 11, 2001 and their aftermath have
exacerbated this downturn. These factors have affected the demand for our
products and services. We do not know how long this economic downturn will last
or how severe it will become. We also cannot predict the extent of the effect of
the economic downturn in the United States on economies in other countries and
geographic regions in which we conduct business. To the extent that this
downturn continues or spreads to other geographic regions, the Internet security
industry and demand for our products and services are likely to be adversely
affected and could result in a decline in our stock price.

     We base our spending levels for product development, sales and marketing
and other operating expenses largely on our expected future revenues. Because
our expenses are largely fixed for a particular quarter or year, we may be
unable to adjust our spending in time to compensate for any unexpected quarterly
or annual shortfall in revenues. A failure to so adjust our spending in time
also could cause operating results to fall below the expectations of securities
analysts and investors, resulting in a decline in our stock price.

In attempting to integrate the business and technology of RapidStream and any
future acquisition, we will incur significant costs that may not be outweighed
by any benefits of the acquisition.

     We expect to incur costs and commit significant management time integrating
the operations, technology, products, customers, suppliers and personnel of
RapidStream. As part of our business strategy, we may acquire other companies,
products or technologies, and these acquisitions may also result in substantial
costs. The costs of the RapidStream acquisition and any future acquisitions may
include costs for:

         .        integration of operations, including combining teams and
                  processes in various functional areas;

         .        reorganization or closure of operations and facilities;

         .        integration of new technology into our products;

         .        fees and expenses of professionals involved in completing the
                  integration process; and

                                      -27-

<PAGE>

         .        potential existing liabilities of RapidStream or any future
                  acquisition.

     Successful integration of the operations, technology, products, customers,
suppliers and personnel of RapidStream or any future acquisition will place a
significant burden on our management and internal resources. The diversion of
the attention of our management and any difficulties encountered in the
transition and integration process could disrupt our business and have an
adverse effect on our business and operating results. In addition, as a result
of the RapidStream acquisition, we expect that our gross margins will
temporarily decrease slightly in the first few quarters after the acquisition is
completed as we sell the RapidStream inventory we acquire in the acquisition,
because this inventory will be valued at fair market value, which is
significantly higher than RapidStream's cost for the inventory. If our gross
margins fall below the expectations of securities analysts and investors, the
price of our common stock may decline.

If we do not successfully integrate the business, technology and operations of
RapidStream and any future acquisition, our business and our ability to achieve
profitability will be adversely affected.

     We plan to integrate the RapidStream technology with our products. We may
be unable to successfully integrate RapidStream's ASIC-based technology into our
products in a timely and efficient manner. Even if we are successful in
integrating RapidStream's technology with our own, our sales force, consultants
and development staff may not effectively adapt to the new product line and the
new product line may not achieve market acceptance.

     Although we will strive to maintain RapidStream's relationships with
customers and suppliers, including our competitor Check Point Software
Technologies, Ltd., as we integrate RapidStream's customers, suppliers,
operations and personnel, we may be unable to do so and, as a result, we may not
realize the benefits of these relationships and may incur significant costs in
establishing new relationships. Integration of RapidStream's personnel may be
difficult and unpredictable because of differences between corporate cultures
and different opinions on strategic plans, personnel and other decisions.

     If we cannot successfully integrate RapidStream's technology, products,
operations and personnel and maintain its relationships with third-party
customers and suppliers, including Check Point, we may not realize any benefit
from the acquisition, notwithstanding our significant expenditure of time and
resources. As part of our business strategy, we may acquire other companies,
products or technologies. These acquisitions entail numerous operational and
financial risks and difficulties, including those described above with respect
to the RapidStream acquisition.

Because many potential customers do not fully understand or remain unaware of
the need for comprehensive Internet security or may perceive it as costly and
difficult to implement, our products and services may not achieve market
acceptance.

     We believe that many potential customers, particularly SMEs, do not fully
understand or are not aware of the need for comprehensive Internet security
products and services, particularly those products designed for server content
and application security. Historically, only enterprises having substantial
resources have developed or purchased comprehensive Internet security solutions.
Also, there is a perception that comprehensive Internet security is costly and
difficult to implement. We will therefore not succeed unless the market
understands the need for comprehensive Internet security and we can convince our
potential customers of our ability to provide this security in a cost-effective
and administratively feasible manner. Although we have spent, and will continue
to spend, considerable resources educating potential customers about the need
for comprehensive Internet security and the benefits of our products and
services, our efforts may be unsuccessful.

If potential customers do not accept our Firebox and ServerLock products and the
related LiveSecurity Service, our business will not succeed.

     We currently expect all future revenues to be generated through sales of
our Firebox and ServerLock products and the related LiveSecurity Service,
including subscription fees, and we cannot succeed if the market does not accept
these products and services. Our success depends on our ability and the ability
of our distribution network, which includes distributors, VARs and Internet
service providers and other managed service providers, to obtain and retain
customers. Some of our Firebox products, particularly those based on the
newly-acquired RapidStream technology, the LiveSecurity Service and all of our
ServerLock products, however, are relatively new and unproven. The Firebox
products based on the RapidStream technology were launched in May of 2002, the
broadcast portion of

                                      -28-

<PAGE>

our LiveSecurity solution has been available only since February 1999 and our
ServerLock products were launched under the WatchGuard brand only in February
2001. The Firebox products based on the RapidStream technology are also directed
at a new class of customer for us, one that requires a high performance security
solution with enterprise-level networking functionality and VPN scalability, and
we may be unsuccessful in marketing and selling to this class of customer. To
receive our LiveSecurity Service, enterprises will also be required to pay an
annual subscription fee, either to us or, if they obtain the LiveSecurity
Service through one of our channel customers, to the channel partner. We are not
aware of any other Internet security product that allows enterprises to keep
their security solution current by receiving software updates and comprehensive
security information over the Internet. Enterprises may be unwilling to pay a
subscription fee to keep their Internet security up to date and to receive
Internet security-related information. Because our LiveSecurity Service is
relatively new, we cannot accurately predict the rate at which our customers
will renew their annual subscriptions. In addition, most businesses implementing
security services have traditionally managed their own Internet security rather
than using the services of third-party service providers. As a result, our
products and services and the outsourcing of Internet security to third parties
may not achieve significant market acceptance.

If we are unable to compete successfully in the highly competitive market for
Internet security products and services, our business will fail.

     The market for Internet security products is intensely competitive and we
expect competition to intensify in the future, particularly with our expansion
into the larger enterprise market with the products based on the RapidStream
technology. An increase in competitive pressures in our market or our failure to
compete effectively may result in pricing reductions, reduced gross margins and
loss of market share. Currently, the primary competitors in our industry include
Check Point Software Technologies Ltd., Cisco Systems, Inc., NetScreen
Technologies, Inc., Nokia Corporation, SonicWALL, Inc. and Symantec Corporation.
Other competitors offering security products include hardware and software
vendors such as Lucent Technologies, Inc. and Network Associates, Inc.,
operating system vendors such as Microsoft Corporation, Novell, Inc. and Sun
Microsystems, Inc., and a number of smaller companies. Many of our competitors
have longer operating histories, greater name recognition, larger customer bases
and significantly greater financial, technical, marketing and other resources
than we do. In addition, our current and potential competitors may establish
cooperative relationships among themselves or with third parties that may
further enhance their resources. As a result, they may be able to adapt more
quickly to new technologies and customer needs, devote greater resources to the
promotion or sale of their products and services, initiate or withstand
substantial price competition, take advantage of acquisition or other
opportunities more readily or develop and expand their product and service
offerings more quickly. In addition, our competitors may bundle products
competitive with ours with other products that they may sell to our current or
potential customers. These customers may accept these bundled products rather
than separately purchasing our products.

Seasonality and concentration of revenues at the end of the quarter could cause
our revenues to fall below the expectations of securities analysts and
investors, resulting in a decline in our stock price.

     The growth rate of our domestic and international sales has been and may
continue to be lower in the summer months, when businesses often defer
purchasing decisions. Also, as a result of customer buying patterns and the
efforts of our sales force to meet or exceed quarterly and year-end quotas,
historically we have received a substantial portion of a quarter's sales orders
and earned a substantial portion of a quarter's revenues during its last month
and, more recently, in the latter half of the last month. If expected revenues
at the end of any quarter are delayed, our revenues for that quarter could fall
below the expectations of securities analysts and investors, resulting in a
decline in our stock price.

If our third-party channel customers fail to perform, our ability to sell our
products and services will be limited.

     We sell most of our products and services through our distribution network,
and we expect our success to continue to depend in large part on the performance
of this network. Our channel customers have the ability to sell products and
services that are competitive with ours, to devote more resources to those
competitive products or to cease selling our products and services altogether.
Two channel customers, Ingram Micro and Tech Data, together accounted for 23% of
our revenues for the three months ended March 31, 2001 and 2002. The loss of one
of these distributors, a reduction in their sales, a reduction in our share of
their sales of Internet security products, or a loss or

                                      -29-

<PAGE>

reduction in sales involving one or more other channel customers, particularly
if the reduction results in increased sales of competitive products, could harm
our business. In addition, we are in the process of consolidating our channel by
reducing the number of channel customers with whom we have a direct
contract while expanding our programs for our indirect partners to improve
overall performance and efficiencies. If this consolidation causes disruption,
we could experience a loss or reduction in sales involving one or more of our
channel customers.

Product returns or retroactive price adjustments could exceed our allowances,
which could adversely affect our operating results.

     We provide some of our channel customers with product return rights for
stock rotation and price protection rights for their inventories, which they may
exercise if we lower our prices for those products. We also provide promotional
rebates to some of our channel customers. We may experience significant returns,
price adjustments and rebate costs for which we may not have adequate
allowances. The short life cycles of our products and the difficulty of
predicting future sales increase the risk that new product introductions or
price reductions by us or our competitors could result in significant product
returns or price adjustments. When we introduced the Firebox II, and then later
the Firebox III, security appliances, we experienced an increase in returns of
previous products and product versions. Provisions for returns and allowances
were $1.1 million in 1999, $1.9 million in 2000 and $6.9 million in 2001, or 5%,
3% and 10% of total revenues before returns and allowances. The provision for
returns and allowances was $1.3 million, or 7% of total revenues before returns
and allowances, for the three months ended March 31, 2001 and $1.1 million, or
7% of total revenues before returns and allowances, for the three months ended
March 31, 2002. We decreased the sales reserve during the three months ended
March 31, 2002, reflecting the decreased potential for returns and pricing
adjustments associated with new products and promotional rebates introduced
early in 2001. While we review and adjust our provision for returns and
allowances in order to properly reflect the potential for promotional rebate
costs, increased returns and pricing adjustments associated with new products
introduced during 2001 and products we expect to introduce in 2002, including
new products resulting from our acquisition of RapidStream, the provision may
still be inadequate.

We may be unable to adequately expand our operational systems to accommodate
growth, which could harm our ability to deliver our products and services.

     Our operational systems have not been tested at the customer volumes that
may be required in the future. We may encounter performance difficulties when
operating with a substantially greater number of customers. These performance
difficulties could harm our ability to deliver our products and services. An
inability to add software and hardware or to develop and upgrade existing
technology or operational systems to handle increased traffic may cause
unanticipated system disruptions, slower response times and poor customer
service, including problems filling customer orders.

Rapid changes in technology and industry standards could render our products and
services unmarketable or obsolete, and we may be unable to introduce new
products and services timely and successfully.

     To succeed, we must continually change and improve our products in response
to rapid technological developments and changes in operating systems, Internet
access and communications, application and networking software, computer and
communications hardware, programming tools, computer language technology and
hacker techniques. We may be unable to successfully and timely develop these new
products and services or achieve and maintain market acceptance. The development
of new, technologically advanced products and services is a complex and
uncertain process that requires great innovation and the ability to anticipate
technological and market trends. Because Internet security technology is
complex, it can require long development and testing periods.

     Releasing new products and services prematurely may result in quality
problems, and releasing them late may result in loss of customer confidence and
market share. In the past, we have on occasion experienced delays in the
scheduled introduction of new and enhanced products and services, and we may
experience delays in the future. When we do introduce new or enhanced products
and services, we may be unable to manage the transition from the older products
and services to minimize disruption in customer ordering patterns, avoid
excessive inventories of older products and deliver enough new products and
services to meet customer demand.

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<PAGE>

We may be required to defend lawsuits or pay damages in connection with the
alleged or actual failure of our products and services.

     Because our products and services provide and monitor Internet security and
may protect valuable information, we may face claims for product liability, tort
or breach of warranty relating to our products and services. Anyone who
circumvents our security measures could misappropriate the confidential
information or other property of end-users using our products and services or
interrupt their operations. If that happens, affected end-users or channel
customers may sue us. In addition, we may face liability for breaches caused by
faulty installation and implementation of our products by end-users or channel
customers. Although we attempt to reduce the risk of losses from claims through
contractual warranty disclaimers and liability limitations, these provisions may
be unenforceable. Some courts, for example, have found contractual limitations
of liability in standard software licenses to be unenforceable because the
licensee does not sign the license. Defending a suit, regardless of its merit,
could be costly and could divert management attention. Although we currently
maintain business liability insurance, this coverage may be inadequate or may be
unavailable in the future on acceptable terms, if at all.

A breach of security could harm public perception of our products and services.

     We will not succeed unless the marketplace is confident that we provide
effective Internet security protection. Even networks protected by our software
products may be vulnerable to electronic break-ins and computer viruses. If an
actual or perceived breach of Internet security occurs in an end-user's systems,
regardless of whether the breach is attributable to us, the market perception of
the efficacy of our products and services could be harmed. This could cause us
or our channel customers to lose current and potential customers or cause us to
lose potential channel customers. Because the techniques used by computer
hackers to access or sabotage networks change frequently and generally are not
recognized until launched against a target, we may be unable to anticipate these
techniques.

If we are unable to prevent attacks on our internal network system by computer
hackers, public perception of our products and services will be harmed.

     Because we provide Internet security, we are a significant target of
computer hackers. We have experienced attacks by computer hackers in the past
and expect attacks to continue. If attacks on our internal network system are
successful, public perception of our products and services will be harmed.

We may be unable to adequately protect our operational systems from damage,
failure or interruption, which could harm our reputation and our ability to
attract and retain customers.

     Our operations, customer service, reputation and ability to attract and
retain customers depend on the uninterrupted operation of our operational
systems. Although we utilize limited off-site backup facilities and take other
precautions to prevent damage, failure or interruption of our systems, our
precautions may be inadequate. Any damage, failure or interruption of our
computer or communications systems could lead to service interruptions, delays,
loss of data and inability to accept and fill customer orders and provide
customers with our LiveSecurity Service.

We may be unable to deliver our products and services if we cannot continue to
license third-party technology that is important for the functionality of our
products.

     Our success will depend in part on our continued ability to license
technology that is important for the functionality of our products. A
significant interruption in the supply of a third-party technology could delay
our development and sales until we can find, license and integrate equivalent
technology. This could damage our brand and result in loss of current and
potential customers. Although we believe that we could find other sources for
the technology we license, alternative technologies may be unavailable on
acceptable terms, if at all. We depend on our third-party licensors to deliver
reliable, high-quality products, develop new products on a timely and
cost-effective basis and respond to evolving technology and changes in industry
standards. We also depend on the continued compatibility of our third-party
software with future versions of our products.

                                      -31-

<PAGE>

We may be unable to deliver our products and services if component manufacturers
fail to supply component parts with acceptable quantity, quality and cost.

     We obtain the component parts for our hardware from a variety of
manufacturers. While our component vendors have produced parts for us in
acceptable quantities and with acceptable quality and cost in the past, they may
be unable to do so in the future. Companies in the electronics industry
regularly experience lower-than-required component allocations, and the industry
is subject to frequent component shortfalls. Although we believe that we could
find additional or replacement sources for our hardware components, our
operations could be disrupted if we have to add or switch to a replacement
vendor or if our component supply is interrupted for an extended period. This
could result in loss of customer orders and revenue.

Governmental controls over the export or import of encryption technology could
cause us to lose sales.

     Any additional governmental regulation of imports or exports or failure to
obtain required export approval of our encryption technologies could adversely
affect our international and domestic sales. The United States and various other
countries have imposed controls, export license requirements and restrictions on
the import or export of some technologies, especially encryption technology. In
addition, from time to time governmental agencies have proposed additional
regulation of encryption technology, such as requiring the escrow and
governmental recovery of private encryption keys. Additional regulation of
encryption technology could delay or prevent the acceptance and use of
encryption products and public networks for secure communications. This, in
turn, could result in decreased demand for our products and services. In
addition, some foreign competitors are subject to less stringent controls on
exporting their encryption technologies. As a result, they may be able to
compete more effectively than we can in the U.S. and international Internet
security markets.

We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may misappropriate or infringe on our trade secrets, copyrights, trademarks,
service marks and similar proprietary rights. We face additional risk when
conducting business in countries that have poorly developed or inadequately
enforced intellectual property laws. While we are unable to determine the extent
to which piracy of our software products exists, we expect piracy to be a
continuing concern, particularly in international markets and as a result of the
growing use of the Internet.

     If we fail to obtain and maintain patent protection for our technology, we
may be unable to compete effectively. We have 12 patents pending, but our patent
applications may not result in issued patents. Even if we secure a patent, the
patent may not provide meaningful protection. In addition, we rely on unpatented
proprietary technology. Because this proprietary technology does not have patent
protection, we may be unable to meaningfully protect this technology from
unauthorized use or misappropriation by a third party. In addition, our
competitors may independently develop similar or superior technologies or
duplicate any unpatented technologies that we have developed, which could
significantly reduce the value of our proprietary technology or threaten our
market position.

Intellectual property claims and litigation could subject us to significant
liability for damages and invalidation of our proprietary rights.

     In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant time
and attention of our key management and technical personnel. Litigation could
also force us to

         .        stop or delay selling, incorporating or using products that
                  incorporate the challenged intellectual property;

         .        pay damages;

         .        enter into licensing or royalty agreements, which may be
                  unavailable on acceptable terms; or

                                      -32-

<PAGE>

         .        redesign products or services that incorporate infringing
                  technology.

     Although we have not been sued for intellectual property infringement, we
may face infringement claims from third parties in the future. The software
industry has seen frequent litigation over intellectual property rights, and we
expect that participants in the Internet security industry will be increasingly
subject to infringement claims as the number of products, services and
competitors grows and functionality of products and services overlaps.

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

     Our products and services may contain undetected errors or defects,
especially when first released. Despite extensive testing, some errors are
discovered only after a product has been installed and used by customers. Any
errors discovered after commercial release could result in loss of revenues or
claims against us or our channel customers.

If we do not retain our key employees, our ability to execute our business
strategy will be impaired.

     Our future success will depend largely on the efforts and abilities of our
senior management and our key development, technical, operations, information
systems, customer support and sales and marketing personnel, and on our ability
to retain them. These employees are not obligated to continue their employment
with us and may leave us at any time.

If we do not expand our international operations and successfully overcome the
risks inherent in international business activities, the growth of our business
will be limited.

     Our ability to grow will depend in part on the expansion of our
international sales and operations, which are expected to continue to account
for a significant portion of our revenues. Sales to customers outside of the
United States accounted for approximately 50% of our revenues in 1999, 55% in
2000, 56% in 2001 and 64% in the three months ended March 31, 2002. The failure
of our channel customers to sell our products internationally would limit our
ability to increase our revenues. In addition, our international sales are
subject to the risks inherent in international business activities, including

         .        cost of customizing products for foreign countries;

         .        export and import restrictions, such as those affecting
                  encryption commodities and software or those requiring local
                  content;

         .        difficulties in acquiring and authenticating customer
                  information;

         .        reduced protection of intellectual property rights and
                  increased liability exposure; and

         .        regional economic and political conditions.

     Our international sales currently are U.S. dollar-denominated. As a
result, an increase in the value of the U.S. dollar relative to foreign
currencies has made and may continue to make our products less competitive in
international markets.

We may need additional capital and our ability to secure additional funding is
uncertain.

     Our future revenues may be insufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital. We may seek additional funding through

         .        public or private equity financings, which could result in
                  significant dilution to stockholders;

         .        public or private debt financings; and

                                      -33-

<PAGE>

         .        capital lease transactions.

     We believe that existing cash and cash equivalent balances will be
sufficient to meet our capital required for at least the next 12 months. Our
capital requirements will depend on several factors, however, including

         .        the rate of market acceptance of our products and services;

         .        our ability to expand our customer base;

         .        the growth of our sales and marketing capabilities; and

         .        the cost of any acquisitions we may complete.

Financing may be unavailable to us when needed or on acceptable terms.

Our stock price is volatile.

     The trading price of our common stock could be subject to fluctuations for
a number of reasons, including

         .        actual or anticipated variations in quarterly or annual
                  operating results;

         .        changes in analysts' earnings projections or recommendations;

         .        failure to meet analysts' revenue or earnings projections;

         .        inability to successfully implement our business strategy;

         .        changes in business conditions affecting our customers, our
                  competitors and us; and

         .        changes in accounting standards that adversely affect our
                  revenues and earnings.

     In recent years, moreover, the stock market in general and the market for
Internet-related technology companies in particular have experienced extreme
price and volume fluctuations, often unrelated to the operating performance of
the affected companies. Our common stock has experienced, and is likely to
continue to experience, these fluctuations in price, regardless of our
performance.

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Interest Rate Risk

      We do not hold derivative financial instruments or derivative equity
securities in our investment portfolio. Our cash equivalents and debt securities
available for sale consist of high-quality securities, as specified in our
investment policy guidelines. Our policy limits the amount of credit exposure to
any one issue or issuer to a maximum of 20% of the total portfolio or $5 million
per issuer, with the exception of treasury securities and money market funds,
which are exempt from this size limitation. Our policy limits all investments to
those that mature in two years or less, and our investments have an average
maturity of one year or less. These securities are subject to interest-rate risk
and will decrease in value if interest rates increase. The fair value of our
investment portfolio or related income would not be significantly impacted by a
100-basis-point increase or decrease in interest rates, due primarily to the
short-term nature of most of our investment portfolio.

      Foreign Currency Risk

      All of our sales and the majority of our expenses are currently
denominated in U.S. dollars. As a result, we have not experienced significant
foreign exchange gains and losses. While we conducted some transactions in

                                      -34-

<PAGE>

foreign currencies during the first quarter of 2002 and expect to continue to do
so in the future, we do not anticipate that foreign exchange gains or losses
will be material to WatchGuard. Although we have not engaged in foreign currency
hedging to date, we may do so in the future.

                                      -35-

<PAGE>

                           PART II. OTHER INFORMATION

ITEM 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS

(d)      Use of Proceeds
         ---------------

         On February 15, 2000 our registration statement on Form S-1 for our
public offering, file number 333-95049, became effective. The offering
terminated as a result of all of the shares offered being sold. After accounting
for approximately $5.3 million in underwriting discounts and commissions and
$600,000 in other expenses, we received proceeds of approximately $90.4 million.

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits
         --------

         2.1      Agreement and Plan of Merger dated as of February 6, 2002,
                  among River Acquisition Corp., RapidStream, Inc., WatchGuard
                  Technologies, Inc. and, for purposes of Section 6.16 only,
                  certain management shareholders of RapidStream, Inc.
                  (incorporated by reference to Exhibit 2.1 to WatchGuard's
                  Annual Report on Form 10-K (file number 000-26819), filed
                  March 28, 2002).

         2.2      Amendment No. 1 to Agreement and Plan of Merger dated as of
                  March 1, 2002, by and among WatchGuard Technologies, Inc.,
                  River Acquisition Corp., RapidStream, Inc. and Wai San Loke,
                  as Shareholder Representative (incorporated by reference to
                  Exhibit 2.2 to WatchGuard's Current Report on Form 8-K (file
                  number 000-26819), filed April 12, 2002).

         3.1      Restated Certificate of Incorporation of WatchGuard
                  Technologies, Inc. (incorporated by reference to Exhibit 3.1
                  to WatchGuard's Registration Statement on Form S-1 (file
                  number 333-78813), filed July 30, 1999).

         3.2      Restated Bylaws of WatchGuard Technologies, Inc. (incorporated
                  by reference to Exhibit 3.2 to WatchGuard's Registration
                  Statement on Form S-1 (file number 333-78813), filed July 30,
                  1999).

         10.1     Offer letter to Gary J. Franza, dated as of July 3, 2001.

         10.2     Offer letter to Jean Nassar, dated as of November 3, 2001.

(b)      Reports on Form 8-K
         -------------------

         On February 15, 2002, we filed a current report on Form 8-K to report
         our planned acquisition of RapidStream, Inc.

                                      -36-

<PAGE>

                                   SIGNATURES

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

May 15, 2002
                                    WATCHGUARD TECHNOLOGIES, INC


                                      By:  /s/ Michael E. McConnell
                                           ------------------------
                                          Michael E. McConnell

                                          Senior Vice President, Chief Financial
                                           Officer and Treasurer
                                           (Principal Financial and Accounting
                                          Officer)

                                      -37-