##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





Form 10-K/ A


|  |  |                                                  
|- |  | -------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)    
|  |  | OF THE SECURITIES EXCHANGE ACT OF 1934           
| 
|  |  | For the fiscal year ended December 31, 2004      
|  |  | or                                               
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|  |  | OF THE SECURITIES EXCHANGE ACT OF 1934           
| 
|  |  | For the transition period
    from           to  

Commission file number: 000-27723





SonicWALL, Inc.


(Exact name of registrant as specified in its charter)


|                             |  |                              |  |                    
|---------------------------- |  | ---------------------------- |  | -------------------
|California                   |  | 7372                         |  | 77-0270079         
|(State or other jurisdiction |  | (Primary Standard Industrial |  | (I.R.S. Employer   
|of incorporation)            |  | Classification Code Number)  |  | Identification No.)

1143 Borregas Avenue


Sunnyvale, California 94089


(408) 745-9600


fax: (408) 745-9300


(Address, including zip code, and telephone number,


including area code, of registrants principal executive
offices)





Securities registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934:


|                    |  |                                     
|------------------- |  | ------------------------------------
|Title of Each Class |  | Name of Exchange on Which Registered
|                    |  |                                     
|None                |  | None                                

Securities registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934:


Common Stock (no par value)





þ o


o


þ o






DOCUMENTS INCORPORATED BY REFERENCE












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TABLE OF CONTENTS



|                                                |                                                                                               |  |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                         
|                                                | Item 1. Business                                                                             
|                                                | Item 2. Properties                                                                           
|                                                | Item 3. Legal Proceedings                                                                    
|                                                | Item 4. Submission Of Matters To A Vote Of Security Holders                                  
|PART II                                        
|                                                | Item 5. Market For Registrants Common Equity And Related Stockholder Matters                
|                                                | Item 5c. Stock Repurchase Program                                                            
|                                                | Item 6. Selected Consolidated Financial Data                                                 
|                                                | Item 7. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
|                                                | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|                                                | Item 8. Financial Statements And Supplementary Data                                          
|CONSOLIDATED BALANCE SHEETS                    
|CONSOLIDATED STATEMENTS OF OPERATIONS          
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|CONSOLIDATED STATEMENTS OF CASH FLOWS          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                                                | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                       
|                                                | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                | Item 11. Executive Compensation                                                              
|                                                | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                | Item 13. Certain Relationships and Related Transactions                                      
|                                                | Item 14. Principal Accountant Fees and Services                                              
|PART IV                                        
|                                                | Item 15. Exhibits and Financial Statement Schedules                                          
|SIGNATURES                                     
|VALUATION AND QUALIFYING ACCOUNTS              
|EXHIBIT INDEX                                  
|EXHIBIT 23.1                                   
|EXHIBIT 31.1                                   
|EXHIBIT 31.2                                   
|EXHIBIT 32.1                                   



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Explanatory Note to Form 10-K Amendment No. 1








| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | Part I, Item 1. Business                                                                                   
|
| |  | Part II, Item 6. Selected Financial Data.                                                                  
|
| |  | Part II, Item 7. Managements Discussion and
    Analysis of Financial Condition and Results of Operations.
|
| |  | Part II, Item 8. Financial Statements and
    Supplementary Data.                                          
|
| |  | Part II, Item 9A. Controls and Procedures.                                                                 
|
| |  | Part III, Item 15. Exhibits and Financial Statement
    Schedules and Reports on Form 8-K.                 



2



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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS









PART I







|        |         
|------- | --------
|Item 1. | Business

Overview






3



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Industry Background




| |                                        
| | ---------------------------------------
| | Growth of Internet Usage and Acceptance





| |                                                
| | -----------------------------------------------
| | Increasing Use of Broadband Access Technologies





| |                                
| | -------------------------------
| | Importance of Internet Security







| |                                                           
| | ----------------------------------------------------------
| | Acceptance of Firewall Solutions for Internet
    Security



4



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| |                                        
| | ---------------------------------------
| | Importance of Productivity and Mobility





| |                                                         
| | --------------------------------------------------------
| | The Advent of Secure Virtual Private Networks
    (VPNs)







| |                                                                              
| | -----------------------------------------------------------------------------
| | Need for Anti-Virus, Intrusion Prevention and Content
    Filtering Solutions



5



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| |                                             
| | --------------------------------------------
| | Use of SSL to Secure E-Commerce Transactions





The SonicWALL Solutions








6



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High-Performance, Scalable and Robust Access Security.
    The SonicWALL product line provides a comprehensive integrated
    security solution that includes firewall, VPN, anti-virus,
    intrusion prevention and content filtering. Our access security
    products protect private networks against Internet-based theft,
    destruction or modification of data, and can automatically
    notify customers if their network is under certain types of
    attack. SonicWALL has been awarded the internationally
    recognized International Computer Security Association
    (ICSA) Firewall Certification. Our VPN products
    enable affordable, secure communications among remote offices,
    mobile employees and business partners over the Internet. Our
    anti-virus services provide comprehensive virus protection with
    automatic updates and minimal administration. Our content
    filtering service enables customers such as businesses, schools,
    government agencies and libraries to restrict access to
    objectionable or inappropriate web sites.
|
| |  | High-Performance, Robust Transaction Security. The
    SonicWALL product line also includes SSL acceleration and
    offloading products which completely offload SSL processing,
    thereby increasing server performance. This increased server
    performance allows enterprises and service providers to
    accelerate e-commerce transactions. By accelerating and
    offloading the processing of secure e-commerce transactions, our
    SSL products allow web sites to handle significantly higher
    volumes of customer traffic.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Ease of Installation and Use. The SonicWALL product line
    delivers plug-and-play appliances designed for easy
    installation and use. Installation consists of connecting a
    SonicWALL device between the private network and the broadband
    Internet access device for our access security products and in
    front of the e-commerce web server for our transaction security
    products. SonicWALL products are easily configured and managed
    through a web browser-based interface or through our Global
    Management System. No reconfiguration of any personal computer
    application is required. Our access security products are
    pre-configured to interface with major Internet access
    technologies, including cable, DSL, Integrated Services Design
    Network (ISDN), Frame Relay and T-1 via Ethernet.
    Our transaction security products are compatible with major web
    server and e-commerce software products and are designed to
    operate in the most sophisticated and highest traffic network
    architectures.                  
|
| |  | Low Total Cost of Ownership. The SonicWALL product design
    minimizes the purchase, installation and maintenance costs of
    Internet security. The suggested retail prices of our access
    security products begin at $395 and scale up with products and
    features that span a wide array of customer requirements. Our
    affordable, easy-to-manage Internet security appliances also
    enable customers to avoid employee expenses that may otherwise
    be required to implement and maintain an effective Internet
    security solution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Reliability. The SonicWALL product design maximizes
    reliability and uptime. Our products use an embedded single
    purpose operating system and a solid state hardware design. Some
    competitive product offerings consist of software installed on
    general-purpose host computers that use the Windows NT or
    UNIX operating systems. General-purpose operating systems are
    designed to run multiple applications, creating an environment
    less dedicated to security. In such circumstances we believe the
    probability of random system crashes may increase. Moreover,
    since general-purpose computers contain many moving parts, such
    as hard disk drives, floppy drives, fans and switching power
    supplies, they are more prone to hardware failures over time.
    Such software and hardware failures may compromise Internet
    security.                                                                                                                                                                                                        

7



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Strategy








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Global Growth. We plan to focus our investment in those
    geographical areas that can return the growth rates consistent
    with a global high-tech organization. Part of the global growth
    initiative also includes taking advantage of supply chain
    improvements wherever possible. We believe that this type of
    alignment of our resources will strengthen our global position.                                                                                                                                                                                                                                                                                
|
| |  | Continue to Develop New Products. We intend to use our
    product design and development expertise to produce outstanding
    solutions that deliver value to our end-users.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Continuous Cost Reduction. We anticipate that the
    hardware appliance business will continue to operate under the
    same economic pressures common to the IT industry generally. The
    constraints include constant pressure for improved
    price-performance. We intend to be vigorous in our pursuit to
    lower costs in all aspects of our business. Supply chain
    improvements and overall continual business process improvement
    are key components of this initiative. We believe that the
    associated cost reductions will strengthen our market position
    and assist us in penetrating new markets.                                              
|
| |  | Strengthen Our Indirect Channel. Our target markets are
    generally served by a two-tier distribution channel. We believe
    we have successfully penetrated these markets with large scale
    distributors at the hub of our model and over 10,000 value-added
    resellers and systems integrators forming a distribution web
    that covers over 50 countries. We intend to continue to
    implement programs designed to enhance our competitive position
    through distributors and value added resellers.                                                                                                                                                         
|
| |  | Increase Services and Software Revenue. We intend to
    continue to develop new service and licensed software offerings
    to generate additional revenue from our installed base and
    provide additional functionality ancillary to our product sales.
    We currently offer integrated gateway anti-virus, client
    anti-virus, intrusion prevention and content filtering
    subscription services. We also offer fee-based customer support
    services and training to our customers. We have dedicated sales
    and marketing personnel and programs that focus on selling these
    services, as well as add-on products to our existing base of
    customers.

Products and Services






Access Security Features




8



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Deep Packet Inspection Firewall Security.


Internet Protocol Address Management.


Web Browser-Based Management.


Logging and Reporting.


Internet Gateway Appliances






SonicWALL TZ 150.


SonicWALL TZ 170 and TZ 170 Wireless.


SonicWALL TZ 170 SP and TZ 170 SP Wireless.


9



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SonicWALL PRO 1260.


SonicWALL PRO 2040.


SonicWALL PRO 3060.


SonicWALL PRO 4060.


SonicWALL PRO 5060.


SonicWALL Content Security Manager.


Security Application and Services




SonicWALL Global VPN Client.


SonicWALL Content Filtering Service.


SonicWALL Anti-Virus.


SonicWALL Gateway Anti-Virus and Intrusion Prevention.


10



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Transaction Security Products




SonicWALL SSL Appliances.


Global Security Management Applications






Customer Service and Technical Support






11



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Customers




Top Domestic and International Distributors




| |   |                           
| | - | --------------------------
| |  | Ingram Micro              
|
| |  | Tech Data                 
|
| |  | Securematics, Inc.        
|
| |  | Alternative Technology    
|
| |  | Azlan Group (UK)          
|
| |  | Ideal Hardware (UK)       
|
| |  | Tek Data (UK)             
|
| |  | Canon Solutions (Japan)   
|
| |  | Marubeni Solutions (Japan)
|
| |  | Risc Technology (France)  

End Users




Sales and Marketing








12



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Domestic Channel.




International Channel.




Original Equipment Manufacturer Channel.


Technology






| |                    
| | -------------------
| | Appliance Platforms









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deep Packet Inspection Firewall. The core technology is
    the deep packet inspection firewall software, a widely
    recognized method of implementing an Internet firewall. This
    software examines all layers of the packet (from the physical
    layer up to application layer) and determines whether to accept
    or reject the requested communication based on information
    derived from previous communications and the applications in
    use. Deep packet inspection dynamically adjusts based on the
    changing state of the communication running across the firewall
    and is invisible to users on the protected network.
|
| |  | IP Address Management. We have developed tools to manage
    the complexity of IP addressing. Network Access Transmission
    (NAT) allows networks to share a small number of
    valid public IP addresses with an equal or larger number of
    client computers on the LAN. Our DHCP Client and Server tools
    allow both the firewall and the client computers behind it to
    obtain their respective IP addresses dynamically from a server
    and thereby eliminate the need for manual configuration.                                                                                                                                  

13



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Web Browser-Based Management Interface. We believe our
    products have an intuitive and easy-to-use web-based management
    interface for rapid installation, configuration, and
    maintenance, without the need for a dedicated information
    technology staff to install and maintain the solution. This
    interface can be easily accessed from any web browser on the
    internal, private network. This interface can also be accessed
    remotely in a secure manner using the virtual private networking
    feature described above.
|
| |  | SonicWALL Global Management System. Our global management
    system, SonicWALL GMS, is an enterprise software application
    that is designed to enable service providers and distributed
    enterprises to manage all of their SonicWALL appliances from a
    central location. SonicWALL GMS is available to use in
    Windows NT, Windows 2000 and Sun Solaris operating
    environments. SonicWALL GMS is also compatible with leading
    relational database management systems such as Oracle and
    Microsoft SQL Server.               



| |                          
| | -------------------------
| | Applications and Services





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Content Filtering. Our Internet content filter blocks
    objectionable content using a list of prohibited URLs and
    keywords as well as cookies, Java and ActiveX scripts.
    Subscribers to this service enable their SonicWALL appliance to
    automatically download an updated URL list weekly to keep pace
    with the dynamic nature of Internet content.                                                                                                                                                       
|
| |  | Anti-Virus. Our anti-virus subscription service is
    intended to provide anti-virus protection throughout a business
    and across a distributed network. This SonicWALL service
    integrates with our security appliances to deploy and maintain
    anti-virus software for each user on the network 
    without the need for desktop-by-desktop installation,
    configuration and maintenance. Automatic anti-virus updates are
    available for all network nodes to protect them from new virus
    outbreaks.



| |                              
| | -----------------------------
| | Transaction Security Products





| |                         
| | ------------------------
| | Research and Development





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Competition










| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | enterprise firewall software vendors such as Check Point,
    Microsoft and Symantec;                     
|
| |  | network equipment manufacturers such as Cisco Systems, Lucent
    Technologies, Nortel Networks and Nokia;
|
| |  | security appliance and/or PCI card suppliers such as WatchGuard
    Technologies and Juniper Networks.    

Intellectual Property




U.S. Government Export Regulation Compliance




15



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Manufacturing






Information about Segments and Geographic Areas




Employees




Where You Can Find More Information


www.sonicwall.com




16



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RISK FACTORS


You should carefully review the following risks associated
with owning our common stock. Our business, operating results or
financial condition could be materially adversely affected by
any of the following risks. You should also refer to the other
information set forth in this report and incorporated by
reference herein, including our financial statements and the
related notes. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements.




| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Difficulty predicting our future operating results or
    profitability due to volatility in general economic conditions
    and the Internet security market may result in a misallocation
    in spending, and a shortfall in revenues which would harm our
    operating results.





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





| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on two major distributors for a significant
    amount of our revenue, and if they or others cancel or delay
    purchase orders, our revenue may decline and the price of our
    stock may fall.



17



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| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to compete successfully in the highly
    competitive market for Internet security products and services,
    our business could be adversely affected.







| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | The selling prices of our solution-based product, software
    and services offerings may decrease, which may reduce our gross
    margins.





| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We offer retroactive price protection to our major
    distributors and if we fail to balance their inventory with end
    user demand for our products, our allowance for price protection
    may be inadequate. This could adversely affect our results of
    operations.



18



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| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent on international sales for a substantial
    amount of our revenue. We face the risk of international
    business and associated currency fluctuations, which might
    adversely affect our operating results.





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Delays in deliveries from our suppliers could cause our
    revenue to decline and adversely affect our results of
    operations.





| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on partners to provide us with the anti-virus
    and content filtering software, and if they experience delays in
    product updates or provide us with products of substandard
    quality, our revenue may decline and our products are services
    may become obsolete.



19



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| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely primarily on contract manufacturers for our
    product manufacturing and assembly, and if these operations are
    disrupted for any reason, we may not be able to ship our
    products.





| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Net Product Sales may be adversely affected by various
    factors which would adversely affect our revenue.





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Changes to our senior management may have an adverse
    effect on our ability to execute our business strategy.





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | We must be able to hire and retain sufficient qualified
    employees or our business will be adversely affected.



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| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We may experience competition from products developed by
    companies with whom we currently have OEM relationships.





| |                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenue growth is dependent on the continued growth of
    broadband access services and if such services are not widely
    adopted or we are unable to address the issues associated with
    the development of such services, our sales will be adversely
    affected.





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





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Potential intellectual property claims and litigation
    could subject us to significant liability for damages and
    invalidation of our proprietary rights.



21



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| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | 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                 
|
| |  | redesign products or services that incorporate infringing
    technology.                                        





| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We have been named as defendant in litigation matters that
    could subject us to liability for significant damages.







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





| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | A security breach of our internal systems or those of our
    customers could harm our business.



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





| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Product errors or defects could result in loss of revenue,
    delayed market acceptance and claims against us.





| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Potential future acquisitions could be difficult to
    integrate, disrupt our business, dilute shareholder value and
    adversely affect our operating results.







| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Industry consolidation may lead to increased competition
    and may harm our operating results.





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | If we are unable to meet our future capital requirements,
    our business will be harmed.



23



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| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Governmental regulations affecting Internet security could
    affect our revenue.







| |                                 
| | --------------------------------
| | Our stock price may be volatile.





| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general economic conditions and the effect that such conditions
    have upon customers purchasing decisions;                                                                
|
| |  | variations in quarterly operating results;                                                                                                                                    
|
| |  | changes in financial estimates by securities analysts;                                                                                                                        
|
| |  | changes in market valuations of technology and Internet
    infrastructure companies;                                                                                         
|
| |  | announcements by us of significant contracts, acquisitions,
    strategic partnerships, joint ventures or capital commitments;                                                
|
| |  | loss of a major client or failure to complete significant
    license transactions;                                                                                           
|
| |  | additions or departures of key personnel;                                                                                                                                     
|
| |  | our ability to remediate material weaknesses and/or significant
    deficiencies, if any, in internal controls over financial
    reporting in an effective and timely manner;
|
| |  | receipt of an adverse or qualified opinion from our independent
    auditors regarding our internal controls over financial
    reporting;                                    
|
| |  | sales of common stock in the future; and                                                                                                                                      
|
| |  | fluctuations in stock market price and volume, which are
    particularly common among highly volatile securities of
    Internet-related companies.                          

24



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







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





| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our estimates or judgments relating to our critical
    accounting policies are based on assumptions that change or
    prove to be incorrect, our operating results could fall below
    expectations of securities analysts and investors, resulting in
    a decline in our stock price.





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| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to maintain an effective system of internal
    controls, we may not be able to accurately report our financial
    results. As a result, current and potential stockholders could
    lose confidence in our financial reporting, which would harm our
    business and the trading price of our stock.





| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot be certain that the remediation efforts
    concerning our internal control over financial reporting will be
    effective or sufficient.





| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot be certain that our internal controls over
    financial reporting will be effective or sufficient when tested
    by increased scale of growth or the impact of
    acquisitions.





| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | When we are required to take a compensation expense for
    the value of stock options or other compensatory awards that we
    issue to our employees, our earnings will be harmed.

Share-


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based Payment




| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is especially subject to the risks of
    earthquakes, floods and other natural catastrophic events, and
    to interruption by manmade problems such as computer viruses or
    terrorism.





| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | We face risks associated with changes in
    telecommunications regulation and tariffs.



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| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Due to the global nature of our business, economic or
    social conditions or changes in a particular country or region
    could adversely affect our sales or increase our costs and
    expenses, which would have a material adverse impact on our
    financial condition.








|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





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|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission Of Matters To A Vote Of Security Holders



29



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PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market For Registrants Common Equity And Related
    Stockholder Matters



|            |                |      |   |       |     |  |   |      | 
|----------- | -------------- | ---- | - | ----- | --- |  | - | ---- | 
|            |                | High |   |       | Low | 
|            |                |      |   |       |     | 
|Fiscal 2003 |                |      |   |       |     |  |   |     
|            | First Quarter  |      | $ | 4.54  |     |  | $ | 3.05 | 
|            | Second Quarter |      | $ | 5.81  |     |  | $ | 3.30 | 
|            | Third Quarter  |      | $ | 7.21  |     |  | $ | 4.84 | 
|            | Fourth Quarter |      | $ | 8.33  |     |  | $ | 6.09 | 
|Fiscal 2004 |                |      |   |       |     |  |   |     
|            | First Quarter  |      | $ | 10.05 |     |  | $ | 7.71 | 
|            | Second Quarter |      | $ | 9.59  |     |  | $ | 6.71 | 
|            | Third Quarter  |      | $ | 8.35  |     |  | $ | 5.26 | 
|            | Fourth Quarter |      | $ | 7.25  |     |  | $ | 5.00 | 










|         |                         
|-------- | ------------------------
|Item 5c. | Stock Repurchase Program



|                            |  |          |      |  |           |  |       |        |  |       |               |   |  |   |         |  
|--------------------------- |  | -------- | ---- |  | --------- |  | ----- | ------ |  | ----- | ------------- | - |  | - | ------- | -
|                            |  | Average  |      |  | Shares of |  |       |        |  | Total |              
|                            |  | Purchase |      |  | Common    |  |       | Common |  |       | Shareholders |  
|                            |  | Price    |      |  | Stock     |  |       | Stock  |  |       | Equity        |  
|                            |  |          |      |  |           |  |       |        |  |       |               |  
|Repurchases of common stock |  | $        | 6.08 |  |           |  | 3,183 |        |  | $     | (19,356       | ) |  | $ | (19,356 | )



30



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|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data



|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |         |        |         |   |        |        |        | 
|------------------------------------------------------------ | ----------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------- | - | ------- | ------ | ------ | - | -------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | 
|                                                             |                                                             | Year Ended December 31,               |       
|                                                             |                                                             |                                       |       
|                                                             |                                                             | 2004                                  |        |        | 2003    |   |         | 2002   |        |   | 2001     |        |         | 2000 |        
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|                                                             |                                                             | (In thousands, except per share data) |       
|                                                             |                                                             | As restated                           |        |        |        
|Statements of Operations Data:                               |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |         |        |         |   |        |       
|Revenue:                                                     |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |         |        |         |   |        |       
|                                                             | Product                                                     |                                       | $      | 82,994 |         |   | $       | 65,931 |        |   | $        | 78,184 |         |      | $       | 86,777 |         |   | $      | 60,101 |       
|                                                             | License and service                                         |                                       |        | 42,655 |         |   |         | 28,470 |        |   |          | 25,035 |         |      |         | 25,210 |         |   |        | 9,347  |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|                                                             |                                                             | Total revenue                         |        |        | 125,649 |   |         |        | 94,401 |   |          |        | 103,219 |      |         |        | 111,987 |   |        |        | 69,448 | 
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Cost of revenue:                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |         |        |         |   |        |       
|                                                             | Product                                                     |                                       |        | 30,118 |         |   |         | 27,906 |        |   |          | 25,303 |         |      |         | 25,244 |         |   |        | 17,310 |       
|                                                             | License and service                                         |                                       |        | 7,002  |         |   |         | 5,617  |        |   |          | 4,659  |         |      |         | 1,431  |         |   |        | 262    |       
|                                                             | Amortization of purchased technology                        |                                       |        | 4,543  |         |   |         | 4,543  |        |   |          | 4,543  |         |      |         | 4,399  |         |   |        | 546    |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|                                                             |                                                             | Total cost of revenue                 |        |        | 41,663  |   |         |        | 38,066 |   |          |        | 34,505  |      |         |        | 31,074  |   |        |        | 18,118 | 
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Gross margin                                                 |                                                             |                                       | 83,986 |        |         |   | 56,335  |        |        |   | 68,714   |        |         |      | 80,913  |        |         |   | 51,330 |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Operating expenses:                                          |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |         |        |         |   |        |       
|                                                             | Research and development                                    |                                       |        | 23,337 |         |   |         | 19,864 |        |   |          | 18,900 |         |      |         | 21,327 |         |   |        | 11,888 |       
|                                                             | Sales and marketing                                         |                                       |        | 47,353 |         |   |         | 40,139 |        |   |          | 42,937 |         |      |         | 31,988 |         |   |        | 15,133 |       
|                                                             | General and administrative                                  |                                       |        | 14,365 |         |   |         | 11,893 |        |   |          | 11,200 |         |      |         | 9,571  |         |   |        | 5,745  |       
|                                                             | In-process research and development                         |                                       |        |       |         |   |         |       |        |   |          |       |         |      |         |       |         |   |        | 2,300  |       
|                                                             | Amortization of goodwill and purchased intangible assets(1) |                                       |        | 3,089  |         |   |         | 5,333  |        |   |          | 5,744  |         |      |         | 38,839 |         |   |        | 4,415  |       
|                                                             | Impairment of goodwill                                      |                                       |        |       |         |   |         |       |        |   |          | 87,640 |         |      |         |       |         |   |        |       |       
|                                                             | Restructuring charges                                       |                                       |        | (171   | )       |   |         | 1,833  |        |   |          | 3,969  |         |      |         |       |         |   |        |       |       
|                                                             | Stock-based compensation                                    |                                       |        | 75     |         |   |         | 700    |        |   |          | 1,400  |         |      |         | 3,009  |         |   |        | 3,315  |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|                                                             |                                                             | Total operating expenses              |        |        | 88,048  |   |         |        | 79,762 |   |          |        | 171,790 |      |         |        | 104,734 |   |        |        | 42,796 | 
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Income (loss) from operations                                |                                                             |                                       | (4,062 | )      |         |   | (23,427 | )      |        |   | (103,076 | )      |         |      | (23,821 | )      |         |   | 8,534  |       
|Interest income and other expense, net                       |                                                             |                                       | 4,050  |        |         |   | 4,169   |        |        |   | 6,044    |        |         |      | 9,258   |        |         |   | 10,136 |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Income (loss) before income taxes                            |                                                             |                                       | (12    | )      |         |   | (19,258 | )      |        |   | (97,032  | )      |         |      | (14,563 | )      |         |   | 18,670 |       
|Benefit from (provision for) income taxes                    |                                                             |                                       | (301   | )      |         |   | 1,590   |        |        |   | 3,119    |        |         |      | (6,351  | )      |         |   | (9,923 | )     
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Net income (loss)                                            |                                                             | $                                     | (313   | )      |         | $ | (17,668 | )      |        | $ | (93,913  | )      |         | $    | (20,914 | )      |         | $ | 8,747  |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Basic net income (loss) per share                            |                                                             | $                                     | (0.00  | )      |         | $ | (0.26   | )      |        | $ | (1.40    | )      |         | $    | (0.32   | )      |         | $ | 0.16   |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Diluted net income (loss) per share                          |                                                             | $                                     | (0.00  | )      |         | $ | (0.26   | )      |        | $ | (1.40    | )      |         | $    | (0.32   | )      |         | $ | 0.14   |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Shares used in computing basic net income (loss) per share   |                                                             |                                       | 70,850 |        |         |   | 67,895  |        |        |   | 67,124   |        |         |      | 64,467  |        |         |   | 54,879 |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        
|Shares used in computing diluted net income (loss) per share |                                                             |                                       | 70,850 |        |         |   | 67,895  |        |        |   | 67,124   |        |         |      | 64,467  |        |         |   | 60,496 |       
|                                                             |                                                             |                                       |        |        |         |   |         |        |        |   |          |        |         |      |        

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|                                 |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|-------------------------------- |  | ------------------ | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                 |  | As of December 31, |        
|                                 |  |                    |        
|                                 |  | 2004               |         |  | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |        
|                                 |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                 |  | (In thousands)     |        
|                                 |  | As restated        |         |  |     
|Consolidated Balance Sheet Data: |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Cash and cash equivalents        |  | $                  | 23,446  |  |      | $ | 30,467  |      |  | $ | 23,030  |  |  | $    | 60,908  |  |  | $ | 140,287 | 
|Short-term investments           |  |                    | 229,226 |  |      |   | 213,010 |      |  |   | 209,854 |  |  |      | 166,271 |  |  |   | 79,257  | 
|Total assets                     |  |                    | 386,845 |  |      |   | 381,721 |      |  |   | 405,098 |  |  |      | 516,351 |  |  |   | 488,117 | 
|Total shareholders equity       |  |                    | 337,976 |  |      |   | 344,269 |      |  |   | 357,183 |  |  |      | 451,153 |  |  |   | 435,758 | 
|Long-term liabilities            |  |                    |        |  |      |   |        |      |  |   | 12,272  |  |  |      | 17,625  |  |  |   | 20,426  | 






|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with SFAS No. 142, goodwill and
    intangibles related to workforce are not being amortized
    effective January 1, 2002.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion And Analysis Of Financial
    Condition And Results Of Operations

This Form 10-K contains forward-looking statements which
relate to future events or our future financial performance. In
many cases you can identify forward-looking statements by
terminology such as may, will,
should, expect, plan,
anticipate, believe,
estimate, predict,
potential, intend or
continue, or the negative of such terms and other
comparable terminology. In addition, forward-looking statements
in this document include, but are not limited to, those
regarding: revenue from, and our ability to reach, the access
security market; our ability to maintain and enhance our current
product line and develop new products that achieve market
acceptance; our ability to maintain technological
competitiveness; our ability to meet the expanding range of
customer requirements; achieving a reduction in channel
conflict; the ability of our channel partners to absorb new
product introductions in a timely fashion; changes in our
product mix and supply chain model; our ability to provide
support sufficient to allow our channel partners and
distributors to create and fulfill demand for our products; our
ability to generate additional revenue through additional value
added service offerings and software licenses; our ability to
provide differentiated solutions that are innovative, easy to
use, reliable and provide good value; our ability to achieve
reasonable rates of selling associated services to our install
base or as part of new product sales; our ability to increase
sales in targeted vertical markets; our continued support of our
distribution sales model; the technological benefits associated
with a distributed architecture deployment; our ability to
increase market opportunity for selling subscription services to
our installed base; our ability to grow international sales to
match the rate of penetration of our products in the domestic
market; our ability to implement operational efficiency, cost
reductions and increase product functionality to offset
competitive pricing pressures on our gross margins; our ability
to leverage incremental revenue out of each product transaction;
our continued market leadership in the markets in which we
participate; the possible impact of geopolitical and macro
economic conditions on demand for our offerings; our ability to
achieve increased renewal rates for our service offerings; the
impact of macro-economic factors on information technology
spending; sales and implementation cycles for our products, the
ability of our contract manufacturers to meet our requirements;
and belief that existing cash, cash equivalents and short-term
investments will be sufficient to meet our cash requirements at
least through the next twelve months. These statements are only
predictions, and they are subject to risks and uncertainties.
Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of a variety of
factors, including, but not limited to, those set forth herein
under the heading Risk Factors in this
Form 10-K. References to we, our,
and us refer to SonicWALL, Inc. and its
subsidiaries.


Overview




32



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Restatement




Key Success Factors of our Business






| |        
| | -------
| | Channel





| |                             
| | ----------------------------
| | Product and Service Platform



33



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| |                         
| | ------------------------
| | Distributed Architecture





| |                    
| | -------------------
| | End User Acceptance





| |                  
| | -----------------
| | Integrated Design



Our Opportunities, Challenges and Risks




| |                     
| | --------------------
| | International Growth







| |                              
| | -----------------------------
| | License and Services Revenues



34



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| |                                             
| | --------------------------------------------
| | Macro-economic factors affecting IT spending





| |                 
| | ----------------
| | Vertical markets



Critical Accounting Policies and Critical Accounting
Estimates




Revenue recognition.








35



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Sales returns and other allowances, allowance for doubtful
accounts and warranty reserve.


36



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Valuation of inventory.


Accounting for income taxes.




Valuation of long-lived and intangible assets and
goodwill.


37



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Step 1  A comparison of the fair value of our
    reporting units to the carrying value, including goodwill of
    each of those units. For each reporting unit where the carrying
    value, including goodwill, exceeds the units fair value,
    we will move to step 2. If a units fair value exceeds the
    carrying value, no further work is performed and no impairment
    charge is necessary.                                                                                                                                                           
|
| | Step 2  An allocation of the fair value of the
    reporting unit to its identifiable tangible and non-goodwill
    intangible assets and liabilities. This will derive an implied
    fair value for the reporting units goodwill. We will then
    compare the implied fair value of the reporting units
    goodwill with the carrying amount of the reporting units
    goodwill. If the carrying amount of the reporting units
    goodwill is greater than the implied fair value of its goodwill,
    an impairment loss must be recognized for the excess.



Significant Transactions




| |             
| | ------------
| | Acquisitions





38



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| |              
| | -------------
| | Restructuring



Results of Operations




|                                          |                                                          |                          |      |      |       |  |       |      |       |  |       |      |       | 
|----------------------------------------- | -------------------------------------------------------- | ------------------------ | ---- | ---- | ----- |  | ----- | ---- | ----- |  | ----- | ---- | ----- | 
|                                          |                                                          | Year Ended December 31,  |     
|                                          |                                                          |                          |     
|                                          |                                                          | 2004                     |      |      | 2003  |  |       | 2002 |      
|                                          |                                                          |                          |      |      |       |  |       |      |      
|                                          |                                                          | As restated              |      |      |       |  |      
|Revenue:                                  |                                                          |                          |      |      |       |  |       |      |       |  |       |     
|                                          | Product                                                  |                          |      | 66.1 | %     |  |       | 69.8 | %     |  |       | 75.7 | %    
|                                          | License and service                                      |                          |      | 33.9 |       |  |       | 30.2 |       |  |       | 24.3 |      
|                                          |                                                          |                          |      |      |       |  |       |      |      
|                                          |                                                          | Total revenue            |      |      | 100.0 |  |       |      | 100.0 |  |       |      | 100.0 | 
|Cost of revenue:                          |                                                          |                          |      |      |       |  |       |      |       |  |       |     
|                                          | Product                                                  |                          |      | 23.9 |       |  |       | 29.6 |       |  |       | 24.5 |      
|                                          | License and service                                      |                          |      | 5.6  |       |  |       | 5.9  |       |  |       | 4.5  |      
|                                          | Amortization of purchase technology                      |                          |      | 3.6  |       |  |       | 4.8  |       |  |       | 4.4  |      
|                                          |                                                          |                          |      |      |       |  |       |      |      
|                                          |                                                          | Total cost of revenue    |      |      | 33.1  |  |       |      | 40.3  |  |       |      | 33.4  | 
|                                          |                                                          |                          |      |      |       |  |       |      |      
|Gross margin                              |                                                          |                          | 66.9 |      |       |  | 59.7  |      |       |  | 66.6  |     
|Operating expenses:                       |                                                          |                          |      |      |       |  |       |      |       |  |       |     
|                                          | Research and development                                 |                          |      | 18.5 |       |  |       | 21.0 |       |  |       | 18.3 |      
|                                          | Sales and marketing                                      |                          |      | 37.7 |       |  |       | 42.5 |       |  |       | 41.6 |      
|                                          | General and administrative                               |                          |      | 11.4 |       |  |       | 12.6 |       |  |       | 10.8 |      
|                                          | Amortization of goodwill and purchased intangible assets |                          |      | 2.5  |       |  |       | 5.7  |       |  |       | 5.6  |      
|                                          | Impairment of goodwill                                   |                          |      |     |       |  |       |     |       |  |       | 84.9 |      
|                                          | Restructuring charges                                    |                          |      | (0.1 | )     |  |       | 1.9  |       |  |       | 3.8  |      
|                                          | Stock-based compensation                                 |                          |      | 0.1  |       |  |       | 0.7  |       |  |       | 1.4  |      
|                                          |                                                          |                          |      |      |       |  |       |      |      
|                                          |                                                          | Total operating expenses |      |      | 70.1  |  |       |      | 84.4  |  |       |      | 166.4 | 
|                                          |                                                          |                          |      |      |       |  |       |      |      
|Loss from operations                      |                                                          |                          | (3.2 | )    |       |  | (24.7 | )    |       |  | (99.8 | )   
|Interest income and other expense, net    |                                                          |                          | 3.2  |      |       |  | 4.4   |      |       |  | 5.8   |     
|                                          |                                                          |                          |      |      |       |  |       |      |      
|Loss before income taxes                  |                                                          |                          | (0.0 | )    |       |  | (20.3 | )    |       |  | (94.0 | )   
|Benefit from (provision for) income taxes |                                                          |                          | (0.2 | )    |       |  | 1.7   |      |       |  | 3.0   |     
|                                          |                                                          |                          |      |      |       |  |       |      |      
|Net loss                                  |                                                          |                          | (0.2 | )%   |       |  | (18.6 | )%   |       |  | (91.0 | )%  
|                                          |                                                          |                          |      |      |       |  |       |      |      

39



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| |                      
| | ---------------------
| | 2004 compared to 2003



| |        
| | -------
| | Revenue

|                    |                             |                                        |        |         |          |   |        |              |   |  |    |    |  
|------------------- | --------------------------- | -------------------------------------- | ------ | ------- | -------- | - | ------ | ------------ | - |  | -- | -- | -
|                    |                             | Year Ended December                    |        |         |         
|                    |                             |                                        |        |         | % Change |  
|                    |                             | 2004                                   |        |         | 2003     |   |        | 2004 to 2003 |  
|                    |                             |                                        |        |         |          |   |        |              |  
|                    |                             | (In thousands, except percentage data) |       
|Product             |                             | $                                      | 82,994 |         |          | $ | 65,931 |              |   |  | 26 | % 
|                    | Percentage of total revenue |                                        |        | 66      | %        |   |        | 70           | % |  |    |    |  
|License and service |                             |                                        | 42,655 |         |          |   | 28,470 |              |   |  | 50 | % 
|                    | Percentage of total revenue |                                        |        | 34      | %        |   |        | 30           | % |  |    |    |  
|                    |                             |                                        |        |         |          |   |        |              |  
|                    | Total revenue               |                                        | $      | 125,649 |          |   | $      | 94,401       |   |  |    | 33 | %
|                    |                             |                                        |        |         |          |   |        |              |  



| |                
| | ---------------
| | Product revenue







| |                            
| | ---------------------------
| | License and Service Revenue





| |             
| | ------------
| | Channel data



40



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##### Table of Contents









| |                        
| | -----------------------
| | Geographic revenue data

|         |                              |                                        |        |         |          |   |        |              |   |  |    |   | 
|-------- | ---------------------------- | -------------------------------------- | ------ | ------- | -------- | - | ------ | ------------ | - |  | -- | - | 
|         |                              | Year Ended December                    |        |         |         
|         |                              |                                        |        |         | % Change |  
|         |                              | 2004                                   |        |         | 2003     |   |        | 2004 to 2003 |  
|         |                              |                                        |        |         |          |   |        |              |  
|         |                              | (In thousands, except percentage data) |       
|Americas |                              | $                                      | 87,450 |         |          | $ | 66,548 |              |   |  | 31 | %
|         | Percentage of total revenues |                                        |        | 70      | %        |   |        | 70           | % |  |    |   | 
|EMEA     |                              |                                        | 23,275 |         |          |   | 18,522 |              |   |  | 26 | %
|         | Percentage of total revenues |                                        |        | 18      | %        |   |        | 20           | % |  |    |   | 
|APAC     |                              |                                        | 14,924 |         |          |   | 9,331  |              |   |  | 60 | %
|         | Percentage of total revenues |                                        |        | 12      | %        |   |        | 10           | % |  |    |   | 
|         | Total revenues               |                                        | $      | 125,649 |          |   | $      | 94,401       |   |  |    |   | 
|         |                              |                                        |        |         |          |   |        |              |  







| |                
| | ---------------
| | Cost of Revenue

|                                     |                       |                                        |        |        |          |   |        |              |   |  |    |   | 
|------------------------------------ | --------------------- | -------------------------------------- | ------ | ------ | -------- | - | ------ | ------------ | - |  | -- | - | 
|                                     |                       | Year Ended December                    |        |        |         
|                                     |                       |                                        |        |        | % Change |  
|                                     |                       | 2004                                   |        |        | 2003     |   |        | 2004 to 2003 |  
|                                     |                       |                                        |        |        |          |   |        |              |  
|                                     |                       | (In thousands, except percentage data) |       
|                                     |                       | As restated                            |        |        |         
|Product                              |                       | $                                      | 30,118 |        |          | $ | 27,906 |              |   |  | 8  | %
|                                     | Gross margin          |                                        |        | 64     | %        |   |        | 58           | % |  |    |   | 
|License and service                  |                       |                                        | 7,002  |        |          |   | 5,617  |              |   |  | 25 | %
|                                     | Gross margin          |                                        |        | 84     | %        |   |        | 80           | % |  |    |   | 
|Amortization of purchased technology |                       |                                        | 4,543  |        |          |   | 4,543  |              |   |  | 0  | %
|                                     | Total cost of revenue |                                        | $      | 41,663 |          |   | $      | 38,066       |   |  |    |   | 
|                                     |                       |                                        |        |        |          |   |        |              |  

41



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##### Table of Contents







| |                                      
| | -------------------------------------
| | Cost of Product Revenue; Gross Margin







| |                                                  
| | -------------------------------------------------
| | Cost of License and Service Revenue; Gross Margin





| |                                     
| | ------------------------------------
| | Amortization of purchased technology

|         |                             |                                        |       |   |          |   |       |              |   |  |   |   | 
|-------- | --------------------------- | -------------------------------------- | ----- | - | -------- | - | ----- | ------------ | - |  | - | - | 
|         |                             | Year Ended December                    |       |   |         
|         |                             |                                        |       |   | % Change |  
|         |                             | 2004                                   |       |   | 2003     |   |       | 2004 to 2003 |  
|         |                             |                                        |       |   |          |   |       |              |  
|         |                             | (In thousands, except percentage data) |      
|Expenses |                             | $                                      | 4,543 |   |          | $ | 4,543 |              |   |  | 0 | %
|         | Percentage of total revenue |                                        |       | 4 | %        |   |       | 5            | % |  |   |   | 



42



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|            |       |   |       |       | 
|----------- | ----- | - | ----- | ----- | 
|Fiscal Year |       |  
|            |       |  
|2005        |       | $ | 4,543 |      
|2006        |       |   | 3,860 |      
|            |       |   |      
|            | Total |   | $     | 8,403 | 
|            |       |   |      





| |                   
| | ------------------
| | Operating Expenses



| |                         
| | ------------------------
| | Research and development

|         |                             |                                        |        |    |          |   |        |              |   |  |    |   | 
|-------- | --------------------------- | -------------------------------------- | ------ | -- | -------- | - | ------ | ------------ | - |  | -- | - | 
|         |                             | Year Ended December                    |        |    |         
|         |                             |                                        |        |    | % Change |  
|         |                             | 2004                                   |        |    | 2003     |   |        | 2004 to 2003 |  
|         |                             |                                        |        |    |          |   |        |              |  
|         |                             | (In thousands, except percentage data) |       
|         |                             | As restated                            |        |    |         
|Expenses |                             | $                                      | 23,337 |    |          | $ | 19,864 |              |   |  | 17 | %
|         | Percentage of total revenue |                                        |        | 19 | %        |   |        | 21           | % |  |    |   | 







| |                    
| | -------------------
| | Sales and marketing

|         |                             |                                        |        |    |          |   |        |              |   |  |    |   | 
|-------- | --------------------------- | -------------------------------------- | ------ | -- | -------- | - | ------ | ------------ | - |  | -- | - | 
|         |                             | Year Ended December                    |        |    |         
|         |                             |                                        |        |    | % Change |  
|         |                             | 2004                                   |        |    | 2003     |   |        | 2004 to 2003 |  
|         |                             |                                        |        |    |          |   |        |              |  
|         |                             | (In thousands, except percentage data) |       
|         |                             | As restated                            |        |    |         
|Expenses |                             | $                                      | 47,353 |    |          | $ | 40,139 |              |   |  | 18 | %
|         | Percentage of total revenue |                                        |        | 38 | %        |   |        | 43           | % |  |    |   | 



43



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| |                           
| | --------------------------
| | General and administrative

|         |                             |                                        |        |    |          |   |        |              |   |  |    |   | 
|-------- | --------------------------- | -------------------------------------- | ------ | -- | -------- | - | ------ | ------------ | - |  | -- | - | 
|         |                             | Year Ended December                    |        |    |         
|         |                             |                                        |        |    | % Change |  
|         |                             | 2004                                   |        |    | 2003     |   |        | 2004 to 2003 |  
|         |                             |                                        |        |    |          |   |        |              |  
|         |                             | (In thousands, except percentage data) |       
|         |                             | As restated                            |        |    |         
|Expenses |                             | $                                      | 14,365 |    |          | $ | 11,893 |              |   |  | 21 | %
|         | Percentage of total revenue |                                        |        | 11 | %        |   |        | 13           | % |  |    |   | 







| |                                            
| | -------------------------------------------
| | Amortization of purchased intangible assets

|         |                             |                                        |       |   |          |   |       |              |   |  |     |    | 
|-------- | --------------------------- | -------------------------------------- | ----- | - | -------- | - | ----- | ------------ | - |  | --- | -- | 
|         |                             | Year Ended December                    |       |   |         
|         |                             |                                        |       |   | % Change |  
|         |                             | 2004                                   |       |   | 2003     |   |       | 2004 to 2003 |  
|         |                             |                                        |       |   |          |   |       |              |  
|         |                             | (In thousands, except percentage data) |      
|Expenses |                             | $                                      | 3,089 |   |          | $ | 5,333 |              |   |  | (42 | )%
|         | Percentage of total revenue |                                        |       | 2 | %        |   |       | 6            | % |  |     |    | 





|            |       |   |       |       | 
|----------- | ----- | - | ----- | ----- | 
|Fiscal Year |       |  
|            |       |  
|2005        |       | $ | 2,813 |      
|2006        |       |   | 2,450 |      
|            |       |   |      
|            | Total |   | $     | 5,263 | 
|            |       |   |      

44



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| |                       
| | ----------------------
| | Impairment of goodwill

|         |                             |                                        |   |   |          |   |   |              |   |  |   |   | 
|-------- | --------------------------- | -------------------------------------- | - | - | -------- | - | - | ------------ | - |  | - | - | 
|         |                             | Year Ended December                    |   |   |         
|         |                             |                                        |   |   | % Change |  
|         |                             | 2004                                   |   |   | 2003     |   |   | 2004 to 2003 |  
|         |                             |                                        |   |   |          |   |   |              |  
|         |                             | (In thousands, except percentage data) |  
|Expenses |                             | $                                      |  |   |          | $ |  |              |   |  | 0 | %
|         | Percentage of total revenue |                                        |   | 0 | %        |   |   | 0            | % |  |   |   | 







| |                      
| | ---------------------
| | Restructuring charges

|         |                             |                                        |      |    |          |   |       |              |   |  |      |    | 
|-------- | --------------------------- | -------------------------------------- | ---- | -- | -------- | - | ----- | ------------ | - |  | ---- | -- | 
|         |                             | Year Ended December                    |      |    |         
|         |                             |                                        |      |    | % Change |  
|         |                             | 2004                                   |      |    | 2003     |   |       | 2004 to 2003 |  
|         |                             |                                        |      |    |          |   |       |              |  
|         |                             | (In thousands, except percentage data) |     
|Expenses |                             | $                                      | (171 | )  |          | $ | 1,833 |              |   |  | (109 | )%
|         | Percentage of total revenue |                                        |      | (0 | )%       |   |       | 2            | % |  |      |    | 





45



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| |                         
| | ------------------------
| | Stock-based compensation

|         |                             |                                        |    |   |          |   |     |              |   |  |     |    | 
|-------- | --------------------------- | -------------------------------------- | -- | - | -------- | - | --- | ------------ | - |  | --- | -- | 
|         |                             | Year Ended December                    |    |   |         
|         |                             |                                        |    |   | % Change |  
|         |                             | 2004                                   |    |   | 2003     |   |     | 2004 to 2003 |  
|         |                             |                                        |    |   |          |   |     |              |  
|         |                             | (In thousands, except percentage data) |   
|Expenses |                             | $                                      | 75 |   |          | $ | 700 |              |   |  | (89 | )%
|         | Percentage of total revenue |                                        |    | 0 | %        |   |     | 1            | % |  |     |    | 



Interest income and other expense, net.




| |                                          
| | -----------------------------------------
| | Benefit from (provision for) income taxes

|                    |                             |                                        |      |   |          |   |       |              |   |  |      |    | 
|------------------- | --------------------------- | -------------------------------------- | ---- | - | -------- | - | ----- | ------------ | - |  | ---- | -- | 
|                    |                             | Year Ended December                    |      |   |         
|                    |                             |                                        |      |   | % Change |  
|                    |                             | 2004                                   |      |   | 2003     |   |       | 2004 to 2003 |  
|                    |                             |                                        |      |   |          |   |       |              |  
|                    |                             | (In thousands, except percentage data) |     
|                    |                             | As restated                            |      |   |         
|Benefit (provision) |                             | $                                      | (301 | ) |          | $ | 1,590 |              |   |  | (119 | )%
|                    | Percentage of total revenue |                                        |      | 0 | %        |   |       | 2            | % |  |      |    | 



46



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| |                      
| | ---------------------
| | 2003 compared to 2002



| |        
| | -------
| | Revenue

|                    |                             |                                        |        |        |          |   |        |              |   |  |     |    |   
|------------------- | --------------------------- | -------------------------------------- | ------ | ------ | -------- | - | ------ | ------------ | - |  | --- | -- | --
|                    |                             | Year Ended December                    |        |        |         
|                    |                             |                                        |        |        | % Change |  
|                    |                             | 2003                                   |        |        | 2002     |   |        | 2003 to 2002 |  
|                    |                             |                                        |        |        |          |   |        |              |  
|                    |                             | (In thousands, except percentage data) |       
|Product             |                             | $                                      | 65,931 |        |          | $ | 78,184 |              |   |  | (16 | )%
|                    | Percentage of total revenue |                                        |        | 70     | %        |   |        | 76           | % |  |     |    |   
|License and service |                             |                                        | 28,470 |        |          |   | 25,035 |              |   |  | 14  | % 
|                    | Percentage of total revenue |                                        |        | 30     | %        |   |        | 24           | % |  |     |    |   
|                    |                             |                                        |        |        |          |   |        |              |  
|                    | Total revenue               |                                        | $      | 94,401 |          |   | $      | 103,219      |   |  |     | (9 | )%
|                    |                             |                                        |        |        |          |   |        |              |  



| |                
| | ---------------
| | Product revenue









| |                            
| | ---------------------------
| | License and service revenue





47



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| |             
| | ------------
| | Channel data







| |                        
| | -----------------------
| | Geographic revenue data

|         |                              |                                        |        |        |          |   |        |              |   |  |     |    | 
|-------- | ---------------------------- | -------------------------------------- | ------ | ------ | -------- | - | ------ | ------------ | - |  | --- | -- | 
|         |                              | Year Ended December                    |        |        |         
|         |                              |                                        |        |        | % Change |  
|         |                              | 2003                                   |        |        | 2002     |   |        | 2003 to 2002 |  
|         |                              |                                        |        |        |          |   |        |              |  
|         |                              | (In thousands, except percentage data) |       
|Americas |                              | $                                      | 66,548 |        |          | $ | 69,748 |              |   |  | (5  | )%
|         | Percentage of total revenues |                                        |        | 70     | %        |   |        | 68           | % |  |     |    | 
|EMEA     |                              |                                        | 18,522 |        |          |   | 20,948 |              |   |  | (12 | )%
|         | Percentage of total revenues |                                        |        | 20     | %        |   |        | 20           | % |  |     |    | 
|APAC     |                              |                                        | 9,331  |        |          |   | 12,523 |              |   |  | (25 | )%
|         | Percentage of total revenues |                                        |        | 10     | %        |   |        | 12           | % |  |     |    | 
|         | Total revenues               |                                        | $      | 94,401 |          |   | $      | 103,219      |   |  |     |    | 
|         |                              |                                        |        |        |          |   |        |              |  



48



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| |                
| | ---------------
| | Cost of Revenue

|                                     |                       |                                        |        |        |          |   |        |              |   |  |    |   | 
|------------------------------------ | --------------------- | -------------------------------------- | ------ | ------ | -------- | - | ------ | ------------ | - |  | -- | - | 
|                                     |                       | Year Ended December                    |        |        |         
|                                     |                       |                                        |        |        | % Change |  
|                                     |                       | 2003                                   |        |        | 2002     |   |        | 2003 to 2002 |  
|                                     |                       |                                        |        |        |          |   |        |              |  
|                                     |                       | (In thousands, except percentage data) |       
|Product                              |                       | $                                      | 27,906 |        |          | $ | 25,303 |              |   |  | 10 | %
|                                     | Gross margin          |                                        |        | 58     | %        |   |        | 68           | % |  |    |   | 
|License and service                  |                       |                                        | 5,617  |        |          |   | 4,659  |              |   |  | 21 | %
|                                     | Gross margin          |                                        |        | 80     | %        |   |        | 81           | % |  |    |   | 
|Amortization of purchased technology |                       |                                        | 4,543  |        |          |   | 4,543  |              |   |  | 0  | %
|                                     | Total cost of revenue |                                        | $      | 38,066 |          |   | $      | 34,505       |   |  |    |   | 
|                                     |                       |                                        |        |        |          |   |        |              |  





| |                      
| | ---------------------
| | Product; gross margin







| |                                  
| | ---------------------------------
| | License and service; gross margin



49



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| |                                     
| | ------------------------------------
| | Amortization of purchased technology

|         |                             |                                        |       |   |          |   |       |              |   |  |   |   | 
|-------- | --------------------------- | -------------------------------------- | ----- | - | -------- | - | ----- | ------------ | - |  | - | - | 
|         |                             | Year Ended December                    |       |   |         
|         |                             |                                        |       |   | % Change |  
|         |                             | 2003                                   |       |   | 2002     |   |       | 2003 to 2002 |  
|         |                             |                                        |       |   |          |   |       |              |  
|         |                             | (In thousands, except percentage data) |      
|Expenses |                             | $                                      | 4,543 |   |          | $ | 4,543 |              |   |  | 0 | %
|         | Percentage of total revenue |                                        |       | 5 | %        |   |       | 4            | % |  |   |   | 





| |                   
| | ------------------
| | Operating Expenses



| |                         
| | ------------------------
| | Research and development

|         |                             |                                        |        |    |          |   |        |              |   |  |   |   | 
|-------- | --------------------------- | -------------------------------------- | ------ | -- | -------- | - | ------ | ------------ | - |  | - | - | 
|         |                             | Year Ended December                    |        |    |         
|         |                             |                                        |        |    | % Change |  
|         |                             | 2003                                   |        |    | 2002     |   |        | 2003 to 2002 |  
|         |                             |                                        |        |    |          |   |        |              |  
|         |                             | (In thousands, except percentage data) |       
|Expenses |                             | $                                      | 19,864 |    |          | $ | 18,900 |              |   |  | 5 | %
|         | Percentage of total revenue |                                        |        | 21 | %        |   |        | 18           | % |  |   |   | 





| |                    
| | -------------------
| | Sales and marketing

|         |                             |                                        |        |    |          |   |        |              |   |  |    |    | 
|-------- | --------------------------- | -------------------------------------- | ------ | -- | -------- | - | ------ | ------------ | - |  | -- | -- | 
|         |                             | Year Ended December                    |        |    |         
|         |                             |                                        |        |    | % Change |  
|         |                             | 2003                                   |        |    | 2002     |   |        | 2003 to 2002 |  
|         |                             |                                        |        |    |          |   |        |              |  
|         |                             | (In thousands, except percentage data) |       
|Expenses |                             | $                                      | 40,139 |    |          | $ | 42,937 |              |   |  | (7 | )%
|         | Percentage of total revenue |                                        |        | 43 | %        |   |        | 42           | % |  |    |    | 



50



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| |                           
| | --------------------------
| | General and administrative

|         |                             |                                        |        |    |          |   |        |              |   |  |   |   | 
|-------- | --------------------------- | -------------------------------------- | ------ | -- | -------- | - | ------ | ------------ | - |  | - | - | 
|         |                             | Year Ended December                    |        |    |         
|         |                             |                                        |        |    | % Change |  
|         |                             | 2003                                   |        |    | 2002     |   |        | 2003 to 2002 |  
|         |                             |                                        |        |    |          |   |        |              |  
|         |                             | (In thousands, except percentage data) |       
|Expenses |                             | $                                      | 11,893 |    |          | $ | 11,200 |              |   |  | 6 | %
|         | Percentage of total revenue |                                        |        | 13 | %        |   |        | 11           | % |  |   |   | 





| |                                            
| | -------------------------------------------
| | Amortization of purchased intangible assets

|         |                             |                                        |       |   |          |   |       |              |   |  |    |    | 
|-------- | --------------------------- | -------------------------------------- | ----- | - | -------- | - | ----- | ------------ | - |  | -- | -- | 
|         |                             | Year Ended December                    |       |   |         
|         |                             |                                        |       |   | % Change |  
|         |                             | 2003                                   |       |   | 2002     |   |       | 2003 to 2002 |  
|         |                             |                                        |       |   |          |   |       |              |  
|         |                             | (In thousands, except percentage data) |      
|Expenses |                             | $                                      | 5,333 |   |          | $ | 5,744 |              |   |  | (7 | )%
|         | Percentage of total revenue |                                        |       | 6 | %        |   |       | 6            | % |  |    |    | 





| |                       
| | ----------------------
| | Impairment of goodwill

|         |                             |                                        |   |   |          |   |        |              |   |  |      |    | 
|-------- | --------------------------- | -------------------------------------- | - | - | -------- | - | ------ | ------------ | - |  | ---- | -- | 
|         |                             | Year Ended December                    |   |   |         
|         |                             |                                        |   |   | % Change |  
|         |                             | 2003                                   |   |   | 2002     |   |        | 2003 to 2002 |  
|         |                             |                                        |   |   |          |   |        |              |  
|         |                             | (In thousands, except percentage data) |  
|Expenses |                             | $                                      |  |   |          | $ | 87,640 |              |   |  | (100 | )%
|         | Percentage of total revenue |                                        |   | 0 | %        |   |        | 85           | % |  |      |    | 



51



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| |                      
| | ---------------------
| | Restructuring charges

|         |                             |                                        |       |   |          |   |       |              |   |  |     |    | 
|-------- | --------------------------- | -------------------------------------- | ----- | - | -------- | - | ----- | ------------ | - |  | --- | -- | 
|         |                             | Year Ended December                    |       |   |         
|         |                             |                                        |       |   | % Change |  
|         |                             | 2003                                   |       |   | 2002     |   |       | 2003 to 2002 |  
|         |                             |                                        |       |   |          |   |       |              |  
|         |                             | (In thousands, except percentage data) |      
|Expenses |                             | $                                      | 1,833 |   |          | $ | 3,969 |              |   |  | (54 | )%
|         | Percentage of total revenue |                                        |       | 2 | %        |   |       | 4            | % |  |     |    | 







| |                         
| | ------------------------
| | Stock-based compensation

|         |                             |                                        |     |   |          |   |       |              |   |  |     |    | 
|-------- | --------------------------- | -------------------------------------- | --- | - | -------- | - | ----- | ------------ | - |  | --- | -- | 
|         |                             | Year Ended December                    |     |   |         
|         |                             |                                        |     |   | % Change |  
|         |                             | 2003                                   |     |   | 2002     |   |       | 2003 to 2002 |  
|         |                             |                                        |     |   |          |   |       |              |  
|         |                             | (In thousands, except percentage data) |    
|Expenses |                             | $                                      | 700 |   |          | $ | 1,400 |              |   |  | (50 | )%
|         | Percentage of total revenue |                                        |     | 1 | %        |   |       | 1            | % |  |     |    | 



Interest income and other expense, net.


52



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| |                           
| | --------------------------
| | Benefit from income taxes.

|        |                             |                                        |       |   |          |   |       |              |   |  |     |    | 
|------- | --------------------------- | -------------------------------------- | ----- | - | -------- | - | ----- | ------------ | - |  | --- | -- | 
|        |                             | Year Ended December                    |       |   |         
|        |                             |                                        |       |   | % Change |  
|        |                             | 2003                                   |       |   | 2002     |   |       | 2003 to 2002 |  
|        |                             |                                        |       |   |          |   |       |              |  
|        |                             | (In thousands, except percentage data) |      
|Benefit |                             | $                                      | 1,590 |   |          | $ | 3,119 |              |   |  | (49 | )%
|        | Percentage of total revenue |                                        |       | 2 | %        |   |       | 3            | % |  |     |    | 



53



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Quarterly Results of Operations




|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |        |        |   |        |        |        |   |        |        |        | 
|----------------------------------------------------- | ------------------------------------------- | ------------------------ | ------ | ------ | ------------- | - | ------ | ----------- | ------ | - | ----------- | ------ | ------ | ------------ | ------ | ------ | ------------- | - | ------ | -------- | ------ | - | --------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                      |                                             | December 31,             |        |        | September 30, |   |        | June 30,    |        |   | March 31,   |        |        | December 31, |        |        | September 30, |   |        | June 30, |        |   | March 31, |       
|                                                      |                                             | 2004                     |        |        | 2004          |   |        | 2004        |        |   | 2004        |        |        | 2003         |        |        | 2003          |   |        | 2003     |        |   | 2003      |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|                                                      |                                             | As restated              |        |        | As restated   |   |        | As restated |        |   | As restated |        |        |              |        |        |               |   |        |         
|Revenue:                                              |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |        |        |   |        |        |        |   |        |       
|                                                      | Product                                     |                          | $      | 19,524 |               |   | $      | 18,143      |        |   | $           | 22,609 |        |              | $      | 22,718 |               |   | $      | 20,381   |        |   | $         | 16,799 |        |   | $      | 14,500 |        |   | $      | 14,251 |       
|                                                      | License and service                         |                          |        | 12,491 |               |   |        | 11,242      |        |   |             | 9,805  |        |              |        | 9,117  |               |   |        | 8,192    |        |   |           | 7,322  |        |   |        | 6,901  |        |   |        | 6,055  |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|                                                      |                                             | Total revenue            |        |        | 32,015        |   |        |             | 29,385 |   |             |        | 32,414 |              |        |        | 31,835        |   |        |          | 28,573 |   |           |        | 24,121 |   |        |        | 21,401 |   |        |        | 20,306 | 
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Cost of revenue:                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |        |        |   |        |        |        |   |        |       
|                                                      | Product                                     |                          |        | 7,135  |               |   |        | 6,845       |        |   |             | 7,999  |        |              |        | 8,139  |               |   |        | 7,352    |        |   |           | 7,373  |        |   |        | 7,344  |        |   |        | 5,837  |       
|                                                      | License and service                         |                          |        | 2,101  |               |   |        | 1,781       |        |   |             | 1,605  |        |              |        | 1,515  |               |   |        | 1,410    |        |   |           | 1,252  |        |   |        | 1,371  |        |   |        | 1,584  |       
|                                                      | Amortization of purchased technology        |                          |        | 1,136  |               |   |        | 1,135       |        |   |             | 1,136  |        |              |        | 1,136  |               |   |        | 1,136    |        |   |           | 1,135  |        |   |        | 1,136  |        |   |        | 1,136  |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|                                                      |                                             | Total cost of revenue    |        |        | 10,372        |   |        |             | 9,761  |   |             |        | 10,740 |              |        |        | 10,790        |   |        |          | 9,898  |   |           |        | 9,760  |   |        |        | 9,851  |   |        |        | 8,557  | 
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Gross margin                                          |                                             |                          | 21,643 |        |               |   | 19,624 |             |        |   | 21,674      |        |        |              | 21,045 |        |               |   | 18,675 |          |        |   | 14,361    |        |        |   | 11,550 |        |        |   | 11,749 |       
|Operating expenses:                                   |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |        |        |   |        |        |        |   |        |       
|                                                      | Research and development                    |                          |        | 5,614  |               |   |        | 5,556       |        |   |             | 6,187  |        |              |        | 5,980  |               |   |        | 5,178    |        |   |           | 5,281  |        |   |        | 4,880  |        |   |        | 4,525  |       
|                                                      | Sales and marketing                         |                          |        | 11,597 |               |   |        | 11,797      |        |   |             | 12,557 |        |              |        | 11,402 |               |   |        | 10,784   |        |   |           | 9,220  |        |   |        | 10,089 |        |   |        | 10,046 |       
|                                                      | General and administrative                  |                          |        | 3,846  |               |   |        | 3,204       |        |   |             | 3,525  |        |              |        | 3,790  |               |   |        | 3,276    |        |   |           | 3,209  |        |   |        | 2,874  |        |   |        | 2,534  |       
|                                                      | Amortization of purchased intangible assets |                          |        | 704    |               |   |        | 786         |        |   |             | 787    |        |              |        | 812    |               |   |        | 1,119    |        |   |           | 1,404  |        |   |        | 1,405  |        |   |        | 1,405  |       
|                                                      | Restructuring charges                       |                          |        | (156   | )             |   |        | (143        | )      |   |             | 115    |        |              |        | 13     |               |   |        | 164      |        |   |           | 403    |        |   |        | 1,104  |        |   |        | 162    |       
|                                                      | Stock-based compensation                    |                          |        | (30    | )             |   |        | (75         | )      |   |             | 33     |        |              |        | 147    |               |   |        | 268      |        |   |           | 38     |        |   |        | 251    |        |   |        | 143    |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|                                                      |                                             | Total operating expenses |        |        | 21,575        |   |        |             | 21,125 |   |             |        | 23,204 |              |        |        | 22,144        |   |        |          | 20,789 |   |           |        | 19,555 |   |        |        | 20,603 |   |        |        | 18,815 | 
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Income (loss) from operations                         |                                             |                          | 68     |        |               |   | (1,501 | )           |        |   | (1,530      | )      |        |              | (1,099 | )      |               |   | (2,114 | )        |        |   | (5,194    | )      |        |   | (9,053 | )      |        |   | (7,066 | )     
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Interest income and other expense, net                |                                             |                          | 1,325  |        |               |   | 1,105  |             |        |   | 785         |        |        |              | 835    |        |               |   | 953    |          |        |   | 891       |        |        |   | 1,032  |        |        |   | 1,293  |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Income (loss) before income taxes                     |                                             |                          | 1,393  |        |               |   | (396   | )           |        |   | (745        | )      |        |              | (264   | )      |               |   | (1,161 | )        |        |   | (4,303    | )      |        |   | (8,021 | )      |        |   | (5,773 | )     
|Benefit from (provision for) income taxes             |                                             |                          | 72     |        |               |   | (209   | )           |        |   | (79         | )      |        |              | (85    | )      |               |   | (94    | )        |        |   | (143      | )      |        |   | (73    | )      |        |   | 1,900  |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Net income (loss)                                     |                                             | $                        | 1,465  |        |               | $ | (605   | )           |        | $ | (824        | )      |        | $            | (349   | )      |               | $ | (1,255 | )        |        | $ | (4,446    | )      |        | $ | (8,094 | )      |        | $ | (3,873 | )     
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Net income (loss) per share:                          |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |        |        |   |        |        |        |   |        |       
|                                                      | Basic                                       |                          | $      | 0.02   |               |   | $      | (0.01       | )      |   | $           | (0.01  | )      |              | $      | (0.01  | )             |   | $      | (0.02    | )      |   | $         | (0.07  | )      |   | $      | (0.12  | )      |   | $      | (0.06  | )     
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|                                                      | Diluted                                     |                          | $      | 0.02   |               |   | $      | (0.01       | )      |   | $           | (0.01  | )      |              | $      | (0.01  | )             |   | $      | (0.02    | )      |   | $         | (0.07  | )      |   | $      | (0.12  | )      |   | $      | (0.06  | )     
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|Shares used in computing net income (loss) per share: |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |        |        |   |        |        |        |   |        |       
|                                                      | Basic                                       |                          |        | 70,837 |               |   |        | 71,344      |        |   |             | 71,134 |        |              |        | 70,051 |               |   |        | 68,434   |        |   |           | 67,924 |        |   |        | 67,658 |        |   |        | 67,557 |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       
|                                                      | Diluted                                     |                          |        | 73,126 |               |   |        | 71,344      |        |   |             | 71,134 |        |              |        | 70,051 |               |   |        | 68,434   |        |   |           | 67,924 |        |   |        | 67,658 |        |   |        | 67,557 |       
|                                                      |                                             |                          |        |        |               |   |        |             |        |   |             |        |        |              |        |        |               |   |        |          |        |   |           |       

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|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |       |      |  |       |       |      |  |       |       |      | 
|----------------------------------------- | ------------------------------------------- | ------------------------ | ---- | ----- | ------------- |  | ---- | ----------- | ---- |  | ----------- | ----- | ---- | ------------ | ---- | ----- | ------------- |  | ---- | -------- | ---- |  | --------- | ----- | ---- |  | ----- | ----- | ---- |  | ----- | ----- | ---- | 
|                                          |                                             | December 31,             |      |       | September 30, |  |      | June 30,    |      |  | March 31,   |       |      | December 31, |      |       | September 30, |  |      | June 30, |      |  | March 31, |      
|                                          |                                             | 2004                     |      |       | 2004          |  |      | 2004        |      |  | 2004        |       |      | 2003         |      |       | 2003          |  |      | 2003     |      |  | 2003      |      
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|                                          |                                             | As restated              |      |       | As restated   |  |      | As restated |      |  | As restated |       |      |              |      |       |               |  |      |         
|Revenue:                                  |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |       |      |  |       |       |      |  |       |      
|                                          | Product                                     |                          |      | 61.0  | %             |  |      | 61.7        | %    |  |             | 69.8  | %    |              |      | 71.4  | %             |  |      | 71.3     | %    |  |           | 69.6  | %    |  |       | 67.8  | %    |  |       | 70.2  | %   
|                                          | License and service                         |                          |      | 39.0  |               |  |      | 38.3        |      |  |             | 30.2  |      |              |      | 28.6  |               |  |      | 28.7     |      |  |           | 30.4  |      |  |       | 32.2  |      |  |       | 29.8  |     
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|                                          | Total revenue                               |                          |      | 100.0 |               |  |      | 100.0       |      |  |             | 100.0 |      |              |      | 100.0 |               |  |      | 100.0    |      |  |           | 100.0 |      |  |       | 100.0 |      |  |       | 100.0 |     
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|                                          | Cost of revenue:                            |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |       |      |  |       |       |      |  |       |       |     
|                                          | Product                                     |                          |      | 22.3  |               |  |      | 23.3        |      |  |             | 24.7  |      |              |      | 25.6  |               |  |      | 25.7     |      |  |           | 30.6  |      |  |       | 34.3  |      |  |       | 28.7  |     
|                                          | License and service                         |                          |      | 6.6   |               |  |      | 6.0         |      |  |             | 4.9   |      |              |      | 4.7   |               |  |      | 4.9      |      |  |           | 5.2   |      |  |       | 6.4   |      |  |       | 7.8   |     
|                                          | Amortization of purchased technology        |                          |      | 3.5   |               |  |      | 3.9         |      |  |             | 3.5   |      |              |      | 3.6   |               |  |      | 4.0      |      |  |           | 4.7   |      |  |       | 5.3   |      |  |       | 5.6   |     
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|                                          |                                             | Total cost of revenue    |      |       | 32.4          |  |      |             | 33.2 |  |             |       | 33.1 |              |      |       | 33.9          |  |      |          | 34.6 |  |           |       | 40.5 |  |       |       | 46.0 |  |       |       | 42.1 | 
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|Gross margin                              |                                             |                          | 67.6 |       |               |  | 66.8 |             |      |  | 66.9        |       |      |              | 66.1 |       |               |  | 65.4 |          |      |  | 59.5      |       |      |  | 54.0  |       |      |  | 57.9  |      
|Operating expenses:                       |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |       |      |  |       |       |      |  |       |      
|                                          | Research and development                    |                          |      | 17.5  |               |  |      | 18.9        |      |  |             | 19.1  |      |              |      | 18.8  |               |  |      | 18.1     |      |  |           | 21.9  |      |  |       | 22.8  |      |  |       | 22.3  |     
|                                          | Sales and marketing                         |                          |      | 36.2  |               |  |      | 40.2        |      |  |             | 38.7  |      |              |      | 35.8  |               |  |      | 37.7     |      |  |           | 38.2  |      |  |       | 47.1  |      |  |       | 49.5  |     
|                                          | General and administrative                  |                          |      | 12.0  |               |  |      | 10.9        |      |  |             | 10.9  |      |              |      | 11.8  |               |  |      | 11.5     |      |  |           | 13.3  |      |  |       | 13.4  |      |  |       | 12.5  |     
|                                          | Amortization of purchased intangible assets |                          |      | 2.2   |               |  |      | 2.7         |      |  |             | 2.4   |      |              |      | 2.6   |               |  |      | 3.9      |      |  |           | 5.8   |      |  |       | 6.6   |      |  |       | 6.9   |     
|                                          | Restructuring charges                       |                          |      | (0.5  | )             |  |      | (0.5        | )    |  |             | 0.4   |      |              |      | 0.0   |               |  |      | 0.6      |      |  |           | 1.7   |      |  |       | 5.2   |      |  |       | 0.8   |     
|                                          | Stock-based compensation                    |                          |      | (0.0  | )             |  |      | (0.3        | )    |  |             | 0.1   |      |              |      | 0.5   |               |  |      | 0.9      |      |  |           | 0.2   |      |  |       | 1.2   |      |  |       | 0.7   |     
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|                                          |                                             | Total operating expenses |      |       | 67.4          |  |      |             | 71.9 |  |             |       | 71.6 |              |      |       | 69.5          |  |      |          | 72.7 |  |           |       | 81.1 |  |       |       | 96.3 |  |       |       | 92.7 | 
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|Income (loss) from operations             |                                             |                          | 0.2  |       |               |  | (5.1 | )           |      |  | (4.7        | )     |      |              | (3.4 | )     |               |  | (7.3 | )        |      |  | (21.6     | )     |      |  | (42.3 | )     |      |  | (34.8 | )    
|Interest income and other expense, net    |                                             |                          | 4.2  |       |               |  | 3.8  |             |      |  | 2.4         |       |      |              | 2.6  |       |               |  | 3.3  |          |      |  | 3.7       |       |      |  | 4.8   |       |      |  | 6.4   |      
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|Income (loss) before income taxes         |                                             |                          | 4.4  |       |               |  | (1.3 | )           |      |  | (2.3        | )     |      |              | (0.8 | )     |               |  | (4.0 | )        |      |  | (17.9     | )     |      |  | (37.5 | )     |      |  | (28.4 | )    
|Benefit from (provision for) income taxes |                                             |                          | 0.2  |       |               |  | (0.8 | )           |      |  | (0.2        | )     |      |              | (0.3 | )     |               |  | (0.3 | )        |      |  | (0.6      | )     |      |  | (0.3  | )     |      |  | 9.4   |      
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      
|Net income (loss)                         |                                             |                          | 4.6  | %     |               |  | (2.1 | )%          |      |  | (2.5        | )%    |      |              | (1.1 | )%    |               |  | (4.3 | )%       |      |  | (18.5     | )%    |      |  | (37.8 | )%    |      |  | (19.0 | )%   
|                                          |                                             |                          |      |       |               |  |      |             |      |  |             |       |      |              |      |       |               |  |      |          |      |  |           |      

Liquidity and Capital Resources






| |                     
| | --------------------
| | Operating Activities



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| |                     
| | --------------------
| | Investing Activities





| |                     
| | --------------------
| | Financing Activities





| |                   
| | ------------------
| | Financial Position



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Off-Balance Sheet Arrangements and Contractual Obligations




|                                    |  |       |       |                        |          |   |       |              |  |   |              |  |  |   |     | 
|----------------------------------- |  | ----- | ----- | ---------------------- | -------- | - | ----- | ------------ |  | - | ------------ |  |  | - | --- | 
|                                    |  |       |       | Payments Due by Period |         
|                                    |  |       |       |                        |         
|                                    |  |       |       | Less Than              |          |   |      
|Contractual Obligations             |  | Total |       |                        | One Year |   |       | 1 to 3 Years |  |   | 3 to 5 Years | 
|                                    |  |       |       |                        |          |   |       |              |  |   |              | 
|Operating lease obligations         |  | $     | 1,993 |                        |          | $ | 895   |              |  | $ | 709          |  |  | $ | 389 | 
|Non-cancelable purchase obligations |  | $     | 5,707 |                        |          | $ | 5,707 |              |  | $ |             |  |  | $ |    | 



Other Information




Recent Accounting Pronouncements


Accounting for Stock-Based
Compensation. Accounting for Stock Issued to Employees Statement of Cash
Flows.


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other-than-temporary




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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk



| |                   
| | ------------------
| | Interest rate risk









|                               |  |                                        |         |   |           |   |         |       |  |   |         | 
|------------------------------ |  | -------------------------------------- | ------- | - | --------- | - | ------- | ----- |  | - | ------- | 
|                               |  | Maturing in                            |        
|                               |  |                                        |        
|                               |  | Less Than                              |         |   | More Than |   |         |      
|                               |  | One Year                               |         |   | One Year  |   |         | Total | 
|                               |  |                                        |         |   |           |   |         |       | 
|                               |  | (In thousands, except percentage data) |        
|Short-term investments         |  | $                                      | 102,873 |   |           | $ | 126,353 |       |  | $ | 229,226 | 
|Weighted average interest rate |  |                                        | 2.17    | % |           |   | 2.73    | %     |  |   |         | 



| |                      
| | ---------------------
| | Foreign currency risk



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements And Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND


FINANCIAL STATEMENT SCHEDULE


|                                                                     |  |      |     | 
|-------------------------------------------------------------------- |  | ---- | --- | 
|                                                                     |  | Page |    
|                                                                     |  |      |    
|Report of Independent Registered Public Accounting Firm              |  |      | 61  | 
|Consolidated Balance Sheets                                          |  |      | 64  | 
|Consolidated Statements of Operations                                |  |      | 65  | 
|Consolidated Statements of Shareholders Equity                      |  |      | 66  | 
|Consolidated Statements of Cash Flows                                |  |      | 67  | 
|Notes to Consolidated Financial Statements                           |  |      | 68  | 
|Financial Statement Schedule  Valuation and
    Qualifying Accounts |  |      | 105 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







Consolidated financial
statements and financial statement schedule






Internal control over
financial reporting


Internal Control  Integrated
Framework






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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The Company did not maintain effective controls over the timing
    of the recognition of revenue. As a result, during fiscal year
    2004, the Company improperly recognized revenue on certain
    transactions where delivery and transfer of title or the
    evidence of a final arrangement had not yet occurred. This
    control deficiency resulted in material adjustments to revenue
    and cost of revenue during the second and third quarters of 2004.                                               
|
| | (2) | The Company did not maintain effective controls over the
    accounting for certain lease transactions as of
    December 31, 2004. As a result, the Company did not
    properly account for rent expense associated with its corporate
    headquarters lease extension. This control deficiency resulted
    in material adjustments to operating expenses during the third
    quarter of 2004.                                                                                                                  
|
| | (3) | Also, as of December 31, 2004, the Company did not maintain
    effective controls over the determination and accuracy of
    certain liabilities and the related expenses. Specifically, the
    Company failed to properly accrue its obligations for bonuses
    and commissions based on information known by management prior
    to the filing of the interim and annual financial statements.
    This control deficiency resulted in the restatement of the 2004
    annual and interim financial statements.



Internal Control  Integrated
Framework.




Internal
Control  Integrated Framework


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Internal Control  Integrated Framework










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SONICWALL, INC.







CONSOLIDATED BALANCE SHEETS


|                                            |                                                                                                                        |                             |                                            |          |         |         |        |          |         |         | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | -------- | ------- | ------- | ------ | -------- | ------- | ------- | 
|                                            |                                                                                                                        | December 31,                |                                           
|                                            |                                                                                                                        |                             |                                           
|                                            |                                                                                                                        | 2004                        |                                            |          | 2003    |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | (In thousands, except share |                                           
|                                            |                                                                                                                        | data)                       |                                           
|                                            |                                                                                                                        | As restated                 |                                            |          |        
|                                            |                                                                                                                        | (see Note 13)               |                                            |          |        
|ASSETS                                     
|Current Assets:                             |                                                                                                                        |                             |                                            |          |         |         |        |         
|                                            | Cash and cash equivalents                                                                                              |                             | $                                          | 23,446   |         |         | $      | 30,467   |        
|                                            | Short-term investments                                                                                                 |                             |                                            | 229,226  |         |         |        | 213,010  |        
|                                            | Accounts receivable, net of allowance for doubtful accounts of
    $188 and $449                                       |                             |                                            | 14,204   |         |         |        | 9,164    |        
|                                            | Inventories                                                                                                            |                             |                                            | 2,191    |         |         |        | 1,955    |        
|                                            | Prepaid expenses and other current assets                                                                              |                             |                                            | 2,069    |         |         |        | 2,589    |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total current assets        |                                            |          | 271,136 |         |        |          | 257,185 |        
|Property and equipment, net                 |                                                                                                                        |                             | 3,395                                      |          |         |         | 4,903  |         
|Goodwill                                    |                                                                                                                        |                             | 97,953                                     |          |         |         | 97,953 |         
|Purchased intangibles and other assets, net |                                                                                                                        |                             | 14,361                                     |          |         |         | 21,680 |         
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total assets                |                                            | $        | 386,845 |         |        | $        | 381,721 |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                           
|LIABILITIES AND SHAREHOLDERS EQUITY       
|Current Liabilities:                        |                                                                                                                        |                             |                                            |          |         |         |        |         
|                                            | Accounts payable                                                                                                       |                             | $                                          | 5,737    |         |         | $      | 7,376    |        
|                                            | Accrued restructuring                                                                                                  |                             |                                            | 398      |         |         |        | 1,251    |        
|                                            | Accrued payroll and related benefits                                                                                   |                             |                                            | 7,342    |         |         |        | 4,988    |        
|                                            | Other accrued liabilities                                                                                              |                             |                                            | 4,719    |         |         |        | 3,830    |        
|                                            | Deferred revenue                                                                                                       |                             |                                            | 30,173   |         |         |        | 19,180   |        
|                                            | Income taxes payable                                                                                                   |                             |                                            | 500      |         |         |        | 827      |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total current liabilities   |                                            |          | 48,869  |         |        |          | 37,452  |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|Commitments and contingencies (Note 10)     |                                                                                                                        |                             |                                            |          |         |         |        |         
|Shareholders Equity:                       |                                                                                                                        |                             |                                            |          |         |         |        |         
|                                            | Common stock, no par value; 200,000,000 shares authorized;
    68,623,042 and 68,613,012 shares issued and outstanding |                             |                                            | 463,733  |         |         |        | 468,905  |        
|                                            | Accumulated other comprehensive loss                                                                                   |                             |                                            | (846     | )       |         |        | (38      | )      
|                                            | Accumulated deficit                                                                                                    |                             |                                            | (124,911 | )       |         |        | (124,598 | )      
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total shareholders equity  |                                            |          | 337,976 |         |        |          | 344,269 |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        |                             | Total liabilities and shareholders equity |          | $       | 386,845 |        |          | $       | 381,721 | 
|                                            |                                                                                                                        |                             |                                            |          |         |        



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SONICWALL, INC.







CONSOLIDATED STATEMENTS OF OPERATIONS


|                                             |                                                                                                          |                                       |        |        |         |   |         |        |        |   |          |        |         | 
|-------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------- | - | ------- | ------ | ------ | - | -------- | ------ | ------- | 
|                                             |                                                                                                          | Year Ended December 31,               |       
|                                             |                                                                                                          |                                       |       
|                                             |                                                                                                          | 2004                                  |        |        | 2003    |   |         | 2002   |       
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|                                             |                                                                                                          | (In thousands, except per share data) |       
|                                             |                                                                                                          | As restated                           |        |        |        
|                                             |                                                                                                          | (see Note 13)                         |        |        |        
|Revenue:                                     |                                                                                                          |                                       |        |        |         |   |         |        |        |   |          |       
|                                             | Product                                                                                                  |                                       | $      | 82,994 |         |   | $       | 65,931 |        |   | $        | 78,184 |        
|                                             | License and service                                                                                      |                                       |        | 42,655 |         |   |         | 28,470 |        |   |          | 25,035 |        
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|                                             |                                                                                                          | Total revenue                         |        |        | 125,649 |   |         |        | 94,401 |   |          |        | 103,219 | 
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Cost of revenue:                             |                                                                                                          |                                       |        |        |         |   |         |        |        |   |          |       
|                                             | Product, excluding amortization of stock-based compensation of
    $0, $7 and $40                        |                                       |        | 30,118 |         |   |         | 27,906 |        |   |          | 25,303 |        
|                                             | License and service                                                                                      |                                       |        | 7,002  |         |   |         | 5,617  |        |   |          | 4,659  |        
|                                             | Amortization of purchased technology                                                                     |                                       |        | 4,543  |         |   |         | 4,543  |        |   |          | 4,543  |        
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|                                             |                                                                                                          | Total cost of revenue                 |        |        | 41,663  |   |         |        | 38,066 |   |          |        | 34,505  | 
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Gross margin                                 |                                                                                                          |                                       | 83,986 |        |         |   | 56,335  |        |        |   | 68,714   |       
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Operating expenses:                          |                                                                                                          |                                       |        |        |         |   |         |        |        |   |          |       
|                                             | Research and development, excluding amortization of stock-based
    compensation of $75, $70, and $303   |                                       |        | 23,337 |         |   |         | 19,864 |        |   |          | 18,900 |        
|                                             | Sales and marketing, excluding amortization of stock-based
    compensation of $0, $398, and $898        |                                       |        | 47,353 |         |   |         | 40,139 |        |   |          | 42,937 |        
|                                             | General and administrative, excluding amortization of
    stock-based compensation of $0, $225, and $159 |                                       |        | 14,365 |         |   |         | 11,893 |        |   |          | 11,200 |        
|                                             | Amortization of purchased intangible assets                                                              |                                       |        | 3,089  |         |   |         | 5,333  |        |   |          | 5,744  |        
|                                             | Impairment of goodwill                                                                                   |                                       |        |       |         |   |         |       |        |   |          | 87,640 |        
|                                             | Restructuring charges                                                                                    |                                       |        | (171   | )       |   |         | 1,833  |        |   |          | 3,969  |        
|                                             | Stock-based compensation                                                                                 |                                       |        | 75     |         |   |         | 700    |        |   |          | 1,400  |        
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|                                             |                                                                                                          | Total operating expenses              |        |        | 88,048  |   |         |        | 79,762 |   |          |        | 171,790 | 
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Loss from operations                         |                                                                                                          |                                       | (4,062 | )      |         |   | (23,427 | )      |        |   | (103,076 | )     
|Interest income and other expense, net       |                                                                                                          |                                       | 4,050  |        |         |   | 4,169   |        |        |   | 6,044    |       
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Loss before income taxes                     |                                                                                                          |                                       | (12    | )      |         |   | (19,258 | )      |        |   | (97,032  | )     
|Benefit from (provision for) income taxes    |                                                                                                          |                                       | (301   | )      |         |   | 1,590   |        |        |   | 3,119    |       
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Net loss                                     |                                                                                                          | $                                     | (313   | )      |         | $ | (17,668 | )      |        | $ | (93,913  | )     
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Net loss per share:                          |                                                                                                          |                                       |        |        |         |   |         |        |        |   |          |       
|                                             | Basic and diluted                                                                                        |                                       | $      | (0.00  | )       |   | $       | (0.26  | )      |   | $        | (1.40  | )      
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       
|Shares used in computing net loss per share: |                                                                                                          |                                       |        |        |         |   |         |        |        |   |          |       
|                                             | Basic and diluted                                                                                        |                                       |        | 70,850 |         |   |         | 67,895 |        |   |          | 67,124 |        
|                                             |                                                                                                          |                                       |        |        |         |   |         |        |       



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SONICWALL, INC.







CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |   |          |         |   |   |         |         |         |  
|--------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------------- | ---------- | - | -------- | ----- | ------- | ------------- | - | - | ----------- | - | ----- | ------------- | ---- | ---- | ------ | - | -------- | ------- | - | - | ------- | ------- | ------- | -
|                                                                                        |                                               |                                        |            |   |          |       |         | Accumulated   |   |   |             |   |      
|                                                                                        |                                               |                                        |            |   |          | Other |         |               |   |   |            
|                                                                                        |                                               | Common Stock                           |            |   | Deferred |       |         | Comprehensive |   |   |             |   | Total |              
|                                                                                        |                                               |                                        |            |   | Stock    |       |         | Income        |   |   | Accumulated |   |       | Shareholders |     
|                                                                                        |                                               | Shares                                 |            |   | Amount   |       |         | Compensation  |   |   | (Loss)      |   |       | Deficit       |      |      | Equity |  
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  
|                                                                                        |                                               | (In thousands, except for share data)  |           
|Balance at December 31, 2001                                                            |                                               |                                        | 66,557,275 |   |          | $     | 466,857 |               |   | $ | (2,881      | ) |       | $             | 194  |      |        | $ | (13,017  | )       |   | $ | 451,153 |        
|Issuance of common stock upon exercise of stock options                                 |                                               |                                        | 933,618    |   |          |       | 1,839   |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 1,839   |        
|Issuance of common stock in connection with acquisition                                 |                                               |                                        | 50,000     |   |          |       | 243     |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 243     |        
|Return of shares in connection with acquisition                                         |                                               |                                        | (317,244   | ) |          |       | (4,982  | )             |   |   |            |   |       |               |     |      |        |   |         |         |   |   | (4,982  | )      
|Issuance of common stock in connection with the Employee Stock
    Purchase Plan (ESPP) |                                               |                                        | 193,494    |   |          |       | 1,458   |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 1,458   |        
|Stock-based compensation, net of cancellations                                          |                                               |                                        |           |   |          |       | (1,205  | )             |   |   | 2,517       |   |       |               |     |      |        |   |         |         |   |   | 1,312   |        
|Comprehensive loss:                                                                     |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |   |          |         |   |   |         |        
|                                                                                        | Unrealized gain on investment securities, net |                                        |            |  |          |       |         |              |   |   |             |  |       |               |      | 73   |        |   |          |        |   |   |         | 73      |        
|                                                                                        | Net loss                                      |                                        |            |  |          |       |         |              |   |   |             |  |       |               |      |     |        |   |          | (93,913 | ) |   |         | (93,913 | )      
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  
|                                                                                        |                                               | Total comprehensive loss               |            |   |         |       |         |               |  |   |             |   |      |               |      |      |       |   |          |         |  |   |         |         | (93,840 | )
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  
|Balance at December 31, 2002                                                            |                                               |                                        | 67,417,143 |   |          |       | 464,210 |               |   |   | (364        | ) |       |               | 267  |      |        |   | (106,930 | )       |   |   | 357,183 |        
|Issuance of common stock upon exercise of stock options                                 |                                               |                                        | 743,466    |   |          |       | 2,947   |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 2,947   |        
|Issuance of common stock in connection with acquisition                                 |                                               |                                        | 50,000     |   |          |       | 243     |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 243     |        
|Issuance of common stock in connection with the Employee Stock
    Purchase Plan (ESPP) |                                               |                                        | 402,403    |   |          |       | 1,242   |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 1,242   |        
|Stock-based compensation, net of cancellations                                          |                                               |                                        |           |   |          |       | 263     |               |   |   | 364         |   |       |               |     |      |        |   |         |         |   |   | 627     |        
|Comprehensive loss:                                                                     |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |   |          |         |   |   |         |        
|                                                                                        | Unrealized loss on investment securities, net |                                        |            |  |          |       |         |              |   |   |             |  |       |               |      | (305 | )      |   |          |        |   |   |         | (305    | )      
|                                                                                        | Net loss                                      |                                        |            |  |          |       |         |              |   |   |             |  |       |               |      |     |        |   |          | (17,668 | ) |   |         | (17,668 | )      
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  
|                                                                                        |                                               | Total comprehensive loss               |            |   |         |       |         |               |  |   |             |   |      |               |      |      |       |   |          |         |  |   |         |         | (17,973 | )
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  
|Balance at December 31, 2003                                                            |                                               |                                        | 68,613,012 |   |          |       | 468,905 |               |   |   |            |   |       |               | (38  | )    |        |   | (124,598 | )       |   |   | 344,269 |        
|Issuance of common stock upon exercise of stock options                                 |                                               |                                        | 2,805,521  |   |          |       | 12,208  |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 12,208  |        
|Issuance of common stock in connection with the Employee Stock
    Purchase Plan (ESPP) |                                               |                                        | 387,509    |   |          |       | 1,717   |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 1,717   |        
|Stock-based compensation                                                                |                                               |                                        |           |   |          |       | 75      |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 75      |        
|Repurchase of common stock                                                              |                                               |                                        | (3,183,000 | ) |          |       | (19,356 | )             |   |   |            |   |       |               |     |      |        |   |         |         |   |   | (19,356 | )      
|Income tax benefit from stock option exercises  As
    restated                        |                                               |                                        |           |   |          |       | 184     |               |   |   |            |   |       |               |     |      |        |   |         |         |   |   | 184     |        
|Comprehensive loss:                                                                     |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |   |          |         |   |   |         |        
|                                                                                        | Unrealized loss on investment securities, net |                                        |            |  |          |       |         |              |   |   |             |  |       |               |      | (808 | )      |   |          |        |   |   |         | (808    | )      
|                                                                                        | Net loss  As restated                        |                                        |            |  |          |       |         |              |   |   |             |  |       |               |      |     |        |   |          | (313    | ) |   |         | (313    | )      
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  
|                                                                                        |                                               | Total comprehensive loss  As restated |            |   |         |       |         |               |  |   |             |   |      |               |      |      |       |   |          |         |  |   |         |         | (1,121  | )
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  
|Balance at December 31, 2004 As restated                                                |                                               |                                        | 68,623,042 |   |          | $     | 463,733 |               |   | $ |            |   |       | $             | (846 | )    |        | $ | (124,911 | )       |   | $ | 337,976 |        
|                                                                                        |                                               |                                        |            |   |          |       |         |               |   |   |             |   |       |               |      |      |        |  



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SONICWALL, INC.







CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |        |       |         |          |        |        |         |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | ------ | ------ | ------- | -------- | ------ | ----- | ------- | -------- | ------ | ------ | ------- | -
|                                                                            |                                                                                                                  | Year Ended December 31,                                                                 |                                          
|                                                                            |                                                                                                                  |                                                                                         |                                          
|                                                                            |                                                                                                                  | 2004                                                                                    |                                           |                                                     | 2003   |        |         | 2002     |       
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|                                                                            |                                                                                                                  | (In thousands)                                                                          |                                          
|                                                                            |                                                                                                                  | As restated                                                                             |                                           |                                                     |       
|                                                                            |                                                                                                                  | (see Note 13)                                                                           |                                           |                                                     |       
|Cash flows from operating activities:                                       |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |        |       |         |         
|                                                                            | Net loss                                                                                                         |                                                                                         | $                                         | (313                                                | )      |        | $       | (17,668  | )      |       | $       | (93,913  | )     
|                                                                            | Adjustments to reconcile net loss to net cash provided by
    operating activities:                              |                                                                                         |                                           |                                                     |        |        |         |          |        |       |         |          |       
|                                                                            |                                                                                                                  | Depreciation and amortization                                                           |                                           |                                                     | 11,216 |        |         |          | 13,508 |       |         |          | 13,479 |       
|                                                                            |                                                                                                                  | Impairment of goodwill                                                                  |                                           |                                                     |       |        |         |          |       |       |         |          | 87,640 |       
|                                                                            |                                                                                                                  | Income tax benefit from exercise of employee stock options                              |                                           |                                                     | 184    |        |         |          |       |       |         |          |       |       
|                                                                            |                                                                                                                  | Reduction in allowance for doubtful accounts                                            |                                           |                                                     | (104   | )      |         |          | (575   | )     |         |          | (644   | )     
|                                                                            |                                                                                                                  | Deferred income taxes                                                                   |                                           |                                                     |       |        |         |          | (1,960 | )     |         |          | (4,175 | )     
|                                                                            |                                                                                                                  | Non-cash restructuring                                                                  |                                           |                                                     | (171   | )      |         |          | 98     |       |         |          | 1,109  |       
|                                                                            |                                                                                                                  | Amortization of stock-based compensation                                                |                                           |                                                     | 75     |        |         |          | 700    |       |         |          | 1,400  |       
|                                                                            |                                                                                                                  | Changes in operating assets and liabilities, net of effects of
    businesses acquired: |                                           |                                                     |        |        |         |          |        |       |         |          |        |       
|                                                                            |                                                                                                                  |                                                                                         | Accounts receivable                       |                                                     |        | (4,936 | )       |          |        | 4,685 |         |          |        | 4,246  |        
|                                                                            |                                                                                                                  |                                                                                         | Inventories                               |                                                     |        | (236   | )       |          |        | 3,810 |         |          |        | (514   | )      
|                                                                            |                                                                                                                  |                                                                                         | Prepaid expenses and other current assets |                                                     |        | 520    |         |          |        | 827   |         |          |        | 1,358  |        
|                                                                            |                                                                                                                  |                                                                                         | Other assets                              |                                                     |        | (284   | )       |          |        | 10    |         |          |        | (41    | )      
|                                                                            |                                                                                                                  |                                                                                         | Accounts payable                          |                                                     |        | (1,639 | )       |          |        | 574   |         |          |        | (665   | )      
|                                                                            |                                                                                                                  |                                                                                         | Accrued payroll and related benefits      |                                                     |        | 2,354  |         |          |        | 208   |         |          |        | 926    |        
|                                                                            |                                                                                                                  |                                                                                         | Accrued restructuring                     |                                                     |        | (682   | )       |          |        | (191  | )       |          |        | 1,442  |        
|                                                                            |                                                                                                                  |                                                                                         | Other accrued liabilities                 |                                                     |        | 889    |         |          |        | (960  | )       |          |        | (391   | )      
|                                                                            |                                                                                                                  |                                                                                         | Deferred revenue                          |                                                     |        | 10,993 |         |          |        | 5,786 |         |          |        | (1,225 | )      
|                                                                            |                                                                                                                  |                                                                                         | Income taxes payable                      |                                                     |        | (327   | )       |          |        | 363   |         |          |        | 1,118  |        
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|                                                                            |                                                                                                                  |                                                                                         |                                           | Net cash provided by operating activities           |        |        | 17,539  |          |        |       | 9,215   |          |        |        | 11,150  |  
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|Cash flows from investing activities:                                       |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |        |       |         |         
|                                                                            | Purchase of property and equipment                                                                               |                                                                                         |                                           | (2,105                                              | )      |        |         | (2,458   | )      |       |         | (4,138   | )     
|                                                                            | Acquisitions, net of cash acquired                                                                               |                                                                                         |                                           |                                                    |        |        |         |         |        |       |         | (3,262   | )     
|                                                                            | Sale of short-term investments                                                                                   |                                                                                         |                                           | 320,832                                             |        |        |         | 192,468  |        |       |         | 400,638  |       
|                                                                            | Purchase of short-term investments                                                                               |                                                                                         |                                           | (337,856                                            | )      |        |         | (195,977 | )      |       |         | (445,563 | )     
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|                                                                            |                                                                                                                  |                                                                                         |                                           | Net cash used in investing activities               |        |        | (19,129 | )        |        |       | (5,967  | )        |        |        | (52,325 | )
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|Cash flows from financing activities:                                       |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |        |       |         |         
|                                                                            | Proceeds from exercise of stock options and warrants and
    issuance of common stock in connection with ESPP    |                                                                                         |                                           | 13,925                                              |        |        |         | 4,189    |        |       |         | 3,297    |       
|                                                                            | Repurchase of common stock                                                                                       |                                                                                         |                                           | (19,356                                             | )      |        |         |         |        |       |         |         |       
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|                                                                            |                                                                                                                  |                                                                                         |                                           | Net cash provided by (used in) financing activities |        |        | (5,431  | )        |        |       | 4,189   |          |        |        | 3,297   |  
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                                  |                                                                                         | (7,021                                    | )                                                   |        |        | 7,437   |          |        |       | (37,878 | )       
|Cash and cash equivalents at beginning of year                              |                                                                                                                  |                                                                                         | 30,467                                    |                                                     |        |        | 23,030  |          |        |       | 60,908  |         
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|Cash and cash equivalents at end of year                                    |                                                                                                                  | $                                                                                       | 23,446                                    |                                                     |        | $      | 30,467  |          |        | $     | 23,030  |         
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |       
|Supplemental disclosure of cash flow information:                           |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |        |       |         |         
|                                                                            | Cash paid for income taxes                                                                                       |                                                                                         | $                                         | 445                                                 |        |        | $       | 270      |        |       | $       | 137      |       
|Supplemental disclosure of non-cash investing and financing
    activities: |                                                                                                                  |                                                                                         |                                           |                                                     |        |        |         |          |        |       |         |         
|                                                                            | Reversal of deferred stock compensation for terminated employees                                                 |                                                                                         | $                                         |                                                    |        |        | $       | (216     | )      |       | $       | (1,205   | )     
|                                                                            | Issuance of common stock and assumption of stock options and
    warrants in connection with acquired businesses |                                                                                         | $                                         |                                                    |        |        | $       | 243      |        |       | $       | 243      |       
|                                                                            | Return of common stock in connection with acquired businesses                                                    |                                                                                         | $                                         |                                                    |        |        | $       |         |        |       | $       | (4,982   | )     
|                                                                            | Goodwill adjustment recorded for acquired businesses                                                             |                                                                                         | $                                         |                                                    |        |        | $       |         |        |       | $       | 8,783    |       
|                                                                            | Unrealized gain (loss) on short-term investments, net of tax                                                     |                                                                                         | $                                         | (808                                                | )      |        | $       | (305     | )      |       | $       | 73       |       



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SONICWALL, INC.







NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|         |                                                                
|-------- | ---------------------------------------------------------------
|Note 1  | The Company and Summary of Significant Accounting
    Policies:





| |              
| | -------------
| | Consolidation





| |                 
| | ----------------
| | Use of estimates





| |                   
| | ------------------
| | Foreign Currencies





| |                                                         
| | --------------------------------------------------------
| | Cash and cash equivalents and short-term
    investments



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |           
| | ----------
| | Fair value





| |                                                                               
| | ------------------------------------------------------------------------------
| | Concentration of credit risk, foreign operations and
    significant customers









| |            
| | -----------
| | Inventories





| |                       
| | ----------------------
| | Property and equipment



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                       
| | --------------------------------------
| | Purchased intangibles and other assets





| |         
| | --------
| | Goodwill





| |                       
| | ----------------------
| | Impairment of goodwill







| |                                      
| | -------------------------------------
| | Impairment of other long-lived assets





| |                                       
| | --------------------------------------
| | Interest income and other expense, net





| |                         
| | ------------------------
| | Stock-based compensation



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                   
| | ----------------------------------
| | Pro forma stock-based compensation



|                                        |                                                                                                                                                                           |                                              |   |         |      |  |   |         |   |  |   |          |  
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                        |                                                                                                                                                                           | Year Ended December 31,                      |  
|                                        |                                                                                                                                                                           |                                              |  
|                                        |                                                                                                                                                                           | 2004                                         |   |         | 2003 |  |   | 2002    |  
|                                        |                                                                                                                                                                           |                                              |   |         |      |  |   |         |  
|                                        |                                                                                                                                                                           | (In thousands, except for per share amounts) |  
|                                        |                                                                                                                                                                           | As restated                                  |   |         |     
|                                        |                                                                                                                                                                           | (see Note 13)                                |   |         |     
|Net loss:                               |                                                                                                                                                                           |                                              |   |         |      |  |   |         |   |  |   |         
|                                        | As reported                                                                                                                                                               |                                              | $ | (313    | )    |  | $ | (17,668 | ) |  | $ | (93,913  | )
|                                        | Expensed stock compensation under the intrinsic value method,
    net of related tax effect                                                                               |                                              |   | 75      |      |  |   | 700     |   |  |   | 1,400    |  
|                                        | Stock-based compensation expense that would have been included
    in the determination of net loss had the fair value method been
    applied, net of related tax effect |                                              |   | (17,520 | )    |  |   | (24,388 | ) |  |   | (20,153  | )
|                                        |                                                                                                                                                                           |                                              |   |         |      |  |   |         |  
|                                        | Pro forma net loss                                                                                                                                                        |                                              | $ | (17,758 | )    |  | $ | (41,356 | ) |  | $ | (112,666 | )
|                                        |                                                                                                                                                                           |                                              |   |         |      |  |   |         |  
|Net loss per share  basic and diluted: |                                                                                                                                                                           |                                              |   |         |      |  |   |         |   |  |   |         
|                                        | As reported                                                                                                                                                               |                                              | $ | (0.00   | )    |  | $ | (0.26   | ) |  | $ | (1.40    | )
|                                        |                                                                                                                                                                           |                                              |   |         |      |  |   |         |  
|                                        | Pro forma                                                                                                                                                                 |                                              | $ | (0.25   | )    |  | $ | (0.61   | ) |  | $ | (1.68    | )
|                                        |                                                                                                                                                                           |                                              |   |         |      |  |   |         |  





|                        |  |      |                |  |      |  |                |      |  |  |                | 
|----------------------- |  | ---- | -------------- |  | ---- |  | -------------- | ---- |  |  | -------------- | 
|                        |  | 2004 |                |  | 2003 |  |                | 2002 | 
|                        |  |      |                |  |      |  |                |      | 
|Expected volatility     |  |      | 89%            |  |      |  | 90%            |      |  |  | 100%           | 
|Risk-free interest rate |  |      | 2.52% to 3.55% |  |      |  | 2.16% to 2.87% |      |  |  | 2.61% to 4.20% | 
|Expected life           |  |      | 4 years        |  |      |  | 4 years        |      |  |  | 4 years        | 
|Dividend yield          |  |      | 0%             |  |      |  | 0%             |      |  |  | 0%             | 

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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |      |                |  |      |  |                |      |  |  |                | 
|----------------------- |  | ---- | -------------- |  | ---- |  | -------------- | ---- |  |  | -------------- | 
|                        |  | 2004 |                |  | 2003 |  |                | 2002 | 
|                        |  |      |                |  |      |  |                |      | 
|Expected volatility     |  |      | 60%            |  |      |  | 63%            |      |  |  | 90%            | 
|Risk-free interest rate |  |      | 1.00% to 1.73% |  |      |  | 1.01% to 1.33% |      |  |  | 1.69% to 4.72% | 
|Expected life           |  |      | 0.5 year       |  |      |  | 1 year         |      |  |  | 1 year         | 
|Dividend yield          |  |      | 0%             |  |      |  | 0%             |      |  |  | 0%             | 





| |                    
| | -------------------
| | Revenue recognition











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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




















| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Sales returns and other allowances, allowance for doubtful
    accounts and warranty reserve.



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |             
| | ------------
| | Income taxes





| |                                                                        
| | -----------------------------------------------------------------------
| | Research and development and capitalized software
    development costs





| |                  
| | -----------------
| | Reclassifications





| |                  
| | -----------------
| | Advertising Costs





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                  
| | ---------------------------------
| | Computation of net loss per share





|                           |                                                               |                         |       |        |      |   |       |         |   |   |       |         |  
|-------------------------- | ------------------------------------------------------------- | ----------------------- | ----- | ------ | ---- | - | ----- | ------- | - | - | ----- | ------- | -
|                           |                                                               | Year Ended December 31, |      
|                           |                                                               |                         |      
|                           |                                                               | 2004                    |       |        | 2003 |   |       | 2002    |  
|                           |                                                               |                         |       |        |      |   |       |         |  
|                           |                                                               | As restated             |       |        |      |   |      
|                           |                                                               | (see Note 13)           |       |        |      |   |      
|Numerator:                 |                                                               |                         |       |        |      |   |       |         |   |   |       |        
|                           | Net loss                                                      |                         | $     | (313   | )    |   | $     | (17,668 | ) |   | $     | (93,913 | )
|                           |                                                               |                         |       |        |      |   |       |         |  
|Denominator:               |                                                               |                         |       |        |      |   |       |         |   |   |       |        
|                           | Weighted average common shares outstanding                    |                         |       | 70,850 |      |   |       | 67,895  |   |   |       | 67,148  |  
|                           | Weighted average unvested common shares subject to repurchase |                         |       |       |      |   |       |        |   |   |       | (24     | )
|                           |                                                               |                         |       |        |      |   |       |         |  
|                           | Denominator for basic calculation                             |                         |       | 70,850 |      |   |       | 67,895  |   |   |       | 67,124  |  
|                           | Potentially dilutive securities                               |                         |       |       |      |   |       |        |   |   |       |        |  
|                           |                                                               |                         |       |        |      |   |       |         |  
|                           | Denominator for diluted calculation                           |                         |       | 70,850 |      |   |       | 67,895  |   |   |       | 67,124  |  
|                           |                                                               |                         |       |        |      |   |       |         |  
|Basic net loss per share   |                                                               | $                       | (0.00 | )      |      | $ | (0.26 | )       |   | $ | (1.40 | )      
|                           |                                                               |                         |       |        |      |   |       |         |  
|Diluted net loss per share |                                                               | $                       | (0.00 | )      |      | $ | (0.26 | )       |   | $ | (1.40 | )      
|                           |                                                               |                         |       |        |      |   |       |         |  









| |                                 
| | --------------------------------
| | Recent accounting pronouncements

Accounting


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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


for Stock-Based Compensation. Accounting for Stock
Issued to Employees Statement of Cash Flows.






other-than-temporary


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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Note 2  Balance Sheet Components:


|                                             |                                |                |        |         |      |   |        |         |  
|-------------------------------------------- | ------------------------------ | -------------- | ------ | ------- | ---- | - | ------ | ------- | -
|                                             |                                | December 31,   |       
|                                             |                                |                |       
|                                             |                                | 2004           |        |         | 2003 |  
|                                             |                                |                |        |         |      |  
|                                             |                                | (In thousands) |       
|Inventories:                                 |                                |                |        |         |      |   |        |        
|                                             | Raw materials                  |                | $      | 18      |      |   | $      | 43      |  
|                                             | Finished goods                 |                |        | 2,173   |      |   |        | 1,912   |  
|                                             |                                |                |        |         |      |  
|                                             |                                | $              | 2,191  |         |      | $ | 1,955  |        
|                                             |                                |                |        |         |      |  
|Property and equipment, net:                 |                                |                |        |         |      |   |        |        
|                                             | Equipment                      |                | $      | 8,756   |      |   | $      | 7,732   |  
|                                             | Office equipment and furniture |                |        | 1,896   |      |   |        | 1,934   |  
|                                             | Leasehold improvements         |                |        | 1,391   |      |   |        | 1,389   |  
|                                             | Software                       |                |        | 6,538   |      |   |        | 6,131   |  
|                                             |                                |                |        |         |      |  
|                                             |                                |                | 18,581 |         |      |   | 17,186 |        
|                                             | Less: accumulated depreciation |                |        | (15,186 | )    |   |        | (12,283 | )
|                                             |                                |                |        |         |      |  
|                                             |                                | $              | 3,395  |         |      | $ | 4,903  |        
|                                             |                                |                |        |         |      |  
|Purchased intangibles and other assets, net: |                                |                |        |         |      |   |        |        
|                                             | Purchased intangible assets    |                | $      | 52,529  |      |   | $      | 52,529  |  
|                                             | Other assets                   |                |        | 695     |      |   |        | 382     |  
|                                             |                                |                |        |         |      |  
|                                             |                                |                | 53,224 |         |      |   | 52,911 |        
|                                             | Less: accumulated amortization |                |        | (38,863 | )    |   |        | (31,231 | )
|                                             |                                |                |        |         |      |  
|                                             |                                | $              | 14,361 |         |      | $ | 21,680 |        
|                                             |                                |                |        |         |      |  



|         |                                    
|-------- | -----------------------------------
|Note 3  | Goodwill and Purchased Intangibles:



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                       |  |              |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     |  |   |         |   |  |   |        | 
|---------------------- |  | ------------ | --------- | ----------------- | -------- | - | ----------------- | ------------ |  | ----- | ------- | - | -------- | ------ | ------ | ----------- | ------------ | - | ------ | --- |  | - | ------- | - |  | - | ------ | 
|                       |  |              |           | December 31, 2004 |          |   | December 31, 2003 |             
|                       |  | Weighted     |           |                   |          |   |                   |              | 
|                       |  | Average      |           |                   | Gross    |   |                   |              |  | Gross |         |   |         
|                       |  | Amortization |           |                   | Carrying |   |                   | Accumulated  |  |       |         |   | Carrying |        |        | Accumulated |              |   |       
|                       |  | Period       |           |                   | Amount   |   |                   | Amortization |  |       | Net     |   |          | Amount |        |             | Amortization |   |        | Net | 
|                       |  |              |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     | 
|Purchased technology   |  |              | 71 months |                   |          | $ | 26,970            |              |  | $     | (18,567 | ) |          | $      | 8,403  |             |              | $ | 26,970 |     |  | $ | (14,024 | ) |  | $ | 12,946 | 
|Non-compete agreements |  |              | 36 months |                   |          |   | 7,019             |              |  |       | (7,019  | ) |          |        |       |             |              |   | 7,019  |     |  |   | (7,016  | ) |  |   | 3      | 
|Customer base          |  |              | 69 months |                   |          |   | 18,140            |              |  |       | (12,904 | ) |          |        | 5,236  |             |              |   | 18,140 |     |  |   | (9,842  | ) |  |   | 8,298  | 
|Other                  |  |              | 18 months |                   |          |   | 400               |              |  |       | (373    | ) |          |        | 27     |             |              |   | 400    |     |  |   | (350    | ) |  |   | 50     | 
|                       |  |              |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     | 
|Total intangibles      |  |              |           |                   |          | $ | 52,529            |              |  | $     | (38,863 | ) |          | $      | 13,666 |             |              | $ | 52,529 |     |  | $ | (31,232 | ) |  | $ | 21,297 | 
|                       |  |              |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     | 





|            |       |   |       |       | 
|----------- | ----- | - | ----- | ----- | 
|Fiscal Year |       |  
|            |       |  
|2005        |       | $ | 4,543 |      
|2006        |       |   | 3,860 |      
|            |       |   |      
|            | Total |   | $     | 8,403 | 
|            |       |   |      



|            |       |   |       |       | 
|----------- | ----- | - | ----- | ----- | 
|Fiscal Year |       |  
|            |       |  
|2005        |       | $ | 2,813 |      
|2006        |       |   | 2,450 |      
|            |       |   |      
|            | Total |   | $     | 5,263 | 
|            |       |   |      





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Step 1  A comparison of the fair value of the
    Companys reporting units to the carrying value, including
    goodwill of each of those units. For each reporting unit where
    the carrying value, including goodwill, exceeds the units
    fair value, the Company will move to step 2. If a units
    fair value exceeds the carrying value, no further work is
    performed and no impairment charge is necessary.                                                                                                                                                     
|
| | Step 2  An allocation of the fair value of the
    reporting unit to its identifiable tangible and non-goodwill
    intangible assets and liabilities. This will derive an implied
    fair value for the reporting units goodwill. The Company
    will then compare the implied fair value of the reporting
    units goodwill with the carrying amount of the reporting
    units goodwill. If the carrying amount of the reporting
    units goodwill is greater than the implied fair value of
    its goodwill, an impairment loss must be recognized for the
    excess.



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |              
|-------- | -------------
|Note 4  | Acquisitions:







|                               |                     |   |        |        | 
|------------------------------ | ------------------- | - | ------ | ------ | 
|Cash                           |                     | $ | 12,500 |       
|Assumption of RedCreek options |                     |   | 2,205  |       
|Transaction costs              |                     |   | 545    |       
|                               |                     |   |       
|                               | Total consideration |   | $      | 15,250 | 
|                               |                     |   |       

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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                          |                             |   |        |        | 
|----------------------------------------- | --------------------------- | - | ------ | ------ | 
|Tangible assets acquired                  |                             | $ | 1,397  |       
|Intangible assets acquired:               |                             |   |        |       
|Purchased technology                      |                             |   | 750    |       
|                                          | Trademarks                  |   |        | 100    | 
|                                          | Customer base               |   |        | 150    | 
|                                          | Outstanding purchase orders |   |        | 150    | 
|                                          | Goodwill                    |   |        | 17,397 | 
|Deferred compensation of unvested options |                             |   | 1,621  |       
|Liabilities assumed                       |                             |   | (6,315 | )     
|                                          |                             |   |       
|                                          | Total consideration         |   | $      | 15,250 | 
|                                          |                             |   |       











|         |                       
|-------- | ----------------------
|Note 5  | Financial Instruments:



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |                             |                                 |         |            |            |   |         |         |  |   |      |      |  
|-------------------------- | --------------------------- | ------------------------------- | ------- | ---------- | ---------- | - | ------- | ------- |  | - | ---- | ---- | -
|                           |                             | Year Ended December 31, 2004(1) |        
|                           |                             |                                 |        
|                           |                             |                                 |         | Unrealized |           
|                           |                             | Fair Value                      |         |            | Book Value |   |         | (Loss)  | 
|                           |                             |                                 |         |            |            |   |         |         | 
|                           |                             | (In thousands)                  |        
|Marketable securities      |                             |                                 |         |            |            |   |         |         |  |   |      |     
|Corporate debt securities  |                             | $                               | 64,149  |            |            | $ | 64,511  |         |  | $ | (362 | )   
|U.S. government securities |                             |                                 | 51,546  |            |            |   | 51,938  |         |  |   | (392 | )   
|Municipal bonds and notes  |                             |                                 | 113,531 |            |            |   | 113,545 |         |  |   | (14  | )   
|                           |                             |                                 |         |            |            |   |         |         | 
|                           | Total marketable securities |                                 | $       | 229,226    |            |   | $       | 229,994 |  |   | $    | (768 | )
|                           |                             |                                 |         |            |            |   |         |         | 






|    |                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Of the total gross unrealized losses, approximately $27,000 of
    gross unrealized losses relates to corporate and municipal bonds
    with a fair value of $4.3 million that have been in a loss
    position for 12 months or more.

|                           |                             |                              |         |            |            |   |         |             |  |   |     |    | 
|-------------------------- | --------------------------- | ---------------------------- | ------- | ---------- | ---------- | - | ------- | ----------- |  | - | --- | -- | 
|                           |                             | Year Ended December 31, 2003 |        
|                           |                             |                              |        
|                           |                             |                              |         | Unrealized |           
|                           |                             | Fair Value                   |         |            | Book Value |   |         | Gain (Loss) | 
|                           |                             |                              |         |            |            |   |         |             | 
|                           |                             | (In thousands)               |        
|Marketable securities      |                             |                              |         |            |            |   |         |             |  |   |     |   
|Corporate debt securities  |                             | $                            | 36,112  |            |            | $ | 36,015  |             |  | $ | 97  |   
|U.S. government securities |                             |                              | 49,311  |            |            |   | 49,368  |             |  |   | (57 | ) 
|Municipal bonds and notes  |                             |                              | 127,587 |            |            |   | 127,587 |             |  |   |    |   
|                           |                             |                              |         |            |            |   |         |             | 
|                           | Total marketable securities |                              | $       | 213,010    |            |   | $       | 212,970     |  |   | $   | 40 | 
|                           |                             |                              |         |            |            |   |         |             | 



|                               |  |                |         |  |      |   |         | 
|------------------------------ |  | -------------- | ------- |  | ---- | - | ------- | 
|                               |  | December 31,   |        
|                               |  |                |        
|                               |  | 2004           |         |  | 2003 |  
|                               |  |                |         |  |      |  
|                               |  | (In thousands) |        
|Maturity                       |  |                |         |  |      |   |         | 
|Due within one year            |  | $              | 102,873 |  |      | $ | 14,607  | 
|Due between one and five years |  |                | 77,853  |  |      |   | 70,903  | 
|Due after 10 years(1)          |  |                | 48,500  |  |      |   | 127,500 | 
|                               |  |                |         |  |      |  
|Total short-term investments   |  | $              | 229,226 |  |      | $ | 213,010 | 
|                               |  |                |         |  |      |  






|    |                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents auction preferred securities that have reauction
    periods of 90 days or less but whose underlying agreements
    have original maturities of more than 90 days.

Note 6  Restructuring Charges:




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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                        
| | -----------------------
| | 2002 Restructuring Plan





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |                                      |           |      |    |          |   |       |             |  |   |        |   |  |   |        |       | 
|------------------------------ | ------------------------------------ | --------- | ---- | -- | -------- | - | ----- | ----------- |  | - | ------ | - |  | - | ------ | ----- | 
|                               |                                      | Employee  |      |    |          |   |       |             | 
|                               |                                      | Severance |      |    | Facility |   |       | Asset       |  |   |       
|                               |                                      | Benefits  |      |    | Costs    |   |       | Impairments |  |   | Total  |  
|                               |                                      |           |      |    |          |   |       |             |  |   |        |  
|Restructuring charges incurred |                                      | $         | 858  |    |          | $ | 1,944 |             |  | $ | 1,167  |   |  | $ | 3,969  |      
|Cash paid                      |                                      |           | (833 | )  |          |   | (527  | )           |  |   | (58    | ) |  |   | (1,418 | )    
|Non-cash charges               |                                      |           |     |    |          |   |      |             |  |   | (1,109 | ) |  |   | (1,109 | )    
|                               |                                      |           |      |    |          |   |       |             |  |   |        |  
|                               | Reserve balance at December 31, 2002 |           |      | 25 |          |   |       | 1,417       |  |   |        |  |  |   |        | 1,442 | 
|Cash paid                      |                                      |           |     |    |          |   | (818  | )           |  |   |       |   |  |   | (818   | )    
|Adjustments                    |                                      |           | (25  | )  |          |   | 379   |             |  |   |       |   |  |   | 354    |      
|                               |                                      |           |      |    |          |   |       |             |  |   |        |  
|                               | Reserve balance at December 31, 2003 |           |      |   |          |   |       | 978         |  |   |        |  |  |   |        | 978   | 
|Cash paid                      |                                      |           |     |    |          |   | (529  | )           |  |   |       |   |  |   | (529   | )    
|Adjustments                    |                                      |           |     |    |          |   | (134  | )           |  |   |       |   |  |   | (134   | )    
|                               |                                      |           |      |    |          |   |       |             |  |   |        |  
|                               | Reserve balance at December 31, 2004 |           | $    |   |          |   | $     | 315         |  |   | $      |  |  |   | $      | 315   | 
|                               |                                      |           |      |    |          |   |       |             |  |   |        |  



| |                        
| | -----------------------
| | 2003 Restructuring Plan





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |                                      |           |        |    |          |   |      |             |  |   |       |   |  |   |        |     | 
|------------------------------ | ------------------------------------ | --------- | ------ | -- | -------- | - | ---- | ----------- |  | - | ----- | - |  | - | ------ | --- | 
|                               |                                      | Employee  |        |    |          |   |      |             | 
|                               |                                      | Severance |        |    | Facility |   |      | Asset       |  |   |      
|                               |                                      | Benefits  |        |    | Costs    |   |      | Impairments |  |   | Total |  
|                               |                                      |           |        |    |          |   |      |             |  |   |       |  
|Restructuring charges incurred |                                      | $         | 1,139  |    |          | $ | 242  |             |  | $ | 98    |   |  | $ | 1,479  |    
|Cash paid                      |                                      |           | (1,048 | )  |          |   | (60  | )           |  |   |      |   |  |   | (1,108 | )  
|Non-cash charges               |                                      |           |       |    |          |   |     |             |  |   | (98   | ) |  |   | (98    | )  
|                               |                                      |           |        |    |          |   |      |             |  |   |       |  
|                               | Reserve balance at December 31, 2003 |           |        | 91 |          |   |      | 182         |  |   |       |  |  |   |        | 273 | 
|Cash paid                      |                                      |           | (49    | )  |          |   | (104 | )           |  |   |      |   |  |   | (153   | )  
|Adjustments                    |                                      |           | (42    | )  |          |   | 5    |             |  |   |      |   |  |   | (37    | )  
|                               |                                      |           |        |    |          |   |      |             |  |   |       |  
|                               | Reserve balance at December 31, 2004 |           | $      |   |          |   | $    | 83          |  |   | $     |  |  |   | $      | 83  | 
|                               |                                      |           |        |    |          |   |      |             |  |   |       |  



| |                                                         
| | --------------------------------------------------------
| | Summary information for combined restructuring
    plans



|                               |                                      |           |        |    |          |   |       |             |  |   |        |   |  |   |        |       | 
|------------------------------ | ------------------------------------ | --------- | ------ | -- | -------- | - | ----- | ----------- |  | - | ------ | - |  | - | ------ | ----- | 
|                               |                                      | Employee  |        |    |          |   |       |             | 
|                               |                                      | Severance |        |    | Facility |   |       | Asset       |  |   |       
|                               |                                      | Benefits  |        |    | Costs    |   |       | Impairments |  |   | Total  |  
|                               |                                      |           |        |    |          |   |       |             |  |   |        |  
|Restructuring charges incurred |                                      | $         | 858    |    |          | $ | 1,944 |             |  | $ | 1,167  |   |  | $ | 3,969  |      
|Cash paid                      |                                      |           | (833   | )  |          |   | (527  | )           |  |   | (58    | ) |  |   | (1,418 | )    
|Non-cash charges               |                                      |           |       |    |          |   |      |             |  |   | (1,109 | ) |  |   | (1,109 | )    
|                               |                                      |           |        |    |          |   |       |             |  |   |        |  
|                               | Reserve balance at December 31, 2002 |           |        | 25 |          |   |       | 1,417       |  |   |        |  |  |   |        | 1,442 | 
|Restructuring charges incurred |                                      |           | 1,139  |    |          |   | 242   |             |  |   | 98     |   |  |   | 1,479  |      
|Cash paid                      |                                      |           | (1,048 | )  |          |   | (878  | )           |  |   |       |   |  |   | (1,926 | )    
|Adjustments                    |                                      |           | (25    | )  |          |   | 379   |             |  |   |       |   |  |   | 354    |      
|Non-cash charges               |                                      |           |       |    |          |   |      |             |  |   | (98    | ) |  |   | (98    | )    
|                               |                                      |           |        |    |          |   |       |             |  |   |        |  
|                               | Reserve balance at December 31, 2003 |           |        | 91 |          |   |       | 1,160       |  |   |        |  |  |   |        | 1,251 | 
|Cash paid                      |                                      |           | (49    | )  |          |   | (633  | )           |  |   |       |   |  |   | (682   | )    
|Adjustments                    |                                      |           | (42    | )  |          |   | (129  | )           |  |   |       |   |  |   | (171   | )    
|                               |                                      |           |        |    |          |   |       |             |  |   |        |  
|                               | Reserve balance at December 31, 2004 |           | $      |   |          |   | $     | 398         |  |   | $      |  |  |   | $      | 398   | 
|                               |                                      |           |        |    |          |   |       |             |  |   |        |  



|         |                      
|-------- | ---------------------
|Note 7  | Shareholders Equity:



| |                              
| | -----------------------------
| | Stock Option Exchange Program



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |  |        |           |  |                                 |  |           |       |  |  |           |  |  |          |       |  |       |   |       |  |  |   |       | 
|--------------- |  | ------ | --------- |  | ------------------------------- |  | --------- | ----- |  |  | --------- |  |  | -------- | ----- |  | ----- | - | ----- |  |  | - | ----- | 
|                |  | Shares |           |  | Weighted Average Exercise Price | 
|                |  |        |           |  |                                 | 
|Price           |  | Vested |           |  | Unvested                        |  |           | Total |  |  | Vested    |  |  | Unvested |       |  | Total |  
|                |  |        |           |  |                                 |  |           |       |  |  |           |  |  |          |       |  |       |  
|$10.75 - $19.00 |  |        | 774,739   |  |                                 |  | 944,008   |       |  |  | 1,718,747 |  |  | $        | 14.79 |  |       | $ | 14.98 |  |  | $ | 14.89 | 
|$19.01 - $38.00 |  |        | 216,951   |  |                                 |  | 130,049   |       |  |  | 347,000   |  |  |          | 24.78 |  |       |   | 23.69 |  |  |   | 24.37 | 
|$38.01 - $52.06 |  |        | 88,073    |  |                                 |  | 46,927    |       |  |  | 135,000   |  |  |          | 49.67 |  |       |   | 50.56 |  |  |   | 49.98 | 
|                |  |        |           |  |                                 |  |           |       |  |  |           |  |  |          |       |  |       |  
|                |  |        | 1,079,763 |  |                                 |  | 1,120,984 |       |  |  | 2,200,747 |  |  | $        | 19.64 |  |       | $ | 17.48 |  |  | $ | 18.54 | 
|                |  |        |           |  |                                 |  |           |       |  |  |           |  |  |          |       |  |       |  





| |                                  
| | ---------------------------------
| | 1999 Employee Stock Purchase Plan







| |                   
| | ------------------
| | Stock Option Plans



85



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                             |  |               |             |                     |        |          |            |                |  |   |              |  |  |   |       | 
|---------------------------- |  | ------------- | ----------- | ------------------- | ------ | -------- | ---------- | -------------- |  | - | ------------ |  |  | - | ----- | 
|                             |  |               |             | Options Outstanding |       
|                             |  |               |             |                     |       
|                             |  |               |             |                     |        | Weighted |           
|                             |  |               |             |                     |        | Average  |           
|                             |  | Available for |             |                     |        |          | Exercise   |               
|                             |  | Grant         |             |                     | Shares |          |            | Exercise Price |  |   | Price        | 
|                             |  |               |             |                     |        |          |            |                |  |   |              | 
|Balance at December 31, 2001 |  |               | 1,936,765   |                     |        |          | 13,734,809 |                |  | $ | 0.04 - 52.06 |  |  | $ | 12.95 | 
|Authorized                   |  |               | 2,662,291   |                     |        |          |           |                |  |   |             |  |  |   |      | 
|Granted                      |  |               | (3,820,650  | )                   |        |          | 3,820,650  |                |  | $ | 2.87 - 18.79 |  |  | $ | 7.65  | 
|Exercised                    |  |               |            |                     |        |          | (933,618   | )              |  | $ | 0.06 - 18.81 |  |  | $ | 1.97  | 
|Canceled                     |  |               | 3,784,270   |                     |        |          | (6,353,466 | )              |  | $ | 0.06 - 52.06 |  |  | $ | 15.19 | 
|                             |  |               |             |                     |        |          |            |                |  |   |              | 
|Balance at December 31, 2002 |  |               | 4,562,676   |                     |        |          | 10,268,375 |                |  | $ | 0.04 - 52.06 |  |  | $ | 10.59 | 
|Authorized                   |  |               | 2,696,685   |                     |        |          |           |                |  |   |             |  |  |   |      | 
|Granted                      |  |               | (10,103,497 | )                   |        |          | 10,103,497 |                |  | $ | 3.38 -  8.02 |  |  | $ | 5.41  | 
|Exercised                    |  |               |            |                     |        |          | (743,466   | )              |  | $ | 0.04 -  6.45 |  |  | $ | 3.96  | 
|Canceled                     |  |               | 4,235,938   |                     |        |          | (5,071,454 | )              |  | $ | 1.42 - 52.06 |  |  | $ | 13.79 | 
|                             |  |               |             |                     |        |          |            |                |  |   |              | 
|Balance at December 31, 2003 |  |               | 1,391,802   |                     |        |          | 14,556,952 |                |  | $ | 0.06 - 45.56 |  |  | $ | 6.22  | 
|Authorized                   |  |               | 2,744,520   |                     |        |          |           |                |  |   |             |  |  |   |      | 
|Granted                      |  |               | (3,793,070  | )                   |        |          | 3,793,070  |                |  | $ | 5.30 -  9.85 |  |  | $ | 6.09  | 
|Exercised                    |  |               |            |                     |        |          | (2,805,521 | )              |  | $ | 0.06 -  7.73 |  |  | $ | 4.35  | 
|Canceled                     |  |               | 1,617,149   |                     |        |          | (1,989,789 | )              |  | $ | 2.87 - 19.97 |  |  | $ | 9.79  | 
|                             |  |               |             |                     |        |          |            |                |  |   |              | 
|Balance at December 31, 2004 |  |               | 1,960,401   |                     |        |          | 13,554,712 |                |  | $ | 0.06 - 45.56 |  |  | $ | 6.05  | 
|                             |  |               |             |                     |        |          |            |                |  |   |              | 

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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |       |           |  |  |   |       | 
|--------------- |  | ------------------- | ----- | ---------------- | ------------------- |  | ---------------- | ------- |  |  | ------ | ---------------- |  | ----- | --------- |  |  | - | ----- | 
|                |  | Options Outstanding |       |                  |                    
|                |  |                     |       |                  | Options Exercisable | 
|                |  |                     |       | Weighted Average |                     |  |                  |        
|                |  | Weighted            |       |                  |                     |  | Remaining        |         |  |  |        | Weighted         | 
|                |  | Average Exercise    |       |                  |                     |  | Contractual Life |         |  |  |        | Average Exercise | 
|Exercise Prices |  | Price               |       |                  | Shares              |  |                  | (Years) |  |  | Shares |                  |  | Price |          
|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |       |          
|0$.06 - $ 0.06  |  | $                   | 0.06  |                  |                     |  | 51,500           |         |  |  | 0.40   |                  |  |       | 51,500    |  |  | $ | 0.06  | 
|0$.50 - $ 0.50  |  | $                   | 0.50  |                  |                     |  | 58,932           |         |  |  | 4.40   |                  |  |       | 58,932    |  |  | $ | 0.50  | 
|1$.25 - $ 1.42  |  | $                   | 1.26  |                  |                     |  | 127,783          |         |  |  | 4.50   |                  |  |       | 127,783   |  |  | $ | 1.26  | 
|2$.87 - $ 4.28  |  | $                   | 3.46  |                  |                     |  | 3,423,702        |         |  |  | 8.10   |                  |  |       | 1,553,156 |  |  | $ | 3.46  | 
|4$.48 - $ 6.61  |  | $                   | 5.58  |                  |                     |  | 6,134,806        |         |  |  | 8.40   |                  |  |       | 2,164,619 |  |  | $ | 5.55  | 
|6$.83 - $ 9.85  |  | $                   | 7.71  |                  |                     |  | 3,321,735        |         |  |  | 8.70   |                  |  |       | 861,280   |  |  | $ | 7.59  | 
|10$.57 - $14.56 |  | $                   | 11.79 |                  |                     |  | 150,644          |         |  |  | 5.70   |                  |  |       | 147,963   |  |  | $ | 11.80 | 
|15$.88 - $19.97 |  | $                   | 18.02 |                  |                     |  | 155,610          |         |  |  | 6.60   |                  |  |       | 153,109   |  |  | $ | 17.99 | 
|29$.75 - $31.94 |  | $                   | 30.48 |                  |                     |  | 30,000           |         |  |  | 3.60   |                  |  |       | 30,000    |  |  | $ | 30.48 | 
|45$.56 - $45.56 |  | $                   | 45.56 |                  |                     |  | 100,000          |         |  |  | 5.50   |                  |  |       | 100,000   |  |  | $ | 45.56 | 
|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |       |          
|0.$06 - $45.56  |  | $                   | 6.05  |                  |                     |  | 13,554,712       |         |  |  | 8.30   |                  |  |       | 5,248,342 |  |  | $ | 6.49  | 
|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |       |          











| |                         
| | ------------------------
| | Stock Repurchase Program



87



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|         |              
|-------- | -------------
|Note 8  | Income Taxes:



|                                |         |                         |      |      |      |   |        |        |   |   |        |       |  
|------------------------------- | ------- | ----------------------- | ---- | ---- | ---- | - | ------ | ------ | - | - | ------ | ----- | -
|                                |         | Year Ended December 31, |     
|                                |         |                         |     
|                                |         | 2004                    |      |      | 2003 |   |        | 2002   |  
|                                |         |                         |      |      |      |   |        |        |  
|                                |         | As restated             |      |      |      |   |       
|                                |         | (see Note 13)           |      |      |      |   |       
|Current tax (expense) benefit:  |         |                         |      |      |      |   |        |        |   |   |        |      
|                                | Federal |                         | $    | 39   |      |   | $      | 3,724  |   |   | $      | (706  | )
|                                | State   |                         |      | (77  | )    |   |        | (1     | ) |   |        | (57   | )
|                                | Foreign |                         |      | (263 | )    |   |        | (341   | ) |   |        | (293  | )
|                                |         |                         |      |      |      |   |        |        |  
|                                |         |                         | (301 | )    |      |   | 3,382  |        |   |   | (1,056 | )    
|                                |         |                         |      |      |      |   |        |        |  
|Deferred tax (expense) benefit: |         |                         |      |      |      |   |        |        |   |   |        |      
|                                | Federal |                         |      |     |      |   |        | (1,792 | ) |   |        | 2,981 |  
|                                | State   |                         |      |     |      |   |        |       |   |   |        | 1,194 |  
|                                |         |                         |      |      |      |   |        |        |  
|                                |         |                         |     |      |      |   | (1,792 | )      |   |   | 4,175  |      
|                                |         |                         |      |      |      |   |        |        |  
|                                |         | $                       | (301 | )    |      | $ | 1,590  |        |   | $ | 3,119  |      
|                                |         |                         |      |      |      |   |        |        |  





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                          |                                  |                           |   |         |        |  |   |         |        | 
|------------------------- | -------------------------------- | ------------------------- | - | ------- | ------ |  | - | ------- | ------ | 
|                          |                                  | December 31,              |  
|                          |                                  |                           |  
|                          |                                  | 2004                      |   |         | 2003   | 
|                          |                                  |                           |   |         |        | 
|                          |                                  | As restated               |   |         |       
|                          |                                  | (see Note 13)             |   |         |       
|Deferred tax assets:      |                                  |                           |   |         |        |  |   |        
|                          | Net operating loss carryforwards |                           | $ | 31,376  |        |  | $ | 24,527  |       
|                          | Inventory reserves               |                           |   | 462     |        |  |   | 608     |       
|                          | Deferred revenue                 |                           |   | 442     |        |  |   | 285     |       
|                          | Tax credits                      |                           |   | 6,182   |        |  |   | 6,465   |       
|                          | Other reserves and accruals      |                           |   | 8,415   |        |  |   | 7,605   |       
|                          |                                  |                           |   |         |        | 
|                          |                                  | Total deferred tax assets |   |         | 46,877 |  |   |         | 39,490 | 
|                          | Valuation allowance              |                           |   | (41,402 | )      |  |   | (31,059 | )     
|                          |                                  |                           |   |         |        | 
|                          |                                  | Net deferred tax assets   |   | $       | 5,475  |  |   | $       | 8,431  | 
|                          |                                  |                           |   |         |        | 
|Deferred tax liabilities: |                                  |                           |   |         |        |  |   |        
|                          | Intangible assets                |                           | $ | (5,475  | )      |  | $ | (8,431  | )     
|                          |                                  |                           |   |         |        | 







|                                    |  |                         |      |    |      |  |     |      |  |  |     |   
|----------------------------------- |  | ----------------------- | ---- | -- | ---- |  | --- | ---- |  |  | --- | --
|                                    |  | Year Ended December 31, |     
|                                    |  |                         |     
|                                    |  | 2004                    |      |    | 2003 |  |     | 2002 | 
|                                    |  |                         |      |    |      |  |     |      | 
|                                    |  | As restated             |      |    |      |  |    
|                                    |  | (see Note 13)           |      |    |      |  |    
|Federal statutory rate (benefit)    |  |                         | (35  | )% |      |  | (35 | )%   |  |  | (35 | )%
|State taxes, net of federal benefit |  |                         | (4   | )  |      |  | (5  | )    |  |  | (5  | ) 
|Deferred compensation charge        |  |                         | 1532 |    |      |  | 1   |      |  |  | 1   |   
|Goodwill impairment                 |  |                         |     |    |      |  |    |      |  |  | 36  |   
|Tax credits                         |  |                         | (922 | )  |      |  | (4  | )    |  |  | (1  | ) 
|Change in valuation allowance       |  |                         | 2244 |    |      |  | 33  |      |  |  |    |   
|Other                               |  |                         | (314 | )  |      |  | 2   |      |  |  | 1   |   
|                                    |  |                         |      |    |      |  |     |      | 
|                                    |  |                         | 2501 | %  |      |  | (8  | )%   |  |  | (3  | )%
|                                    |  |                         |      |    |      |  |     |      | 

89



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|         |  |                         |      |   |      |   |         |      |  |   |         |  
|-------- |  | ----------------------- | ---- | - | ---- | - | ------- | ---- |  | - | ------- | -
|         |  | Year Ended December 31, |     
|         |  |                         |     
|         |  | 2004                    |      |   | 2003 |   |         | 2002 | 
|         |  |                         |      |   |      |   |         |      | 
|         |  | As restated             |      |   |      |   |        
|         |  | (see Note 13)           |      |   |      |   |        
|Domestic |  | $                       | (822 | ) |      | $ | (19,329 | )    |  | $ | (96,648 | )
|Foreign  |  |                         | 810  |   |      |   | 71      |      |  |   | (384    | )
|         |  |                         |      |   |      |   |         |      | 
|Total    |  | $                       | (12  | ) |      | $ | (19,258 | )    |  | $ | (97,032 | )
|         |  |                         |      |   |      |   |         |      | 



|         |                   
|-------- | ------------------
|Note 9  | Segment Reporting:





|                    |  |                         |         |  |      |   |        |      |  |   |         | 
|------------------- |  | ----------------------- | ------- |  | ---- | - | ------ | ---- |  | - | ------- | 
|                    |  | Year Ended December 31, |        
|                    |  |                         |        
|                    |  | 2004                    |         |  | 2003 |   |        | 2002 | 
|                    |  |                         |         |  |      |   |        |      | 
|United States       |  | $                       | 83,757  |  |      | $ | 64,983 |      |  | $ | 68,426  | 
|All other countries |  |                         | 41,892  |  |      |   | 29,418 |      |  |   | 34,793  | 
|                    |  |                         |         |  |      |   |        |      | 
|Total               |  | $                       | 125,649 |  |      | $ | 94,401 |      |  | $ | 103,219 | 
|                    |  |                         |         |  |      |   |        |      | 

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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                    |  |                         |       |  |      |   |       |      |  |   |       | 
|------------------- |  | ----------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                    |  | Year Ended December 31, |      
|                    |  |                         |      
|                    |  | 2004                    |       |  | 2003 |   |       | 2002 | 
|                    |  |                         |       |  |      |   |       |      | 
|United States       |  | $                       | 3,381 |  |      | $ | 5,024 |      |  | $ | 6,216 | 
|All other countries |  |                         | 386   |  |      |   | 261   |      |  |   | 351   | 
|                    |  |                         |       |  |      |   |       |      | 
|Total               |  | $                       | 3,767 |  |      | $ | 5,285 |      |  | $ | 6,567 | 
|                    |  |                         |       |  |      |   |       |      | 





|          |                               
|--------- | ------------------------------
|Note 10  | Commitments and Contingencies:





|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year Ending December 31, |  |  
|                         |  |  
|2005                     |  | $ | 895   | 
|2006                     |  |   | 62    | 
|2007                     |  |   | 129   | 
|2008                     |  |   | 518   | 
|2009                     |  |   | 389   | 
|                         |  |   |      
|                         |  | $ | 1,993 | 
|                         |  |   |      



| |                     
| | --------------------
| | Purchase commitments



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                   
| | ------------------
| | Product warranties



|                                   |  |                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                   |  | Year Ended December 31, |      
|                                   |  |                         |      
|                                   |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|                                   |  |                         |       |   |      |   |       |      | 
|                                   |  | (In thousands)          |      
|Beginning balance                  |  | $                       | 1,290 |   |      | $ | 1,168 |      |  | $ | 1,194 |  
|Accruals for warranties issued     |  |                         | 386   |   |      |   | 933   |      |  |   | 503   |  
|Settlements made during the period |  |                         | (605  | ) |      |   | (811  | )    |  |   | (529  | )
|                                   |  |                         |       |   |      |   |       |      | 
|Ending balance                     |  | $                       | 1,071 |   |      | $ | 1,290 |      |  | $ | 1,168 |  
|                                   |  |                         |       |   |      |   |       |      | 



| |                                          
| | -----------------------------------------
| | Guarantees and Indemnification Agreements





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                  
| | -----------------
| | Legal Proceedings







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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|          |                    
|--------- | -------------------
|Note 11  | Comprehensive Loss:



|                                                                 |  |                         |        |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                 |  | Year Ended December 31, |       
|                                                                 |  |                         |       
|                                                                 |  | 2004                    |        |   | 2003 |   |         | 2002 | 
|                                                                 |  |                         |        |   |      |   |         |      | 
|                                                                 |  | As restated             |        |   |      |   |        
|                                                                 |  | (see Note 13)           |        |   |      |   |        
|Net loss                                                         |  | $                       | (313   | ) |      | $ | (17,668 | )    |  | $ | (93,913 | )
|Unrealized gains (losses) on investment securities               |  |                         | (808   | ) |      |   | (353    | )    |  |   | 70      |  
|Tax effect of unrealized gains (losses) on investment securities |  |                         |       |   |      |   | 48      |      |  |   | 3       |  
|                                                                 |  |                         |        |   |      |   |         |      | 
|Comprehensive loss                                               |  | $                       | (1,121 | ) |      | $ | (17,973 | )    |  | $ | (93,840 | )
|                                                                 |  |                         |        |   |      |   |         |      | 



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|          |                   
|--------- | ------------------
|Note 12  | Employee Benefits:



| |             
| | ------------
| | Pension Plan





| |                           
| | --------------------------
| | Deferred Compensation Plan





|          |             
|--------- | ------------
|Note 13  | Restatement:





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Fiscal Year 2004


|                                                                  |                                             |                                       |          |        |             |   |        |             |   |   |          |        |  
|----------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | -------- | ------ | ----------- | - | ------ | ----------- | - | - | -------- | ------ | -
|                                                                  |                                             | As Previously                         |          |        |             |   |       
|                                                                  |                                             | Reported                              |          |        | Adjustments |   |        | As restated |  
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|                                                                  |                                             | (In thousands, except per share data) |         
|Revenue                                                           |                                             |                                       |          |        |             |   |        |             |   |   |          |       
|                                                                  | Product                                     |                                       | $        | 82,994 |             |   | $      |             |   |   | $        | 82,994 |  
|                                                                  | License and service                         |                                       |          | 42,655 |             |   |        |             |   |   |          | 42,655 |  
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Total revenue                                                     |                                             |                                       | 125,649  |        |             |   |        |             |   |   | 125,649  |       
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Cost of revenue                                                   |                                             |                                       |          |        |             |   |        |             |   |   |          |       
|                                                                  | Product                                     |                                       |          | 30,161 |             |   |        | (43         | ) |   |          | 30,118 |  
|                                                                  | License and service                         |                                       |          | 7,024  |             |   |        | (22         | ) |   |          | 7,002  |  
|                                                                  | Amortization of purchased technology        |                                       |          | 4,543  |             |   |        |             |   |   |          | 4,543  |  
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Total cost of revenue                                             |                                             |                                       | 41,728   |        |             |   | (65    | )           |   |   | 41,663   |       
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Gross Margin                                                      |                                             |                                       | 83,921   |        |             |   | 65     |             |   |   | 83,986   |       
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Operating expenses:                                               |                                             |                                       |          |        |             |   |        |             |   |   |          |       
|                                                                  | Research and development                    |                                       |          | 23,681 |             |   |        | (344        | ) |   |          | 23,337 |  
|                                                                  | Sales and marketing                         |                                       |          | 47,909 |             |   |        | (556        | ) |   |          | 47,353 |  
|                                                                  | General and administrative                  |                                       |          | 14,467 |             |   |        | (102        | ) |   |          | 14,365 |  
|                                                                  | Amortization of purchased intangible assets |                                       |          | 3,089  |             |   |        |             |   |   |          | 3,089  |  
|                                                                  | Restructuring charges                       |                                       |          | (171   | )           |   |        |             |   |   |          | (171   | )
|                                                                  | Stock-based compensation                    |                                       |          | 75     |             |   |        |             |   |   |          | 75     |  
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Total operating expenses                                          |                                             |                                       | 89,050   |        |             |   | (1,002 | )           |   |   | 88,048   |       
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Loss from operations                                              |                                             |                                       | (5,129   | )      |             |   | 1,067  |             |   |   | (4,062   | )     
|Interest income and other expenses, net                           |                                             |                                       | 4,050    |        |             |   |        |             |   |   | 4,050    |       
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Loss before income taxes                                          |                                             |                                       | (1,079   | )      |             |   | 1,067  |             |   |   | (12      | )     
|Provision for income taxes                                        |                                             |                                       | (229     | )      |             |   | (72    | )           |   |   | (301     | )     
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Net loss                                                          |                                             | $                                     | (1,308   | )      |             | $ | 995    |             |   | $ | (313     | )     
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Basic and diluted net loss per share                              |                                             | $                                     | (0.02    | )      |             |   |        |             |   | $ | (0.00    | )     
|                                                                  |                                             |                                       |          |        |             |   |        |             |  
|Accrued payroll and related benefits                              |                                             | $                                     | 8,409    |        |             | $ | (1,067 | )           |   | $ | 7,342    |       
|Total current liabilities                                         |                                             |                                       | 49,936   |        |             |   | (1,067 | )           |   |   | 48,869   |       
|Common stock  income tax benefit from stock option
    exercises |                                             |                                       | 463,661  |        |             |   | 72     |             |   |   | 463,733  |       
|Accumulated deficit                                               |                                             |                                       | (125,906 | )      |             |   | 995    |             |   |   | (124,911 | )     
|Total shareholders equity                                        |                                             |                                       | 336,909  |        |             |   | 1,067  |             |   |   | 337,976  |       

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures






Managements Report on Internal Control Over Financial
Reporting (as restated)






Internal
Control  Integrated Framework






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The Company did not maintain effective controls over the timing
    of the recognition of revenue. As a result, during fiscal year
    2004, the Company improperly recognized revenue on certain
    transactions where delivery and transfer of title or the
    evidence of a final arrangement had not yet occurred. This
    control deficiency resulted in material adjustments to revenue
    and cost of revenue during the second and third quarters of 2004.

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | The Company did not maintain effective controls over the
    accounting for certain lease transactions as of
    December 31, 2004. As a result, the Company did not
    properly account for rent expense associated with its corporate
    headquarters lease extension. This control deficiency resulted
    in material adjustments to operating expenses during the third
    quarter of 2004.                                                                                                                  
|
| | (3) | Also, as of December 31, 2004, the Company did not maintain
    effective controls over the determination and accuracy of
    certain liabilities and the related expenses. Specifically, the
    Company failed to properly accrue its obligations for bonuses
    and commissions based on information known by management prior
    to the filing of the interim and annual financial statements.
    This control deficiency resulted in the restatement of the 2004
    annual and interim financial statements.



Internal Control  Integrated
Framework.






Changes in Internal Control Over Financial Reporting







PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements




Schedules




Exhibits




Reports on Form 8-K








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| |     |         
| | --- | --------
| | (c) | Exhibits

|       |    |             |  |                                                                                                                                                                                                                                                                                                                                           
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 2  | .1          |  | Agreement and Plan of Merger and Reorganization, dated as of
    October 16, 2000, among Registrant, Pluto Acquisition
    Corp., Phobos Corporation, and GMS Capital Partners, L.P.
    (Incorporated by reference to Registrants Current Report
    on Form 8-K (File No. 000-27723) filed on
    November 27, 2000).                  
|      
|       | 2  | .2          |  | Amendment to Agreement and Plan of Merger, dated as of
    November 6, 2000, by and among Registrant, Pluto
    Acquisition Corp., Phobos Corporation, and GMS Capital Partners,
    L.P. (Incorporated by reference to Registrants Current
    Report on Form 8-K (File No. 000-27723) filed on
    November 27, 2000).                 
|      
|       | 2  | .3          |  | Agreement and Plan of Merger and Reorganization, dated
    March 1, 2001, among Registrant, ITI Acquisition Corp.,
    Ignyte Technology, Inc., and Jeff Stark. (Incorporated by
    reference to Registrants Registration Statement on
    Form S-3 (File No. 333-61168), filed on May 17,
    2001).                                   
|      
|       | 2  | .4          |  | Amendment No. 1 to the Agreement and Plan of Merger and
    Reorganization by and among Registrant, ITI Acquisition Corp.,
    Ignyte Technology, Inc., and Jeff Stark, dated as of
    March 6, 2001. (Incorporated by reference to
    Registrants Registration Statement on Form S-3
    (File No. 333-61168), filed on May 17, 2001).
|      
|       | 3  | .1          |  | Registrants Amended and Restated Articles of Incorporation
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).                                                                                              
|      
|       | 3  | .2          |  | Registrants Restated Bylaws (Incorporated by reference to
    the Registrants Registration Statement on Form S-1,
    as amended (File No. 333-85997), which became effective on
    November 9, 1999).                                                                                                                                 
|      
|       | 4  | .1          |  | Registrants specimen common stock certificate
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).                                                                                                           
|      
|       | 10 | .1          |  | Registrants 1994 Stock Option Plan, as amended to date
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).                                                                                                  
|      
|       | 10 | .2          |  | Form of Stock Option Agreement for Registrants 1994 Stock
    Option Plan (Incorporated by reference to the Registrants
    Filing on Schedule TO (File No. 005-58485), filed on
    January 9, 2003).                                                                                                                                  
|      
|       | 10 | .3          |  | Registrants 1998 Stock Option Plan, as amended to date
    (Incorporated by reference to the Registrants 2000
    Definitive Proxy Statement (File No. 000-27723), which was
    filed on November 7, 2001).                                                                                                                            
|      
|       | 10 | .4          |  | Form of Stock Option Agreement for Registrants 1998 Stock
    Option Plan (Incorporated by reference to the Registrants
    Filing on Schedule TO (File No. 005-58485), filed on
    January 9, 2003).                                                                                                                                  
|      
|       | 10 | .5          |  | Registrants 1999 Employee Stock Purchase Plan
    (Incorporated by reference to the Registrants 2003
    Definitive Proxy Statement (File No. 000-27723), which was
    filed on November 5, 2003).                                                                                                                                     
|      
|       | 10 | .6          |  | Form of Stock Option Agreement under Phobos Corporation 1998
    Stock Plan (Incorporated by reference to the Registrants
    Registration Statement on Form S-8 (File
    No. 333-54976), filed on February 5, 2001).                                                                                                                   

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|       |    |             |  |                                                                                                                                                                                                                                                                                                           
|------ | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|      
|       | 10 | .7          |  | Form of Stock Option Agreement under Phobos Corporation 1999
    Stock Plan (Incorporated by reference to the Registrants
    Registration Statement on Form S-8 (File
    No. 333-54976), filed on February 5, 2001).                                                                                   
|      
|       | 10 | .8          |  | RedCreek Communications, Inc. 2001 Stock Option Plan
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-8 (File No. 333-81492), filed on
    January 28, 2002).                                                                                                      
|      
|       | 10 | .9          |  | Employment agreement dated June 21, 2003 between Registrant
    and Kathleen Fisher (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended June 30, 2003).                                                                       
|      
|       | 10 | .10         |  | Registrants Form of Individual Compensation Arrangements
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-8 (File No. 333-81492), filed on
    January 28, 2002).                                                                                                 
|      
|       | 10 | .11         |  | Form of Indemnification Agreement entered into by Registrant
    with each of its officers and directors (Incorporated by
    reference to the Registrants Quarterly Report on
    Form 10-Q (File No. 000-27723) for the quarter ended
    September 30, 2001, filed on November 14, 2001).             
|      
|       | 10 | .12         |  | Loan and Security Agreement dated May 26, 1995 between
    Registrant and Comerica Bank (Incorporated by reference to the
    Registrants Registration Statement on Form S-1, as
    amended (File No. 333-85997), which became effective on
    November 9, 1999).                                      
|      
|       | 10 | .13       |  | Distribution Agreement dated February 9, 1999 between
    Registrant and Tech Data Product Management, Inc. (Incorporated
    by reference to the Registrants Registration Statement on
    Form S-1, as amended (File No. 333-85997), which
    became effective on November 9, 1999).                  
|      
|       | 10 | .14       |  | Distribution Agreement dated July 5, 1998 between
    Registrant and Sumitomo Metal Systems Development Co., Ltd.
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).        
|      
|       | 10 | .15       |  | Distribution Agreement dated November 11, 1992 between
    Registrant and Ingram Micro, Inc. (Incorporated by reference to
    the Registrants Registration Statement on Form S-1,
    as amended (File No. 333-85997), which became effective on
    November 9, 1999).                                 
|      
|       | 10 | .16         |  | Agreement of Sublease dated as of October 26, 1998 between
    Registrant and AMP Incorporated (Incorporated by reference to
    the Registrants Registration Statement on Form S-1,
    as amended (File No. 333-85997), which became effective on
    November 9, 1999).                               
|      
|       | 10 | .17         |  | Purchase Agreement dated September 28, 1999 between
    Registrant and Flash Electronics Inc. (Incorporated by reference
    to the Registrants Registration Statement on
    Form S-1, as amended (File No. 333-85997), which
    became effective on November 9, 1999).                                
|      
|       | 10 | .18         |  | Lease dated September 27, 1999 between Registrant, as
    Tenant, and AMB Property, L.P., as Landlord (Incorporated by
    reference to the Registrants Registration Statement on
    Form S-1, as amended (File No. 333-85997), which
    became effective on November 9, 1999).                        
|      
|       | 10 | .19         |  | First Amendment to Lease dated May 2, 2001 between
    Registrant, as Tenant, and AMB Property, L.P., as Landlord
    (Incorporated by reference to the Registrants Annual
    Report on Form 10-K (File No. 000-27723) for the
    fiscal year ended December 31, 2001).                                
|      
|       | 10 | .20         |  | Second Amendment to Lease dated September 26, 2001 between
    Registrant, as Tenant, and AMB Property, L.P., as Landlord
    (Incorporated by reference to the Registrants Annual
    Report on Form 10-K (File No. 000-27723) for the
    fiscal year ended December 31, 2001).                        
|      
|       | 10 | .21       |  | OEM Hardware (with Software) License and Purchase Agreement
    effective as of May 29, 2001 between Registrant and Cisco
    Systems, Inc. (Incorporated by reference to the
    Registrants Annual Report on Form 10-K (File
    No. 000-27723) for the fiscal year ended December 31,
    2001).      
|      
|       | 10 | .22       |  | Amendment Number One to OEM Hardware (with Software) License and
    Purchase Agreement dated June 25, 2002 between Registrant
    and Cisco Systems, Inc. (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File
    No. 000-27723) for the quarter ended June 30, 2002).
|      
|       | 10 | .23         |  | Employment agreement dated March 14, 2003 between
    Registrant and Matthew Medeiros (Incorporated by reference to
    the Registrants Annual Report on Form 10-K (File
    No. 000-27723) for the fiscal year ended December 21,
    2002.                                                             

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|       |    |             |  |                                                                                                                                                                                                                                                                                           
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|      
|       | 10 | .24         |  | Employment agreement dated August 11, 2003 between
    Registrant and Michael Stewart (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended September 30, 2003).                                                
|      
|       | 10 | .25         |  | Employment agreement dated October 29, 2003 between
    Registrant and Robert Knauff. (Incorporated by reference to the
    Registrants Annual Report on Form 10-K (File
    No. 000-27723) for the fiscal year ended December 31,
    2003).                                            
|      
|       | 10 | .26         |  | Manufacturing and Purchase Agreement dated June 4, 2004 by
    and between Flash Electronics, Inc. and SonicWALL, Inc.
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended June 30, 2004).                
|      
|       | 10 | .27         |  | Third Amendment to Lease executed on April 28, 2004 by and
    between AMB Property, L.P., as Landlord, and SonicWALL, Inc. as
    Tenant. (Incorporated by reference to the Registrants
    Quarterly Report on Form 10-Q (File No. 000-27723) for
    the quarter ended June 30, 2004).
|      
|       | 10 | .28         |  | Retention and Severance Agreement for Executive Officers dated
    April 20, 2004. (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended June 30, 2004).                                                        
|      
|       | 10 | .29         |  | SonicWALL, Inc. Stock Option Agreement dated July 29, 2004
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended September 30, 2004).                                                                       
|      
|       | 10 | .30         |  | SonicWALL, Inc. Stock Option Agreement dated July 29, 2004
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended September 30, 2004).                                                                       
|      
|       | 10 | .31         |  | SonicWALL, Inc. Matthew Medeiros Employment Agreement as amended
    and restated July 29, 2004 (Incorporated by reference to
    the Registrants Quarterly Report on Form 10-Q (File
    No. 000-27723) for the quarter ended September 30,
    2004).                                  
|      
|       | 10 | .32         |  | SonicWALL, Inc Stock Option Agreement for Outside Directors
    dated July 29, 2004 (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended September 30, 2004).                                                  
|      
|       | 10 | .33         |  | SonicWALL, Inc. Stock Option Agreement dated July 29, 2004
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended September 30, 2004).                                                                       
|      
|       | 10 | .34*        |  | Issuer Repurchase Plan Agreement dated November 29, 2004
    between SonicWALL, Inc. and RBC Dain Rauscher Inc. (Incorporated
    by reference to Registrants Annual Report on
    Form 10-K (File No. 000-27723) for the year ended
    December 31, 2004.)                             
|      
|       | 10 | .35*        |  | Amended and Restated Issuer Repurchase Plan Agreement dated
    February 15, 2005 between SonicWALL, Inc. and RBC Dain
    Rauscher Inc. (Incorporated by reference to Registrants
    Annual Report on Form 10-K (File No. 000-27723)
    for the year ended December 31, 2004.)        
|      
|       | 21 |             |  | Subsidiaries (Incorporated by reference to the Registrants
    Annual Report on Form 10-K (File No. 000-27723)
    for the fiscal year ended December 31, 2001).                                                                                                                         
|      
|       | 23 | .1*         |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                 
|      
|       | 31 | .1*         |  | Certification of Chief Executive Officer pursuant to Securities
    Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 
|      
|       | 31 | .2*         |  | Certification of Chief Financial Officer pursuant to Securities
    Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 
|      
|       | 32 | .1*         |  | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                    






|  |                
|- | ---------------
|* | Filed herewith.



|   |                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment has been obtained or requested for
    portions of this exhibit. The omitted material has been
    separately filed with the Securities and Exchange Commission.

102



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##### Table of Contents





103



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##### Table of Contents






SIGNATURES






| |                
| | ---------------
| | SONICWALL, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ MATTHEW MEDEIROS

| |                        
| | -----------------------
| |                        
| | Matthew Medeiros       
| | Chief Executive Officer



|                                             |  |                                                                                   |  |              |  | 
|-------------------------------------------- |  | --------------------------------------------------------------------------------- |  | ------------ |  | 
|Signature                                    |  | Title                                                                             |  | Date        
|                                             |  |                                                                                   |  |             
|                                            
|/s/ MATTHEW MEDEIROSMatthew
    Medeiros     |  | President, Chief Executive Officer and Director (Principal
    Executive Officer) |  | May 16, 2005
|                                            
|/s/ ROBERT SELVIRobert
    Selvi             |  | Chief Financial Officer
    (Principal Financial Officer)                         |  | May 16, 2005
|                                            
|/s/ ROBERT KNAUFFRobert
    Knauff           |  | Chief Accounting Officer
    (Principal Accounting Officer)                       |  | May 16, 2005
|                                            
|/s/ CHARLES KISSNERCharles
    Kissner       |  | Chairman of the Board of Directors                                                |  | May 16, 2005
|                                            
|/s/ EDWARD THOMPSONEdward
    Thompson       |  | Director                                                                          |  | May 16, 2005
|                                            
|/s/ ROBERT M. WILLIAMSRobert
    M. Williams |  | Director                                                                          |  | May 16, 2005
|                                            
|/s/ CHUCK W. BERGERCharles
    W. Berger     |  | Director                                                                          |  | May 16, 2005
|                                            
|/s/ CARY THOMPSONCary
    Thompson           |  | Director                                                                          |  | May 16, 2005
|                                            
|/s/ JOHN C. SHOEMAKERJohn
    C. Shoemaker   |  | Director                                                                          |  | May 16, 2005
|                                            
|/s/ DAVID GARRISONDavid
    Garrison         |  | Director                                                                          |  | May 16, 2005

104



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##### Table of Contents



SONICWALL, INC.







VALUATION AND QUALIFYING ACCOUNTS


|                             |                                 |            |   |       |       |                |            |          |  |             |             |       |         |         |   |        |   |  |   |       | 
|---------------------------- | ------------------------------- | ---------- | - | ----- | ----- | -------------- | ---------- | -------- |  | ----------- | ----------- | ----- | ------- | ------- | - | ------ | - |  | - | ----- | 
|                             |                                 | Balance at |   |       |       |                | Charged to |          |  | Deductions/ |             |       | Balance |        
|                             |                                 | Beginning  |   |       |       |                | Cost and   |          |  | Write-Off   |             |       | at End  |        
|                             |                                 | of Year    |   |       | Other |                |            | Expenses |  |             | of Accounts |       |         | of Year |  
|                             |                                 |            |   |       |       |                |            |          |  |             |             |       |         |         |  
|                             |                                 |            |   |       |       | (In thousands) |            |          | 
|Year ended December 31, 2002 |                                 |            |   |       |       |                |            |          |  |             |             |       |         |         |   |        |   |  |   |      
|                             | Allowance for doubtful accounts |            | $ | 2,122 |       |                | $          |         |  |             | $           | (644  | )       |         | $ | (81    | ) |  | $ | 1,397 | 
|                             | Inventory reserves              |            |   | 5,742 |       |                |            | 307      |  |             |             | (462  | )       |         |   | (2,365 | ) |  |   | 3,222 | 
|Year ended December 31, 2003 |                                 |            |   |       |       |                |            |          |  |             |             |       |         |         |   |        |   |  |   |      
|                             | Allowance for doubtful accounts |            |   | 1,397 |       |                |            |         |  |             |             | (575  | )       |         |   | (373   | ) |  |   | 449   | 
|                             | Inventory reserves              |            |   | 3,222 |       |                |            |         |  |             |             | 2,627 |         |         |   | (4,358 | ) |  |   | 1,491 | 
|Year ended December 31, 2004 |                                 |            |   |       |       |                |            |          |  |             |             |       |         |         |   |        |   |  |   |      
|                             | Allowance for doubtful accounts |            |   | 449   |       |                |            |         |  |             |             | (104  | )       |         |   | (157   | ) |  |   | 188   | 
|                             | Inventory reserves              |            |   | 1,491 |       |                |            |         |  |             |             | 712   |         |         |   | (1,026 | ) |  |   | 1,177 | 

105



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##### Table of Contents






EXHIBIT INDEX


|       |    |             |  |                                                                                                                                                                                                                                                                                                                                           
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 2  | .1          |  | Agreement and Plan of Merger and Reorganization, dated as of
    October 16, 2000, among Registrant, Pluto Acquisition
    Corp., Phobos Corporation, and GMS Capital Partners, L.P.
    (Incorporated by reference to Registrants Current Report
    on Form 8-K (File No. 000-27723) filed on
    November 27, 2000).                  
|       | 2  | .2          |  | Amendment to Agreement and Plan of Merger, dated as of
    November 6, 2000, by and among Registrant, Pluto
    Acquisition Corp., Phobos Corporation, and GMS Capital Partners,
    L.P. (Incorporated by reference to Registrants Current
    Report on Form 8-K (File No. 000-27723) filed on
    November 27, 2000).                 
|      
|       | 2  | .3          |  | Agreement and Plan of Merger and Reorganization, dated
    March 1, 2001, among Registrant, ITI Acquisition Corp.,
    Ignyte Technology, Inc., and Jeff Stark. (Incorporated by
    reference to Registrants Registration Statement on
    Form S-3 (File No. 333-61168), filed on May 17,
    2001).                                   
|      
|       | 2  | .4          |  | Amendment No. 1 to the Agreement and Plan of Merger and
    Reorganization by and among Registrant, ITI Acquisition Corp.,
    Ignyte Technology, Inc., and Jeff Stark, dated as of
    March 6, 2001. (Incorporated by reference to
    Registrants Registration Statement on Form S-3 (File
    No. 333-61168), filed on May 17, 2001).
|      
|       | 3  | .1          |  | Registrants Amended and Restated Articles of Incorporation
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).                                                                                              
|      
|       | 3  | .2          |  | Registrants Restated Bylaws (Incorporated by reference to
    the Registrants Registration Statement on Form S-1,
    as amended (File No. 333-85997), which became effective on
    November 9, 1999).                                                                                                                                 
|      
|       | 4  | .1          |  | Registrants specimen common stock certificate
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).                                                                                                           
|      
|       | 10 | .1          |  | Registrants 1994 Stock Option Plan, as amended to date
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).                                                                                                  
|      
|       | 10 | .2          |  | Form of Stock Option Agreement for Registrants 1994 Stock
    Option Plan (Incorporated by reference to the Registrants
    Filing on Schedule TO (File No. 005-58485), filed on
    January 9, 2003).                                                                                                                                  
|      
|       | 10 | .3          |  | Registrants 1998 Stock Option Plan, as amended to date
    (Incorporated by reference to the Registrants 2000
    Definitive Proxy Statement (File No. 000-27723), which was
    filed on November 7, 2001).                                                                                                                            
|      
|       | 10 | .4          |  | Form of Stock Option Agreement for Registrants 1998 Stock
    Option Plan (Incorporated by reference to the Registrants
    Filing on Schedule TO (File No. 005-58485), filed on
    January 9, 2003).                                                                                                                                  
|      
|       | 10 | .5          |  | Registrants 1999 Employee Stock Purchase Plan
    (Incorporated by reference to the Registrants 2003
    Definitive Proxy Statement (File No. 000-27723), which was
    filed on November 5, 2003).                                                                                                                                     
|      
|       | 10 | .6          |  | Form of Stock Option Agreement under Phobos Corporation 1998
    Stock Plan (Incorporated by reference to the Registrants
    Registration Statement on Form S-8 (File
    No. 333-54976), filed on February 5, 2001).                                                                                                                   
|      
|       | 10 | .7          |  | Form of Stock Option Agreement under Phobos Corporation 1999
    Stock Plan (Incorporated by reference to the Registrants
    Registration Statement on Form S-8 (File
    No. 333-54976), filed on February 5, 2001).                                                                                                                   
|      
|       | 10 | .8          |  | RedCreek Communications, Inc. 2001 Stock Option Plan
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-8 (File No. 333-81492), filed on
    January 28, 2002).                                                                                                                                      
|      
|       | 10 | .9          |  | Employment agreement dated June 21, 2003 between Registrant
    and Kathleen Fisher (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended June 30, 2003).                                                                                                       
|      
|       | 10 | .10         |  | Registrants Form of Individual Compensation Arrangements
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-8 (File No. 333-81492), filed on
    January 28, 2002).                                                                                                                                 



---



##### Table of Contents



|       |    |             |  |                                                                                                                                                                                                                                                                                                           
|------ | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|      
|       | 10 | .11         |  | Form of Indemnification Agreement entered into by Registrant
    with each of its officers and directors (Incorporated by
    reference to the Registrants Quarterly Report on
    Form 10-Q (File No. 000-27723) for the quarter
    ended September 30, 2001, filed on November 14, 2001).             
|      
|       | 10 | .12         |  | Loan and Security Agreement dated May 26, 1995 between
    Registrant and Comerica Bank (Incorporated by reference to the
    Registrants Registration Statement on Form S-1, as
    amended (File No. 333-85997), which became effective on
    November 9, 1999).                                      
|      
|       | 10 | .13       |  | Distribution Agreement dated February 9, 1999 between
    Registrant and Tech Data Product Management, Inc. (Incorporated
    by reference to the Registrants Registration Statement on
    Form S-1, as amended (File No. 333-85997), which
    became effective on November 9, 1999).                  
|      
|       | 10 | .14       |  | Distribution Agreement dated July 5, 1998 between
    Registrant and Sumitomo Metal Systems Development Co., Ltd.
    (Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File
    No. 333-85997), which became effective on November 9,
    1999).        
|      
|       | 10 | .15       |  | Distribution Agreement dated November 11, 1992 between
    Registrant and Ingram Micro, Inc. (Incorporated by reference to
    the Registrants Registration Statement on Form S-1,
    as amended (File No. 333-85997), which became effective on
    November 9, 1999).                                 
|      
|       | 10 | .16         |  | Agreement of Sublease dated as of October 26, 1998 between
    Registrant and AMP Incorporated (Incorporated by reference to
    the Registrants Registration Statement on Form S-1,
    as amended (File No. 333-85997), which became effective on
    November 9, 1999).                               
|      
|       | 10 | .17         |  | Purchase Agreement dated September 28, 1999 between
    Registrant and Flash Electronics Inc. (Incorporated by reference
    to the Registrants Registration Statement on
    Form S-1, as amended (File No. 333-85997), which
    became effective on November 9, 1999).                                
|      
|       | 10 | .18         |  | Lease dated September 27, 1999 between Registrant, as
    Tenant, and AMB Property, L.P., as Landlord (Incorporated by
    reference to the Registrants Registration Statement on
    Form S-1, as amended (File No. 333-85997), which
    became effective on November 9, 1999).                        
|      
|       | 10 | .19         |  | First Amendment to Lease dated May 2, 2001 between
    Registrant, as Tenant, and AMB Property, L.P., as Landlord
    (Incorporated by reference to the Registrants Annual
    Report on Form 10-K (File No. 000-27723) for the
    fiscal year ended December 31, 2001).                                
|      
|       | 10 | .20         |  | Second Amendment to Lease dated September 26, 2001 between
    Registrant, as Tenant, and AMB Property, L.P., as Landlord
    (Incorporated by reference to the Registrants Annual
    Report on Form 10-K (File No. 000-27723) for the
    fiscal year ended December 31, 2001).                        
|      
|       | 10 | .21       |  | OEM Hardware (with Software) License and Purchase Agreement
    effective as of May 29, 2001 between Registrant and Cisco
    Systems, Inc. (Incorporated by reference to the
    Registrants Annual Report on Form 10-K (File
    No. 000-27723) for the fiscal year ended December 31,
    2001).      
|      
|       | 10 | .22       |  | Amendment Number One to OEM Hardware (with Software) License and
    Purchase Agreement dated June 25, 2002 between Registrant
    and Cisco Systems, Inc. (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File
    No. 000-27723) for the quarter ended June 30, 2002).
|      
|       | 10 | .23         |  | Employment agreement dated March 14, 2003 between
    Registrant and Matthew Medeiros (Incorporated by reference to
    the Registrants Annual Report on Form 10-K (File
    No. 000-27723) for the fiscal year ended December 21,
    2002.                                                             
|      
|       | 10 | .24         |  | Employment agreement dated August 11, 2003 between
    Registrant and Michael Stewart (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended September 30, 2003).                                                                
|      
|       | 10 | .25         |  | Employment agreement dated October 29, 2003 between
    Registrant and Robert Knauff. (Incorporated by reference to the
    Registrants Annual Report on Form 10-K (File No.
    000-27723) for the fiscal year ended December 31, 2003).                                                                
|      
|       | 10 | .26         |  | Manufacturing and Purchase Agreement dated June 4, 2004 by
    and between Flash Electronics, Inc. and SonicWALL, Inc.
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended June 30, 2004).                                
|      
|       | 10 | .27         |  | Third Amendment to Lease executed on April 28, 2004 by and
    between AMB Property, L.P., as Landlord, and SonicWALL, Inc. as
    Tenant. (Incorporated by reference to the Registrants
    Quarterly Report on Form 10-Q (File No. 000-27723) for
    the quarter ended June 30, 2004).                



---



##### Table of Contents



|       |    |             |  |                                                                                                                                                                                                                                                                                   
|------ | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|      
|       | 10 | .28         |  | Retention and Severance Agreement for Executive Officers dated
    April 20, 2004. (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended June 30, 2004).                                                
|      
|       | 10 | .29         |  | SonicWALL, Inc. Stock Option Agreement dated July 29, 2004
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended September 30, 2004).                                                               
|      
|       | 10 | .30         |  | SonicWALL, Inc. Stock Option Agreement dated July 29, 2004
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended September 30, 2004).                                                               
|      
|       | 10 | .31         |  | SonicWALL, Inc. Matthew Medeiros Employment Agreement as amended
    and restated July 29, 2004 (Incorporated by reference to
    the Registrants Quarterly Report on Form 10-Q (File
    No. 000-27723) for the quarter ended September 30,
    2004).                          
|      
|       | 10 | .32         |  | SonicWALL, Inc Stock Option Agreement for Outside Directors
    dated July 29, 2004 (Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q (File No.
    000-27723) for the quarter ended September 30, 2004).                                          
|      
|       | 10 | .33         |  | SonicWALL, Inc. Stock Option Agreement dated July 29, 2004
    (Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q (File No. 000-27723) for the
    quarter ended September 30, 2004).                                                               
|      
|       | 10 | .34*        |  | Issuer Repurchase Plan Agreement dated November 29, 2004
    between SonicWALL, Inc. and RBC Dain Rauscher Inc. (Incorporated
    by reference to Registrants Annual Report on
    Form 10-K (File No. 000-27723) for the year ended
    December 31, 2004.)                     
|      
|       | 10 | .35*        |  | Amended and Restated Issuer Repurchase Plan Agreement dated
    February 15, 2005 between SonicWALL, Inc. and RBC Dain
    Rauscher Inc. (Incorporated by reference to Registrants
    Annual Report on Form 10-K (File No. 000-27723) for the
    year ended December 31, 2004.)
|      
|       | 21 |             |  | Subsidiaries (Incorporated by reference to the Registrants
    Annual Report on Form 10-K (File No. 000-27723)
    for the fiscal year ended December 31, 2001).                                                                                                                 
|      
|       | 23 | .1*         |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                         
|      
|       | 31 | .1*         |  | Certification of Chief Executive Officer pursuant to Securities
    Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                         
|      
|       | 31 | .2*         |  | Certification of Chief Financial Officer pursuant to Securities
    Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                         
|      
|       | 32 | .1*         |  | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                            






|  |                
|- | ---------------
|* | Filed herewith.



|   |                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment has been obtained or requested for
    portions of this exhibit. The omitted material has been
    separately filed with the Securities and Exchange Commission.