##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K





|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the year ended December 31, 2005                                                        
|  
|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                                                         |  | 77-0270079                           
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification No.)

1143 Borregas Avenue


Sunnyvale, CA 94089


(Address of Principal Executive Offices, including zip
code)


(408) 745-9600


(Registrants Telephone Number, including area code)


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


None


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


Common Stock, no par value


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o þ o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE


10-K.










---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. Business                                                                             
|              | ITEM 1A. Risk Factors                                                                        
|              | ITEM 1B. Unresolved Staff Comments                                                           
|              | 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. Issuer Purchases of Equity Securities (in thousands, except per-share amounts)      
|              | 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                                          
|              | ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|              | ITEM 9A. Controls and Procedures                                                             
|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   
|Schedule II  
|EXHIBIT 3.2  
|EXHIBIT 10.36
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 



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##### Table of Contents



CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS









PART I







|        |         
|------- | --------
|ITEM 1. | Business

Overview


e-commerce, point-of easy-to easy-to




1



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##### Table of Contents



Industry Background




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

ease-of




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

dial-up




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







| |                                           
| | ------------------------------------------
| | Integrated Solutions for Internet Security





2



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easy-to




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





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

out-of site-to


point-of site-to




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



3



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| |                                                                 
| | ----------------------------------------------------------------
| | Changing Mobile Computing Environment and Demand for
    SSL-VPN





The SonicWALL Solutions


e-commerce e-business




e-commerce






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High-Performance, Scalable and Robust Access Security.
    The SonicWALL product line provides a comprehensive integrated
    security solution that includes firewall, VPN, gateway
    anti-virus, anti-spyware, 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
    SSL-VPN product family provides organizations of all sizes with
    an affordable, simple and

4



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | secure clientless remote network and application access solution
    that requires no pre-installed client software. Our anti-virus
    services provide comprehensive virus protection with automatic
    updates and minimal administration. Our gateway anti-virus,
    anti-spyware and intrusion prevention services prevent malicious
    code from infecting networks by blocking transmissions through
    the gateway and disrupt background communications from existing
    spyware programs that transmit confidential data. Our content
    filtering service enables customers such as businesses, schools,
    government agencies and libraries to restrict access to
    objectionable or inappropriate web sites.                                                                                                                                                                                                                                                                                                                           
|
| |  | 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 GMS. 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 security.                                                                                                                                                                                  

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 Bring New Products to the Market. We intend
    to use our internal 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

5



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 global target
    markets are generally served by a two-tier distribution channel.
    We have achieved varying degrees of regional penetration in
    these markets with large scale distributors at the hub of our
    model and over 10,000 value-added resellers
    (VARs) 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 VARs.                                                                                                                                                                                        
|
| |  | 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 a selection of integrated functionality
    including gateway anti-virus, client anti-virus, anti-spyware,
    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.
|
| |  | Inorganic Growth. We intend to continue to explore
    corporate opportunities to enhance our ability to broaden the
    product range that we bring to the market. Where appropriate, we
    may license, OEM, or acquire technologies in order to better
    address the current and future requirements of our customers.                                                                                                                                                                                                                                                                                                                                                                                                          

Products and Services






Access Security Features






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Deep Packet Inspection Firewall Security. Our firewall
    technology is designed to protect private networks against
    Internet-based theft, destruction or modification of data, and
    automatically notify customers if their networks are under
    attack. SonicWALL has been awarded the internationally
    recognized ICSA Firewall Certification. In addition, the
    firewall technology in our products detects and thwarts certain
    denial of service attacks and delivers intelligent,
    real-time network security protection against sophisticated
    application layer and content-based attacks. SonicWALL has
    expanded its Gateway Anti-Virus/ Intrusion Prevention Service to
    include protection from spyware. Our Gateway Anti-Virus,
    Anti-Spyware and Intrusion Prevention Service for TZ and PRO
    Series platforms integrates a configurable, high performance
    deep packet inspection engine with a dynamically updated
    database containing thousands of attack and vulnerability
    signatures. This integrated service offering is designed to
    protect networks against a comprehensive array of dynamic
    threats including viruses, spyware, worms, Trojans and software
    vulnerabilities, such as buffer overflows, as well as
    peer-to-peer and
    instant messenger applications, backdoor exploits, and other
    malicious code.
|
| | Internet Protocol Address Management. SonicWALL products
    also include Network Address Translation (NAT) and
    Dynamic Host Configuration Protocol (DHCP) client
    and server capabilities. NAT allows a customer to connect
    multiple users on their private network to the Internet using a
    single public IP Address. DHCP Client allows the appliance to
    automatically acquire its IP address                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

6



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | settings from the Internet Service Provider (ISP).
    DHCP Server allows computers on the private network to
    automatically acquire IP address settings from the appliance,
    simplifying client personal computer configuration.                                                                                                                                                                                                                                                                                                                                                                          
|
| | Web Browser-Based Management. SonicWALL appliances are
    easily and securely configured and managed through a web
    browser-based interface. The SonicWALL interface insulates the
    user from the underlying complexity of Internet security, while
    providing enough flexibility to meet the diverse needs of our
    customers.                                                                                                                                                                                                                                                                        
|
| | Logging and Reporting. SonicWALL appliances maintain an
    event log of potential security concerns, which can be viewed
    with a web browser or automatically sent on a periodic basis to
    any e-mail address.
    SonicWALL appliances notify the administrator of high-priority
    security issues, such as an attack on a server, by immediately
    sending an alert message to a priority
    e-mail account such as
    an e-mail pager.
    SonicWALL appliances also provide pre-defined reports that show
    different views of Internet usage, such as the most commonly
    accessed web sites.

Security Appliances








| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SonicWALL TZ 150 and TZ 150 Wireless. This Internet
    security appliance delivers layered protection to small and home
    offices through an integrated deep packet inspection firewall/
    VPN in an easy-to-use,
    low cost platform. Its compact form factor includes a single
    Ethernet WAN port and four-port LAN switch, allowing multiple
    devices to connect safely to the network.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | SonicWALL TZ 170 and TZ 170 Wireless. This Internet
    security appliance is designed to provide a comprehensive
    security platform, delivering network security, flexibility and
    reliability to home, small, remote and branch offices. This high
    performance deep packet inspection firewall/ VPN ships in
    multiple node configurations and offers a choice between
    absolute ease-of-use
    for basic networks and ultimate flexibility for networks with
    more complex needs. The functionality of the TZ 170 is extended
    by the integrated 5-port medium dependent interface crossover
    (MDIX) switch allowing multiple computers to be
    networked together. The TZ 170 Wireless provides all the same
    features plus wireless connectivity over 802.11b/g standards.
|
| | SonicWALL TZ 170 SP and TZ 170 SP Wireless. This Internet
    security appliance is designed to provide a comprehensive
    security platform delivering continuous network uptime for
    critical, secure data connectivity through integrated and
    automated broadband and analog failover and failback
    technologies. This high performance deep packet inspection
    firewall/ VPN offers automated
    broadband-to-broadband-to-analog
    WAN redundancy for unparalleled network uptime. The TZ 170 SP
    Wireless provides all the same features plus secure 802.11b/g
    wireless connectivity.                                                                                                                                                                                             
|
| | SonicWALL PRO 1260. This Internet security appliance is
    designed to provide a comprehensive security and switching
    platform delivering network security and flexibility to small
    business and remote office networks through an integrated deep
    inspection firewall/ VPN and wire-speed 24-port, auto-MDIX Layer
    2 switch.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | SonicWALL PRO 2040. This Internet security appliance is
    designed to provide a comprehensive network security, mobility
    and productivity solution utilizing high performance
    architecture to deliver business-class firewall and VPN
    performance, advanced features and configuration flexibility in
    a rack-mounted appliance. The PRO 2040 includes a high
    performance architecture with a deep packet inspection firewall
    and 3DES/ AES VPN.                                                                                                                                                                                                                                                                                                                                       
|
| | SonicWALL PRO 3060. This Internet security appliance is
    designed to provide a comprehensive security platform for
    complex networks, utilizing six fully configurable Ethernet
    interfaces to provide                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

7



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | cost-effective, enterprise-class firewall throughput and VPN
    concentration. The PRO 3060 is powered by SonicOS firmware which
    provides hardware fail-over, wide-area network (WAN)
    ISP fail-over and an automated secondary VPN gateway, providing
    continuous network uptime. This product can support up to
    128,000 concurrent sessions, 25 VPN client sessions for remote
    users and 500 to 1,000 VPN
    site-to-site
    connections.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | SonicWALL PRO 4060. This Internet security appliance is
    designed to provide all of the features of the PRO 3060, but
    increases the concurrent sessions to 500,000, VPN client
    sessions for remote users to 1,000 and VPN
    site-to-site
    connections to 3,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | SonicWALL PRO 4100. This Internet security appliance
    provides powerful internal and external network protection
    across all 10 gigabit interfaces to deliver high-speed gateway
    anti-virus, anti-spyware, anti-spam and intrusion prevention.
    The PRO 4100 includes an extensive array of advanced networking
    and configuration flexibility features in an accessible,
    affordable platform that is easy to deploy and manage in a wide
    variety of environments. Its features include 800 Mbps
    firewall, 300Mbps deep packet inspection and 350 Mbps VPN
    throughputs.                                                                                                                                                                                                                                                                                                                       
|
| | SonicWALL PRO 5060. This Internet security appliance is a
    high performance, multi-service security gateway for
    medium-to-large
    networks integrating gigabit-class firewall, VPN, intrusion
    prevention, anti-virus and content filtering into a single
    platform that is designed to be easy to install and manage. The
    PRO 5060 is powered by a high performance architecture
    delivering 1+ Gbps deep packet inspection firewall and
    500 Mbps 3DES/ AES VPN throughput.                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | SonicWALL Content Security Manager. We believe our
    Content Security Management solutions enhance the security of
    the network and the productivity of the workforce. Built on
    SonicWALLs security technology, these appliance-based
    solutions integrate seamlessly into virtually any network
    environment to deliver scalable, cost-effective content
    management. The SonicWALL Content Security Manager 2100 CF
    delivers appliance-based Internet filtering that enhances
    security and employee productivity, optimizes network
    utilization and mitigates liability concerns by managing access
    to objectionable Web content.                                                                                                                                                                                                                                                        
|
| | SonicWALL SSL-VPN 200 and SSL-VPN 2000. The SSL-VPN
    series provides organizations of all sizes with an affordable,
    simple and secure clientless remote network and application
    access solution that requires no pre-installed client software.
    Utilizing only a standard Web browser, users can easily and
    securely access e-mail,
    files, intranets, remote desktops (including both full desktop
    and individual application access) and other resources on the
    corporate LAN from any location. With no need for a
    pre-installed or fat VPN client, administrators are
    freed from the tasks of deploying, configuring and updating
    software, reducing maintenance and support costs. SonicWALL
    SSL-VPN Series solutions integrate seamlessly into virtually any
    network topology to deliver powerful, scalable and affordable
    remote access to corporate resources.

Security Application and Services




SonicWALL Global VPN Client.


SonicWALL Content Filtering Service.


8



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SonicWALL Anti-Virus.


SonicWALL Gateway Anti-Virus, Anti-Spyware and Intrusion
Prevention. peer-to


Global Security Management Applications






Customer Service and Technical Support






Customers




9



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Top Domestic and International Distributors


|                         |  |                             
|------------------------ |  | ----------------------------
| Tech Data              |  |  Canon Solutions (Japan)   
| Ingram Micro           |  |  Tek Data (UK)             
| Alternative Technology |  |  Azlan Group (UK)          
| Securematics, Inc.     |  |  Marubeni Solutions (Japan)
|                         |  |  Softbank BB Corp          
|                         |  |  ComputerLinks AG          

End Users




Sales and Marketing


e-commerce, retail/point-of easy-to






Domestic Channel.




International Channel.


10



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Original Equipment Manufacturer Channel.


Technology


ease-of




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



system-on






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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



11



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Gateway Anti-Virus. Our gateway anti-virus subscription
    service is intended to provide anti-virus protection throughout
    a business and across a distributed network and delivers
    protection for high threat viruses and malware by conducting
    inspections over the most common protocols used in todays
    networked environments. 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.                                                                                                                                               
|
| |  | Anti-Spyware. Our anti-spyware program blocks spyware
    delivered through auto-installed ActiveX components, scans and
    logs spyware threats that are transmitted through the network
    and alerts administrators when new spyware is detected and/or
    blocked. This service offering also stops existing spyware
    programs from communicating in the background with hackers and
    servers on the Internet thereby preventing the transfer of
    confidential information, and provides granular control over
    networked applications by enabling administrators to selectively
    permit or deny the installation of individual spyware programs.
    Our spyware offering prevents
    e-mailed spyware
    threats by scanning and then blocking infected
    e-mails transmitted
    either through SMTP, IMAP or Web-based
    e-mail.
|
| |  | Intrusion Prevention. Our intrusion prevention service
    utilizes a configurable, ultra-high performance deep packet
    inspection engine to deliver maximum network protection while
    preventing known buffer overflow vulnerabilities in software.
    This service also defends against various worms, Trojans, and
    backdoor exploits thereby mitigating risk and liability concerns
    while improving productivity by blocking instant messaging and
    peer-to-peer
    applications. The service not only protects networks from
    attacks originating outside the network (WAN), but also from
    internal attacks targeting network segments (LANs), and provides
    a robust database of attack and vulnerability signatures that is
    dynamically updated as new exploits and vulnerabilities are
    discovered.                  

Research and Development






Competition






12



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| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | 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 suppliers such as WatchGuard Technologies and
    Juniper Networks.                    

Intellectual Property




U.S. Government Export Regulation Compliance




Manufacturing




13



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Information about Segments and Geographic Areas




Employees




Where You Can Find More Information


10-K, 10-Q, 8-K, www.sonicwall.com









|         |             
|-------- | ------------
|ITEM 1A. | 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 in
the event any of the following risks were to be realized. 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.




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



14



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##### Table of Contents







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



|                        |  |         |    |   |         |  |    |         |  |  |    |  
|----------------------- |  | ------- | -- | - | ------- |  | -- | ------- |  |  | -- | -
|                        |  | FY 2005 |    |   | FY 2004 |  |    | FY 2003 | 
|                        |  |         |    |   |         |  |    |         | 
|Distributors/ Resellers |  |         | 97 | % |         |  | 98 | %       |  |  | 96 | %



|             |  |         |    |   |         |  |    |         |  |  |    |  
|------------ |  | ------- | -- | - | ------- |  | -- | ------- |  |  | -- | -
|Customers    |  | FY 2005 |    |   | FY 2004 |  |    | FY 2003 | 
|             |  |         |    |   |         |  |    |         | 
|Ingram Micro |  |         | 18 | % |         |  | 17 | %       |  |  | 23 | %
|Tech Data    |  |         | 21 | % |         |  | 21 | %       |  |  | 20 | %







|             |  |              |      |      |  |  |    |   |  |   |      |  |  |  |    |   |  |   |      |  |  |  |    |  
|------------ |  | ------------ | ---- | ---- |  |  | -- | - |  | - | ---- |  |  |  | -- | - |  | - | ---- |  |  |  | -- | -
|             |  | 2005         |      |      |  |  |    |   |  |   |     
|             |  |              |      |      |  |  |    |   |  |   |     
|             |  |              |      | 2004 |  |  |    |   | 
|             |  |              |      |      |  |  |    |   | 
|             |  | December 31, |     
|             |  |              |     
|             |  |              |      | 2003 | 
|             |  |              |      |      | 
|Ingram Micro |  | $            | 2.0M |      |  |  | 15 | % |  | $ | .8M  |  |  |  | 6  | % |  | $ | 1.3M |  |  |  | 14 | %
|Tech Data    |  | $            | 1.4M |      |  |  | 11 | % |  | $ | 3.8M |  |  |  | 26 | % |  | $ | 1.4M |  |  |  | 15 | %



15



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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.







| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 revenue which would harm our
    operating results





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



16



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





| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 license intellectual property, including certain
    databases and software, and if our licensors experience delays
    in product updates or provide us with products of substandard
    quality, the revenue we receive from our products and services
    that use this intellectual property would be at risk.



17



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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.





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

quarter-to




| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Environmental regulations enacted in various jurisdictions
    in which we do business may increase the component costs of our
    products and if we experience delays in shipment of complaint
    products our revenue would decline and our operating results
    would be adversely affected.



18



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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.





| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Acquisitions could be difficult to integrate, disrupt our
    business, dilute shareholder value and the products and services
    acquired may not be accepted by the market. As a result, our
    operating results would be adversely affected.

day-to






| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have been unable to predict accurately the costs
    associated with evaluating our internal control over financial
    reporting under Section 404 of the Sarbanes-Oxley Act of
    2002 and may continue to be unable to do so in the
    future.





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



19



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| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Our Financial Statements could be affected by the need to
    restate previously issued annual or interim financial
    statements.





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





| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We must attract and retain qualified financial personnel
    to maintain effective controls over the application of generally
    accepted accounting principles within the financial reporting
    process.





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





20



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





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



day-to




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



22



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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 revenue.





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





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





| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Governmental regulations of imports or exports affecting
    Internet security could affect our revenue.



23



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| |                                 
| | --------------------------------
| | 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;                                                
|
| |  | the accretive or dilutive effects of acquisitions on operating
    results;                                                                                                   
|
| |  | 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.                          



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





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| |                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The inability to obtain any third-party license required
    developing 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.





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





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The requirement to record compensation expense for the
    value of stock options or other stock-based awards that we issue
    to our employees will harm our earnings.

Share-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.



25



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





| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|ITEM 2. | Properties














|        |                  
|------- | -----------------
|ITEM 3. | Legal Proceedings



26



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##### Table of Contents







-05CV0572-K,


27



---



##### Table of Contents












|        |                                                    
|------- | ---------------------------------------------------
|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



|            |                |      |   |       |     |  |   |      | 
|----------- | -------------- | ---- | - | ----- | --- |  | - | ---- | 
|            |                | High |   |       | Low | 
|            |                |      |   |       |     | 
|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 | 
|Fiscal 2005 |                |      |   |       |     |  |   |     
|            | First Quarter  |      | $ | 6.50  |     |  | $ | 5.00 | 
|            | Second Quarter |      | $ | 6.27  |     |  | $ | 4.97 | 
|            | Third Quarter  |      | $ | 6.49  |     |  | $ | 5.33 | 
|            | Fourth Quarter |      | $ | 8.02  |     |  | $ | 5.57 | 










|         |                                                                                   
|-------- | ----------------------------------------------------------------------------------
|ITEM 5c. | Issuer Purchases of Equity Securities (in thousands,
    except per-share amounts)



28



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|                                                                           |  |           |       |  |            |   |                        |                      |  |                      |                     |  |  |   |        | 
|-------------------------------------------------------------------------- |  | --------- | ----- |  | ---------- | - | ---------------------- | -------------------- |  | -------------------- | ------------------- |  |  | - | ------ | 
|                                                                           |  | Total     |       |  |            |   | Total Number of Shares |                      |  | Value of Shares That |                    
|                                                                           |  | Number of |       |  | Average    |   |                        | Purchased as Part of |  |                      | May Yet be          | 
|                                                                           |  | Shares    |       |  | Price Paid |   |                        | Publicly Announced   |  |                      | Purchased Under the | 
|Period                                                                     |  | Purchased |       |  | per Share  |   |                        | Plans or Programs    |  |                      | Plans or Programs   | 
|                                                                           |  |           |       |  |            |   |                        |                      |  |                      |                     | 
|Shares purchased prior to 6/30/05 under the current repurchase
    program |  |           | 8,181 |  |            | $ | 6.06                   |                      |  |                      | 8,181               |  |  | $ | 25,426 | 
|July 1, 2005 to December 31, 2005                                          |  |           | None  |  |            |   | None                   |                      |  |                      | None                |  |  |   | None   | 
|                                                                           |  |           |       |  |            |   |                        |                      |  |                      |                     | 
|Total                                                                      |  |           | 8,181 |  |            |   |                        |                      |  |                      | 8,181               |  |  | $ | 25,426 | 
|                                                                           |  |           |       |  |            |   |                        |                      |  |                      |                     | 





29



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

10-K.


|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |          |        |         |   |         |        |         | 
|------------------------------------------------------------ | --------------------------------------------------------------- | ---------------------------------------------------------- | ------ | ------ | ------- | - | ------ | ------ | ------- | - | ------- | ------ | ------ | ---- | -------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                             |                                                                 | Year Ended December 31,                                    |       
|                                                             |                                                                 |                                                            |       
|                                                             |                                                                 | 2005                                                       |        |        | 2004    |   |        | 2003   |         |   | 2002    |        |        | 2001 |         
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|                                                             |                                                                 | (In thousands, except per share data)                      |       
|Statements of Operations Data:                               |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |          |        |         |   |         |       
|Revenue:                                                     |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |          |        |         |   |         |       
|                                                             | Product                                                         |                                                            | $      | 75,525 |         |   | $      | 82,994 |         |   | $       | 65,931 |        |      | $        | 78,184 |         |   | $       | 86,777 |        
|                                                             | License and service                                             |                                                            |        | 59,799 |         |   |        | 42,655 |         |   |         | 28,470 |        |      |          | 25,035 |         |   |         | 25,210 |        
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|                                                             |                                                                 | Total revenue                                              |        |        | 135,324 |   |        |        | 125,649 |   |         |        | 94,401 |      |          |        | 103,219 |   |         |        | 111,987 | 
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Cost of revenue:                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |          |        |         |   |         |       
|                                                             | Product                                                         |                                                            |        | 27,699 |         |   |        | 30,118 |         |   |         | 27,906 |        |      |          | 25,303 |         |   |         | 25,244 |        
|                                                             | License and service                                             |                                                            |        | 8,031  |         |   |        | 7,002  |         |   |         | 5,617  |        |      |          | 4,659  |         |   |         | 1,431  |        
|                                                             | Amortization of purchased technology                            |                                                            |        | 4,552  |         |   |        | 4,543  |         |   |         | 4,543  |        |      |          | 4,543  |         |   |         | 4,399  |        
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|                                                             |                                                                 | Total cost of revenue (excluding stock-based compensation) |        |        | 40,282  |   |        |        | 41,663  |   |         |        | 38,066 |      |          |        | 34,505  |   |         |        | 31,074  | 
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Gross profit                                                 |                                                                 |                                                            | 95,042 |        |         |   | 83,986 |        |         |   | 56,335  |        |        |      | 68,714   |        |         |   | 80,913  |       
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Operating expenses:                                          |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |          |        |         |   |         |       
|                                                             | Research and development (excluding stock-based compensation)   |                                                            |        | 22,603 |         |   |        | 23,337 |         |   |         | 19,864 |        |      |          | 18,900 |         |   |         | 21,327 |        
|                                                             | Sales and marketing (excluding stock-based compensation)        |                                                            |        | 53,367 |         |   |        | 47,353 |         |   |         | 40,139 |        |      |          | 42,937 |         |   |         | 31,988 |        
|                                                             | General and administrative (excluding stock-based compensation) |                                                            |        | 15,535 |         |   |        | 14,365 |         |   |         | 11,893 |        |      |          | 11,200 |         |   |         | 9,571  |        
|                                                             | Amortization of goodwill and purchased intangible assets(1)     |                                                            |        | 2,893  |         |   |        | 3,089  |         |   |         | 5,333  |        |      |          | 5,744  |         |   |         | 38,839 |        
|                                                             | Impairment of goodwill                                          |                                                            |        |       |         |   |        |       |         |   |         |       |        |      |          | 87,640 |         |   |         |       |        
|                                                             | Restructuring charges                                           |                                                            |        |       |         |   |        | (171   | )       |   |         | 1,833  |        |      |          | 3,969  |         |   |         |       |        
|                                                             | Stock-based compensation                                        |                                                            |        | 201    |         |   |        | 75     |         |   |         | 700    |        |      |          | 1,400  |         |   |         | 3,009  |        
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|                                                             |                                                                 | Total operating expenses                                   |        |        | 94,599  |   |        |        | 88,048  |   |         |        | 79,762 |      |          |        | 171,790 |   |         |        | 104,734 | 
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Income (loss) from operations                                |                                                                 |                                                            | 443    |        |         |   | (4,062 | )      |         |   | (23,427 | )      |        |      | (103,076 | )      |         |   | (23,821 | )     
|Interest income and other expense, net                       |                                                                 |                                                            | 6,867  |        |         |   | 4,050  |        |         |   | 4,169   |        |        |      | 6,044    |        |         |   | 9,258   |       
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Income (loss) before income taxes                            |                                                                 |                                                            | 7,310  |        |         |   | (12    | )      |         |   | (19,258 | )      |        |      | (97,032  | )      |         |   | (14,563 | )     
|Benefit from (provision for) income taxes                    |                                                                 |                                                            | (1,034 | )      |         |   | (301   | )      |         |   | 1,590   |        |        |      | 3,119    |        |         |   | (6,351  | )     
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Net income (loss)                                            |                                                                 | $                                                          | 6,276  |        |         | $ | (313   | )      |         | $ | (17,668 | )      |        | $    | (93,913  | )      |         | $ | (20,914 | )     
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Basic net income (loss) per share                            |                                                                 | $                                                          | 0.10   |        |         | $ | (0.00  | )      |         | $ | (0.26   | )      |        | $    | (1.40    | )      |         | $ | (0.32   | )     
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Diluted net income (loss) per share                          |                                                                 | $                                                          | 0.09   |        |         | $ | (0.00  | )      |         | $ | (0.26   | )      |        | $    | (1.40    | )      |         | $ | (0.32   | )     
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Shares used in computing basic net income (loss) per share   |                                                                 |                                                            | 64,684 |        |         |   | 70,850 |        |         |   | 67,895  |        |        |      | 67,124   |        |         |   | 64,467  |       
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         
|Shares used in computing diluted net income (loss) per share |                                                                 |                                                            | 66,797 |        |         |   | 70,850 |        |         |   | 67,895  |        |        |      | 67,124   |        |         |   | 64,467  |       
|                                                             |                                                                 |                                                            |        |        |         |   |        |        |         |   |         |        |        |      |         

30



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|                                 |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|-------------------------------- |  | ------------------ | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                 |  | As of December 31, |        
|                                 |  |                    |        
|                                 |  | 2005               |         |  | 2004 |   |         | 2003 |  |   | 2002    |  |  | 2001 |        
|                                 |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                 |  | (In thousands)     |        
|Consolidated Balance Sheet Data: |  |                    |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Cash and cash equivalents        |  | $                  | 42,593  |  |      | $ | 23,446  |      |  | $ | 30,467  |  |  | $    | 23,030  |  |  | $ | 60,908  | 
|Short-term investments           |  |                    | 197,849 |  |      |   | 229,226 |      |  |   | 213,010 |  |  |      | 209,854 |  |  |   | 166,271 | 
|Total assets                     |  |                    | 387,683 |  |      |   | 386,845 |      |  |   | 381,721 |  |  |      | 405,098 |  |  |   | 516,351 | 
|Total shareholders equity       |  |                    | 320,170 |  |      |   | 337,976 |      |  |   | 344,269 |  |  |      | 357,183 |  |  |   | 451,153 | 
|Long-term liabilities            |  |                    |        |  |      |   |        |      |  |   |        |  |  |      | 12,272  |  |  |   | 17,625  | 






|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(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:growth of Internet usage and acceptance; increasing
use of Broadband access technologies; increasing importance of
network security; benefits of integrated solutions for network
security, importance of productivity and mobility to our end
users; factors fueling the growth of content filtering services;
strength of international markets for our products; expected
competition in the Internet security market and our ability to
compete in markets in which we participate; ability to
successfully introduce new products and services; pricing
pressures on our solution based offerings; possible impact of
government regulation on our operating results; possible impact
of acquisition activity on our operating results; expectations
regarding trends in operating expenses and operating cash flow;
impact of stock based compensation expense on operating results;
the strengths of the flexibility of our product architecture;
benefits associated with our software and services revenue
model; our ability to sustain success in targeted vertical
markets; assessment of future effective tax rates and the
continued need for a valuation allowance; expansion of market
acceptance of our product offerings; our ability to grow
international sales to match the rate of penetration of our
products in domestic markets; our ability to implement
operational efficiencies; our ability to leverage incremental
revenue out of each product transaction; the impact of
geopolitical and macro-economic conditions on demand for our
offerings; our ability to achieve increased renewal rates for
our service offerings; the ability of our contract manufacturers
to meet our requirements; the 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; and the growth of market opportunity for our license and
service business. 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.. References to we,
our, and us refer to SonicWALL, Inc. and
its subsidiaries.


Overview






31



---



##### Table of Contents











Key Success Factors of our Business






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





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





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



32



---



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

ease-of




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

ease-of


Our Opportunities, Challenges and Risks




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







| |                             
| | ----------------------------
| | License and Services Revenue





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



33



---



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



Critical Accounting Policies and Critical Accounting
Estimates






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



00-21.


97-2, 03-05), 97-2






34



---



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



35



---



##### Table of Contents











| |                       
| | ----------------------
| | Valuation of inventory





| |                            
| | ---------------------------
| | Accounting for income taxes





36



---



##### Table of Contents





| |                                                               
| | --------------------------------------------------------------
| | Valuation of long-lived and intangible assets and
    goodwill







Significant Transactions




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

Business Combinations,






37



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Goodwill and Other Intangible Assets.


|                             |  |   |        | 
|---------------------------- |  | - | ------ | 
|Net tangible assets          |  | $ | 1,351  | 
|Intangible assets            |  | $ | 14,421 | 
|                             |  |   |       
|Total purchase consideration |  | $ | 15,772 | 
|                             |  |   |       











8-K/




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



38



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##### Table of Contents



Results of Operations




|                                          |                                                                 |                                                            |      |      |       |  |      |      |       |  |       |      |       | 
|----------------------------------------- | --------------------------------------------------------------- | ---------------------------------------------------------- | ---- | ---- | ----- |  | ---- | ---- | ----- |  | ----- | ---- | ----- | 
|                                          |                                                                 | Year Ended December 31,                                    |     
|                                          |                                                                 |                                                            |     
|                                          |                                                                 | 2005                                                       |      |      | 2004  |  |      | 2003 |      
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|Revenue:                                  |                                                                 |                                                            |      |      |       |  |      |      |       |  |       |     
|                                          | Product                                                         |                                                            |      | 55.8 | %     |  |      | 66.1 | %     |  |       | 69.8 | %    
|                                          | License and service                                             |                                                            |      | 44.2 |       |  |      | 33.9 |       |  |       | 30.2 |      
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|                                          |                                                                 | Total revenue                                              |      |      | 100.0 |  |      |      | 100.0 |  |       |      | 100.0 | 
|Cost of revenue:                          |                                                                 |                                                            |      |      |       |  |      |      |       |  |       |     
|                                          | Product                                                         |                                                            |      | 20.5 |       |  |      | 23.9 |       |  |       | 29.6 |      
|                                          | License and service                                             |                                                            |      | 5.9  |       |  |      | 5.6  |       |  |       | 5.9  |      
|                                          | Amortization of purchase technology                             |                                                            |      | 3.4  |       |  |      | 3.6  |       |  |       | 4.8  |      
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|                                          |                                                                 | Total cost of revenue (excluding Stock-based compensation) |      |      | 29.8  |  |      |      | 33.1  |  |       |      | 40.3  | 
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|Gross profit                              |                                                                 |                                                            | 70.2 |      |       |  | 66.9 |      |       |  | 59.7  |     
|Operating expenses:                       |                                                                 |                                                            |      |      |       |  |      |      |       |  |       |     
|                                          | Research and development (excluding Stock-based compensation)   |                                                            |      | 16.8 |       |  |      | 18.5 |       |  |       | 21.0 |      
|                                          | Sales and marketing (excluding Stock-based compensation)        |                                                            |      | 39.4 |       |  |      | 37.7 |       |  |       | 42.5 |      
|                                          | General and administrative (excluding Stock-based compensation) |                                                            |      | 11.5 |       |  |      | 11.4 |       |  |       | 12.6 |      
|                                          | Amortization of purchased intangible assets                     |                                                            |      | 2.1  |       |  |      | 2.5  |       |  |       | 5.7  |      
|                                          | Restructuring charges                                           |                                                            |      |     |       |  |      | (0.1 | )     |  |       | 1.9  |      
|                                          | Stock-based compensation                                        |                                                            |      | 0.1  |       |  |      | 0.1  |       |  |       | 0.7  |      
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|                                          |                                                                 | Total operating expenses                                   |      |      | 69.9  |  |      |      | 70.1  |  |       |      | 84.4  | 
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|Income (loss) from operations             |                                                                 |                                                            | 0.3  |      |       |  | (3.2 | )    |       |  | (24.7 | )   
|Interest income and other expense, net    |                                                                 |                                                            | 5.1  |      |       |  | 3.2  |      |       |  | 4.4   |     
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|Income (loss) before income taxes         |                                                                 |                                                            | 5.4  |      |       |  | (0.0 | )    |       |  | (20.3 | )   
|Benefit from (provision for) income taxes |                                                                 |                                                            | (0.8 | )    |       |  | (0.2 | )    |       |  | 1.7   |     
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      
|Net Income (loss)                         |                                                                 |                                                            | 4.6  | %    |       |  | (0.2 | )%   |       |  | (18.6 | )%  
|                                          |                                                                 |                                                            |      |      |       |  |      |      |      



| |                                                         
| | --------------------------------------------------------
| | Revenue (in thousands, except for Percentage
    points)

|                    |                    |                         |        |    |               |   |        |                |         |   |               |    |        |               |        |   |               |   |        |               |        |  |    |   |   |   |    |   |    |  
|------------------- | ------------------ | ----------------------- | ------ | -- | ------------- | - | ------ | -------------- | ------- | - | ------------- | -- | ------ | ------------- | ------ | - | ------------- | - | ------ | ------------- | ------ |  | -- | - | - | - | -- | - | -- | -
|                    |                    | Year Ended December 31, |        |    | Dollar Change |   |        | Percent Change |        
|                    |                    |                         |        |    |               |   |        |                |        
|                    |                    | 2005                    |        |    | 2004          |   |        | 2003           |         |   | 2005 vs. 2004 |    |        | 2004 vs. 2003 |        |   | 2005 vs. 2004 |   |        | 2004 vs. 2003 |       
|                    |                    |                         |        |    |               |   |        |                |         |   |               |    |        |               |        |   |               |   |        |               |       
|Product             |                    | $                       | 75,525 |    |               | $ | 82,994 |                |         | $ | 65,931        |    |        | $             | (7,470 | ) |               | $ | 17,063 |               |        |  | -9 | % |   |   | 26 | %
|                    | % of total revenue |                         |        | 56 | %             |   |        | 66             | %       |   |               | 70 | %      |               |        |   |               |   |        |               |        |  |    |   |   |   |    |   |   
|License and service |                    |                         | 59,799 |    |               |   | 42,655 |                |         |   | 28,470        |    |        |               | 17,146 |   |               |   | 14,185 |               |        |  | 40 | % |   |   | 50 | %
|                    | % of total revenue |                         |        | 44 | %             |   |        | 34             | %       |   |               | 30 | %      |               |        |   |               |   |        |               |        |  |    |   |   |   |    |   |   
|                    |                    |                         |        |    |               |   |        |                |         |   |               |    |        |               |        |   |               |   |        |               |       
|                    |                    | Total revenue           |        | $  | 135,324       |   |        | $              | 125,649 |   |               | $  | 94,401 |               |        | $ | 9,676         |   |        | $             | 31,248 |  |    |   | 8 | % |    |   | 33 | %
|                    |                    |                         |        |    |               |   |        |                |         |   |               |    |        |               |        |   |               |   |        |               |       



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



39



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ease-of ease-of




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





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



40



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| |                                                                         
| | ------------------------------------------------------------------------
| | Geographic revenue data (in thousands, except for Percentage
    Points)

|         |                              |                         |        |         |               |   |        |                |   |   |               |        |   |               |       |       |               |   |        |               |  |  |    |   |   |  |    |    |  
|-------- | ---------------------------- | ----------------------- | ------ | ------- | ------------- | - | ------ | -------------- | - | - | ------------- | ------ | - | ------------- | ----- | ----- | ------------- | - | ------ | ------------- |  |  | -- | - | - |  | -- | -- | -
|         |                              | Year Ended December 31, |        |         | Dollar Change |   |        | Percent Change |  
|         |                              |                         |        |         |               |   |        |                |  
|         |                              | 2005                    |        |         | 2004          |   |        | 2003           |   |   | 2005 vs. 2004 |        |   | 2004 vs. 2003 |       |       | 2005 vs. 2004 |   |        | 2004 vs. 2003 | 
|         |                              |                         |        |         |               |   |        |                |   |   |               |        |   |               |       |       |               |   |        |               | 
|Americas |                              | $                       | 94,956 |         |               | $ | 87,450 |                |   | $ | 66,548        |        |   | $             | 7,506 |       |               | $ | 20,902 |               |  |  | 9  | % |   |  | 31 | % 
|         | Percentage of total revenues |                         |        | 70      | %             |   |        | 70             | % |   |               | 70     | % |               |       |       |               |   |        |               |  |  |    |   |   |  |    |    |  
|EMEA     |                              |                         | 23,725 |         |               |   | 23,275 |                |   |   | 18,522        |        |   | $             | 450   |       |               | $ | 4,753  |               |  |  | 2  | % |   |  | 26 | % 
|         | Percentage of total revenues |                         |        | 18      | %             |   |        | 18             | % |   |               | 20     | % |               |       |       |               |   |        |               |  |  |    |   |   |  |    |    |  
|APAC     |                              |                         | 16,643 |         |               |   | 14,924 |                |   |   | 9,331         |        |   | $             | 1,719 |       |               | $ | 5,593  |               |  |  | 12 | % |   |  | 60 | % 
|         | Percentage of total revenues |                         |        | 12      | %             |   |        | 12             | % |   |               | 10     | % |               |       |       |               |   |        |               |  |  |    |   |   |  |    |    |  
|         |                              |                         |        |         |               |   |        |                |   |   |               |        |   |               |       |       |               |   |        |               | 
|         | Total revenues               |                         | $      | 135,324 |               |   | $      | 125,649        |   |   | $             | 94,401 |   |               | $     | 9,675 |               |   | $      | 31,248        |  |  |    | 8 | % |  |    | 33 | %
|         |                              |                         |        |         |               |   |        |                |   |   |               |        |   |               |       |       |               |   |        |               | 

non-U.S.




41



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| |                                 
| | --------------------------------
| | Cost of Revenue and Gross Profit



|                                     |                       |                         |        |        |                  |   |        |        |  |   |               |        |  |               |    |    |    |  |    |   |  
|------------------------------------ | --------------------- | ----------------------- | ------ | ------ | ---------------- | - | ------ | ------ |  | - | ------------- | ------ |  | ------------- | -- | -- | -- |  | -- | - | -
|                                     |                       | Year Ended December 31, |        |        | Percent Variance |  
|                                     |                       |                         |        |        |                  |  
|                                     |                       | 2005                    |        |        | 2004             |   |        | 2003   |  |   | 2005 vs. 2004 |        |  | 2004 vs. 2003 |   
|                                     |                       |                         |        |        |                  |   |        |        |  |   |               |        |  |               |   
|                                     |                       | (In thousands)          |        |        |                  |   |       
|Product                              |                       | $                       | 27,699 |        |                  | $ | 30,118 |        |  | $ | 27,906        |        |  |               | (8 | )% |    |  | 8  | %
|License and service                  |                       |                         | 8,031  |        |                  |   | 7,002  |        |  |   | 5,617         |        |  |               | 15 | %  |    |  | 25 | %
|Amortization of purchased technology |                       |                         | 4,552  |        |                  |   | 4,543  |        |  |   | 4,543         |        |  |               | 0  | %  |    |  | 0  | %
|                                     |                       |                         |        |        |                  |   |        |        |  |   |               |        |  |               |   
|                                     | Total cost of revenue |                         | $      | 40,282 |                  |   | $      | 41,663 |  |   | $             | 38,066 |  |               |    | (3 | )% |  |    | 9 | %
|                                     |                       |                         |        |        |                  |   |        |        |  |   |               |        |  |               |   





|                                     |                    |                         |        |        |                    |   |        |        |  |   |        |        |  |      |    |    |      |  |    |    |   |  |    |    |  
|------------------------------------ | ------------------ | ----------------------- | ------ | ------ | ------------------ | - | ------ | ------ |  | - | ------ | ------ |  | ---- | -- | -- | ---- |  | -- | -- | - |  | -- | -- | -
|                                     |                    | Gross Profit Amount     |        |        | Gross Profit Year  |  
|                                     |                    | Year Ended December 31, |        |        | Ended December 31, |  
|                                     |                    |                         |        |        |                    |  
|                                     |                    | 2005                    |        |        | 2004               |   |        | 2003   |  |   | 2005   |        |  | 2004 |    |    | 2003 | 
|                                     |                    |                         |        |        |                    |   |        |        |  |   |        |        |  |      |    |    |      | 
|                                     |                    | (In thousands)          |        |        |                    |   |        |        | 
|Product                              |                    | $                       | 47,826 |        |                    | $ | 52,876 |        |  | $ | 38,025 |        |  |      | 63 | %  |      |  | 63 | %  |   |  | 58 | % 
|License and service                  |                    |                         | 51,768 |        |                    |   | 35,653 |        |  |   | 22,853 |        |  |      | 87 | %  |      |  | 86 | %  |   |  | 80 | % 
|Amortization of purchased technology |                    |                         | (4,552 | )      |                    |   | (4,543 | )      |  |   | (4,543 | )      |  |      |    |    |      |  |    |    |   |  |    |   
|                                     |                    |                         |        |        |                    |   |        |        |  |   |        |        |  |      |    |    |      | 
|                                     | Total gross profit |                         | $      | 95,042 |                    |   | $      | 83,986 |  |   | $      | 56,335 |  |      |    | 70 | %    |  |    | 67 | % |  |    | 60 | %
|                                     |                    |                         |        |        |                    |   |        |        |  |   |        |        |  |      |    |    |      | 



| |                                         
| | ----------------------------------------
| | Cost of Product Revenue and Gross Profit







42



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| |                                                     
| | ----------------------------------------------------
| | Cost of License and Service Revenue and Gross Profit







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

|         |                                        |                         |       |   |      |   |       |      |   |   |       |   |  
|-------- | -------------------------------------- | ----------------------- | ----- | - | ---- | - | ----- | ---- | - | - | ----- | - | -
|         |                                        | Year Ended December 31, |      
|         |                                        |                         |      
|         |                                        | 2005                    |       |   | 2004 |   |       | 2003 |  
|         |                                        |                         |       |   |      |   |       |      |  
|         |                                        | (In thousands)          |      
|Expenses |                                        | $                       | 4,552 |   |      | $ | 4,543 |      |   | $ | 4,543 |  
|         | Percentage of total revenue            |                         |       | 3 | %    |   |       | 4    | % |   |       | 5 | %
|         | Period over period variance in Dollars |                         |       | 9 |      |   |       | 0    |   |   |       |   |  
|         | Period over period variance in Percent |                         |       | 0 | %    |   |       | 0    | % |   |       |   |  







|            |       |              |       |       | 
|----------- | ----- | ------------ | ----- | ----- | 
|            |       | Amortization |      
|Fiscal Year |       | Amount       |      
|            |       |              |      
|2006        |       | $            | 4,821 |      
|2007        |       |              | 960   |      
|2008        |       |              | 960   |      
|2009        |       |              | 960   |      
|2010        |       |              | 880   |      
|            |       |              |      
|            | Total |              | $     | 8,581 | 
|            |       |              |      



43



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



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

|         |                                        |                         |        |      |      |   |        |       |   |   |        |    |  
|-------- | -------------------------------------- | ----------------------- | ------ | ---- | ---- | - | ------ | ----- | - | - | ------ | -- | -
|         |                                        | Year Ended December 31, |       
|         |                                        |                         |       
|         |                                        | 2005                    |        |      | 2004 |   |        | 2003  |  
|         |                                        |                         |        |      |      |   |        |       |  
|         |                                        | (In thousands)          |       
|Expenses |                                        | $                       | 22,603 |      |      | $ | 23,337 |       |   | $ | 19,864 |   
|         | Percentage of total revenue            |                         |        | 17   | %    |   |        | 19    | % |   |        | 21 | %
|         | Period over period variance in Dollars |                         |        | (734 | )    |   |        | 3,473 |   |   |        |    |  
|         | Period over period variance in Percent |                         |        | (3   | )%   |   |        | 17    | % |   |        |    |  









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

|         |                                        |                         |        |       |      |   |        |       |   |   |        |    |  
|-------- | -------------------------------------- | ----------------------- | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | -- | -
|         |                                        | Year Ended December 31, |       
|         |                                        |                         |       
|         |                                        | 2005                    |        |       | 2004 |   |        | 2003  |  
|         |                                        |                         |        |       |      |   |        |       |  
|         |                                        | (In thousands)          |       
|Expenses |                                        | $                       | 53,367 |       |      | $ | 47,353 |       |   | $ | 40,139 |   
|         | Percentage of total revenue            |                         |        | 39    | %    |   |        | 38    | % |   |        | 43 | %
|         | Period over period variance in Dollars |                         |        | 6,014 |      |   |        | 7,214 |   |   |        |    |  
|         | Period over period variance in Percent |                         |        | 13    | %    |   |        | 18    | % |   |        |    |  



44



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

|         |                                        |                         |        |       |      |   |        |       |   |   |        |    |  
|-------- | -------------------------------------- | ----------------------- | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | -- | -
|         |                                        | Year Ended December 31, |       
|         |                                        |                         |       
|         |                                        | 2005                    |        |       | 2004 |   |        | 2003  |  
|         |                                        |                         |        |       |      |   |        |       |  
|         |                                        | (In thousands)          |       
|Expenses |                                        | $                       | 15,535 |       |      | $ | 14,365 |       |   | $ | 11,893 |   
|         | Percentage of total revenue            |                         |        | 12    | %    |   |        | 11    | % |   |        | 13 | %
|         | Period over period variance in Dollars |                         |        | 1,170 |      |   |        | 2,472 |   |   |        |    |  
|         | Period over period variance in Percent |                         |        | 8     | %    |   |        | 21    | % |   |        |    |  









| |                                                                               
| | ------------------------------------------------------------------------------
| | Amortization of purchased intangible assets included in
    operating expense.

|         |                                        |                         |       |      |      |   |       |        |    |   |       |   |  
|-------- | -------------------------------------- | ----------------------- | ----- | ---- | ---- | - | ----- | ------ | -- | - | ----- | - | -
|         |                                        | Year Ended December 31, |      
|         |                                        |                         |      
|         |                                        | 2005                    |       |      | 2004 |   |       | 2003   |   
|         |                                        |                         |       |      |      |   |       |        |   
|         |                                        | (In thousands)          |      
|Expenses |                                        | $                       | 2,893 |      |      | $ | 3,089 |        |    | $ | 5,333 |  
|         | Percentage of total revenue            |                         |       | 2    | %    |   |       | 2      | %  |   |       | 6 | %
|         | Period over period variance in Dollars |                         |       | (196 | )    |   |       | (2,244 | )  |   |       |   |  
|         | Period over period variance in Percent |                         |       | (6   | )%   |   |       | (42    | )% |   |       |   |  



45



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|            |       |   |       |       | 
|----------- | ----- | - | ----- | ----- | 
|Fiscal Year |       |  
|            |       |  
|2006        |       | $ | 2,512 |      
|            |       |   |      
|            | Total |   | $     | 2,512 | 
|            |       |   |      

Restructuring
charges.


|         |                                        |                         |   |      |      |   |      |        |    |   |       |   |  
|-------- | -------------------------------------- | ----------------------- | - | ---- | ---- | - | ---- | ------ | -- | - | ----- | - | -
|         |                                        | Year Ended December 31, |  
|         |                                        |                         |  
|         |                                        | 2005                    |   |      | 2004 |   |      | 2003   |   
|         |                                        |                         |   |      |      |   |      |        |   
|         |                                        | (In thousands)          |  
|Expenses |                                        | $                       |  |      |      | $ | (171 | )      |    | $ | 1,833 |  
|         | Percentage of total revenue            |                         |   | 0    | %    |   |      | 0      | %  |   |       | 2 | %
|         | Period over period variance in Dollars |                         |   | 171  |      |   |      | (2,004 | )  |   |       |   |  
|         | Period over period variance in Percent |                         |   | (100 | )%   |   |      | (109   | )% |   |       |   |  





46



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

|         |                                        |                         |     |     |      |   |    |      |    |   |     |   |  
|-------- | -------------------------------------- | ----------------------- | --- | --- | ---- | - | -- | ---- | -- | - | --- | - | -
|         |                                        | Year Ended December 31, |    
|         |                                        |                         |    
|         |                                        | 2005                    |     |     | 2004 |   |    | 2003 |   
|         |                                        |                         |     |     |      |   |    |      |   
|         |                                        | (In thousands)          |    
|Expenses |                                        | $                       | 201 |     |      | $ | 75 |      |    | $ | 700 |  
|         | Percentage of total revenue            |                         |     | 0.1 | %    |   |    | 0    | %  |   |     | 1 | %
|         | Period over period variance in Dollars |                         |     | 126 |      |   |    | (625 | )  |   |     |   |  
|         | Period over period variance in Percent |                         |     | 168 | %    |   |    | (89  | )% |   |     |   |  



Consolidated Financial Statements








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



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

|                    |                                        |                         |        |      |      |   |      |        |    |   |       |   |  
|------------------- | -------------------------------------- | ----------------------- | ------ | ---- | ---- | - | ---- | ------ | -- | - | ----- | - | -
|                    |                                        | Year Ended December 31, |       
|                    |                                        |                         |       
|                    |                                        | 2005                    |        |      | 2004 |   |      | 2003   |   
|                    |                                        |                         |        |      |      |   |      |        |   
|                    |                                        | (In thousands)          |       
|Benefit (provision) |                                        | $                       | (1,034 | )    |      | $ | (301 | )      |    | $ | 1,590 |  
|                    | Percentage of total revenue            |                         |        | (0.8 | )%   |   |      | 0      | %  |   |       | 2 | %
|                    | Period over period variance in Dollars |                         |        | (733 | )    |   |      | (1,891 | )  |   |       |   |  
|                    | Period over period variance in Percent |                         |        | (244 | )%   |   |      | (119   | )% |   |       |   |  







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Quarterly Results of Operations


10-K.


|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        |  
|----------------------------------------------------- | --------------------------------------------------------------- | ---------------------------------------------------------- | ------ | ------ | ------------------------------------- | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                      |                                                                 | Year Ended December 31, 2005                               |        |        | Year Ended December 31, 2004          |  
|                                                      |                                                                 |                                                            |        |        |                                       |  
|                                                      |                                                                 | Q4                                                         |        |        | Q3                                    |   |        | Q2     |        |   | Q1     |        |        | Q4 |        |        | Q3     |   |        | Q2     |        |   | Q1     |       
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | (In thousands, except per share data)                      |        |        | (In thousands, except per share data) |  
|Revenue:                                              |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                      | Product                                                         |                                                            | $      | 19,649 |                                       |   | $      | 18,236 |        |   | $      | 19,032 |        |    | $      | 18,608 |        |   | $      | 19,524 |        |   | $      | 18,143 |        |   | $      | 22,609 |        |   | $      | 22,718 |       
|                                                      | License and service                                             |                                                            |        | 16,766 |                                       |   |        | 15,782 |        |   |        | 14,054 |        |    |        | 13,197 |        |   |        | 12,491 |        |   |        | 11,242 |        |   |        | 9,805  |        |   |        | 9,117  |       
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | Total revenue                                              |        |        | 36,415                                |   |        |        | 34,018 |   |        |        | 33,086 |    |        |        | 31,805 |   |        |        | 32,015 |   |        |        | 29,385 |   |        |        | 32,414 |   |        |        | 31,835 |  
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|Cost of revenue:                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                      | Product                                                         |                                                            |        | 7,379  |                                       |   |        | 6,994  |        |   |        | 6,879  |        |    |        | 6,447  |        |   |        | 7,135  |        |   |        | 6,845  |        |   |        | 7,999  |        |   |        | 8,139  |       
|                                                      | License and service                                             |                                                            |        | 2,165  |                                       |   |        | 1,956  |        |   |        | 1,932  |        |    |        | 1,978  |        |   |        | 2,101  |        |   |        | 1,781  |        |   |        | 1,605  |        |   |        | 1,515  |       
|                                                      | Amortization of purchased technology                            |                                                            |        | 1,142  |                                       |   |        | 1,138  |        |   |        | 1,136  |        |    |        | 1,136  |        |   |        | 1,136  |        |   |        | 1,135  |        |   |        | 1,136  |        |   |        | 1,136  |       
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | Total cost of revenue (excluding stock-based compensation) |        |        | 10,686                                |   |        |        | 10,088 |   |        |        | 9,947  |    |        |        | 9,561  |   |        |        | 10,372 |   |        |        | 9,761  |   |        |        | 10,740 |   |        |        | 10,790 |  
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|Gross profit                                          |                                                                 |                                                            | 25,729 |        |                                       |   | 23,930 |        |        |   | 23,139 |        |        |    | 22,244 |        |        |   | 21,643 |        |        |   | 19,624 |        |        |   | 21,674 |        |        |   | 21,045 |       
|Operating expenses:                                   |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                      | Research and development (excluding stock-based compensation)   |                                                            |        | 6,100  |                                       |   |        | 5,410  |        |   |        | 5,637  |        |    |        | 5,456  |        |   |        | 5,614  |        |   |        | 5,556  |        |   |        | 6,187  |        |   |        | 5,980  |       
|                                                      | Sales and marketing (excluding stock-based compensation)        |                                                            |        | 14,911 |                                       |   |        | 13,339 |        |   |        | 12,946 |        |    |        | 12,171 |        |   |        | 11,597 |        |   |        | 11,797 |        |   |        | 12,557 |        |   |        | 11,402 |       
|                                                      | General and administrative (excluding stock-based compensation) |                                                            |        | 4,574  |                                       |   |        | 3,414  |        |   |        | 3,997  |        |    |        | 3,550  |        |   |        | 3,846  |        |   |        | 3,204  |        |   |        | 3,525  |        |   |        | 3,790  |       
|                                                      | Amortization of purchased intangible assets                     |                                                            |        | 786    |                                       |   |        | 701    |        |   |        | 703    |        |    |        | 703    |        |   |        | 704    |        |   |        | 786    |        |   |        | 787    |        |   |        | 812    |       
|                                                      | Restructuring charges                                           |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        | (156   | )      |   |        | (143   | )      |   |        | 115    |        |   |        | 13     |       
|                                                      | Stock-based compensation                                        |                                                            |        | 182    |                                       |   |        | 84     |        |   |        | 10     |        |    |        | (75    | )      |   |        | (30    | )      |   |        | (75    | )      |   |        | 33     |        |   |        | 147    |       
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | Total operating expenses                                   |        |        | 26,553                                |   |        |        | 22,948 |   |        |        | 23,293 |    |        |        | 21,805 |   |        |        | 21,575 |   |        |        | 21,125 |   |        |        | 23,204 |   |        |        | 22,144 |  
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|Income (loss) from operations                         |                                                                 |                                                            | (824   | )      |                                       |   | 982    |        |        |   | (154   | )      |        |    | 439    |        |        |   | 68     |        |        |   | (1,501 | )      |        |   | (1,530 | )      |        |   | (1,099 | )     
|Interest income and other expense, net                |                                                                 |                                                            | 2,199  |        |                                       |   | 1,748  |        |        |   | 1,564  |        |        |    | 1,356  |        |        |   | 1,325  |        |        |   | 1,105  |        |        |   | 785    |        |        |   | 835    |       
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|Income (loss) before income taxes                     |                                                                 |                                                            | 1,375  |        |                                       |   | 2,730  |        |        |   | 1,410  |        |        |    | 1,795  |        |        |   | 1,393  |        |        |   | (396   | )      |        |   | (745   | )      |        |   | (264   | )     
|Benefit from (provision for) income taxes             |                                                                 |                                                            | (580   | )      |                                       |   | (162   | )      |        |   | (171   | )      |        |    | (121   | )      |        |   | 72     |        |        |   | (209   | )      |        |   | (79    | )      |        |   | (85    | )     
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|Net income (loss)                                     |                                                                 | $                                                          | 795    |        |                                       | $ | 2,568  |        |        | $ | 1,239  |        |        | $  | 1,674  |        |        | $ | 1,465  |        |        | $ | (605   | )      |        | $ | (824   | )      |        | $ | (349   | )     
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|Net income (loss) per share:                          |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | Basic                                                      |        | $      | 0.01                                  |   |        | $      | 0.04   |   |        | $      | 0.02   |    |        | $      | 0.03   |   |        | $      | 0.02   |   |        | $      | (0.01  | ) |        | $      | (0.01  | ) |        | $      | (0.01  | )
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | Diluted                                                    |        | $      | 0.01                                  |   |        | $      | 0.04   |   |        | $      | 0.02   |    |        | $      | 0.02   |   |        | $      | 0.02   |   |        | $      | (0.01  | ) |        | $      | (0.01  | ) |        | $      | (0.01  | )
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|Shares used in computing net income (loss) per share: |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | Basic                                                      |        |        | 64,733                                |   |        |        | 64,308 |   |        |        | 63,995 |    |        |        | 65,713 |   |        |        | 70,837 |   |        |        | 71,344 |   |        |        | 71,134 |   |        |        | 70,051 |  
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       
|                                                      |                                                                 | Diluted                                                    |        |        | 67,503                                |   |        |        | 66,183 |   |        |        | 65,595 |    |        |        | 67,998 |   |        |        | 73,126 |   |        |        | 71,344 |   |        |        | 71,134 |   |        |        | 70,051 |  
|                                                      |                                                                 |                                                            |        |        |                                       |   |        |        |        |   |        |        |        |    |        |        |        |   |        |        |        |   |        |       

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Liquidity and Capital Resources






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









10-K.


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





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





| |                                            
| | -------------------------------------------
| | Liquidity and Capital Resource Requirements



Off-Balance Sheet Arrangements and Contractual Obligations




|                                    |  |       |       |                        |          |   |        |       |  |        |       |  |  |   |   | 
|----------------------------------- |  | ----- | ----- | ---------------------- | -------- | - | ------ | ----- |  | ------ | ----- |  |  | - | - | 
|                                    |  |       |       | Payments due by period
|                                    |  |       |       |                       
|                                    |  |       |       | Less than              |          |   | 1 to 3 |       |  | 3 to 5
|Contractual Obligations             |  | Total |       |                        | one Year |   |        | Years |  |        | Years
|                                    |  |       |       |                        |          |   |        |       |  |        |      
|Operating lease obligations         |  | $     | 1,113 |                        |          | $ | 33     |       |  | $      | 1,080 |  |  | $ |  | 
|Non-cancelable purchase obligations |  | $     | 8,573 |                        |          | $ | 8,573  |       |  | $      |      |  |  | $ |  | 



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Stock Repurchase Program




Recent Accounting Pronouncements









|         |                                                               
|-------- | --------------------------------------------------------------
|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         |  | $                                      | 35,339 |   |           | $ | 162,510 |       |  | $ | 197,849 | 
|Weighted average interest rate |  |                                        | 3.32   | % |           |   | 3.98    | %     |  |   |         | 

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Foreign currency risk




53



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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


AND FINANCIAL STATEMENT SCHEDULE


|                                                                     |  |      |    | 
|-------------------------------------------------------------------- |  | ---- | -- | 
|                                                                     |  | Page |   
|                                                                     |  |      |   
|Reports of Independent Registered Public Accounting Firm             |  |      | 55 | 
|Consolidated Balance Sheets                                          |  |      | 58 | 
|Consolidated Statements of Operations                                |  |      | 59 | 
|Consolidated Statements of Shareholders Equity                      |  |      | 60 | 
|Consolidated Statements of Cash Flows                                |  |      | 61 | 
|Notes to Consolidated Financial Statements                           |  |      | 62 | 
|Financial Statement Schedule  Valuation and
    Qualifying Accounts |  |      | 95 | 

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REPORT OF ARMANINO MCKENNA LLP, INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM










Internal Control 
Integrated Framework








55



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REPORT OF ARMANINO MCKENNA LLP, INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM




Internal Control 
Integrated Framework


















56



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REPORT OF INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM










10-K/


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SONICWALL, INC.


CONSOLIDATED BALANCE SHEETS


|                                            |                                                                                                                        |                             |                                            |          |         |         |        |          |         |         | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | -------- | ------- | ------- | ------ | -------- | ------- | ------- | 
|                                            |                                                                                                                        | December 31,                |                                           
|                                            |                                                                                                                        |                             |                                           
|                                            |                                                                                                                        | 2005                        |                                            |          | 2004    |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | (In thousands, except share |                                           
|                                            |                                                                                                                        | data)                       |                                           
|ASSETS                                     
|Current Assets:                             |                                                                                                                        |                             |                                            |          |         |         |        |         
|                                            | Cash and cash equivalents                                                                                              |                             | $                                          | 42,593   |         |         | $      | 23,446   |        
|                                            | Short-term investments                                                                                                 |                             |                                            | 197,849  |         |         |        | 229,226  |        
|                                            | Accounts receivable, net of allowance for doubtful accounts of
    $123 and $188 in 2005 and 2004, respectively        |                             |                                            | 13,113   |         |         |        | 14,204   |        
|                                            | Inventories                                                                                                            |                             |                                            | 3,707    |         |         |        | 2,191    |        
|                                            | Prepaid expenses and other current assets                                                                              |                             |                                            | 7,331    |         |         |        | 2,069    |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total current assets        |                                            |          | 264,593 |         |        |          | 271,136 |        
|Property and equipment, net                 |                                                                                                                        |                             | 2,595                                      |          |         |         | 3,395  |         
|Goodwill                                    |                                                                                                                        |                             | 109,005                                    |          |         |         | 97,953 |         
|Purchased intangibles and other assets, net |                                                                                                                        |                             | 11,490                                     |          |         |         | 14,361 |         
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total assets                |                                            | $        | 387,683 |         |        | $        | 386,845 |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                           
|LIABILITIES AND SHAREHOLDERS EQUITY       
|Current Liabilities:                        |                                                                                                                        |                             |                                            |          |         |         |        |         
|                                            | Accounts payable                                                                                                       |                             | $                                          | 7,445    |         |         | $      | 5,737    |        
|                                            | Accrued restructuring                                                                                                  |                             |                                            |         |         |         |        | 398      |        
|                                            | Accrued payroll and related benefits                                                                                   |                             |                                            | 9,054    |         |         |        | 7,342    |        
|                                            | Other accrued liabilities                                                                                              |                             |                                            | 6,277    |         |         |        | 4,719    |        
|                                            | Deferred revenue                                                                                                       |                             |                                            | 44,642   |         |         |        | 30,173   |        
|                                            | Income taxes payable                                                                                                   |                             |                                            | 95       |         |         |        | 500      |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total current liabilities   |                                            |          | 67,513  |         |        |          | 48,869  |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|Commitments and contingencies (Note 10)     |                                                                                                                        |                             |                                            |          |         |         |        |         
|Shareholders Equity:                       |                                                                                                                        |                             |                                            |          |         |         |        |         
|                                            | Common stock, no par value; 200,000,000 shares authorized;
    65,026,138 and 68,623,042 shares issued and outstanding |                             |                                            | 440,453  |         |         |        | 463,733  |        
|                                            | Deferred stock-based compensation                                                                                      |                             |                                            | (281     | )       |         |        |         |        
|                                            | Accumulated other comprehensive loss, net                                                                              |                             |                                            | (1,367   | )       |         |        | (846     | )      
|                                            | Accumulated deficit                                                                                                    |                             |                                            | (118,635 | )       |         |        | (124,911 | )      
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        | Total shareholders equity  |                                            |          | 320,170 |         |        |          | 337,976 |        
|                                            |                                                                                                                        |                             |                                            |          |         |        
|                                            |                                                                                                                        |                             | Total liabilities and shareholders equity |          | $       | 387,683 |        |          | $       | 386,845 | 
|                                            |                                                                                                                        |                             |                                            |          |         |        



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SONICWALL, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |         |   |         |        |        | 
|----------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------- | - | ------ | ------ | ------- | - | ------- | ------ | ------ | 
|                                                      |                                                                                                                                                 | Year Ended December 31,               |       
|                                                      |                                                                                                                                                 |                                       |       
|                                                      |                                                                                                                                                 | 2005                                  |        |        | 2004    |   |        | 2003   |        
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|                                                      |                                                                                                                                                 | (In thousands, except per share data) |       
|Revenue:                                              |                                                                                                                                                 |                                       |        |        |         |   |        |        |         |   |         |       
|                                                      | Product                                                                                                                                         |                                       | $      | 75,525 |         |   | $      | 82,994 |         |   | $       | 65,931 |       
|                                                      | License and service                                                                                                                             |                                       |        | 59,799 |         |   |        | 42,655 |         |   |         | 28,470 |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|                                                      |                                                                                                                                                 | Total revenue                         |        |        | 135,324 |   |        |        | 125,649 |   |         |        | 94,401 | 
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Cost of revenue:                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |         |   |         |       
|                                                      | Product, excluding amortization of stock-based compensation of
    $0, $0 and $7 in 2005, 2004 and 2003, respectively                           |                                       |        | 27,699 |         |   |        | 30,118 |         |   |         | 27,906 |       
|                                                      | License and service                                                                                                                             |                                       |        | 8,031  |         |   |        | 7,002  |         |   |         | 5,617  |       
|                                                      | Amortization of purchased technology                                                                                                            |                                       |        | 4,552  |         |   |        | 4,543  |         |   |         | 4,543  |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|                                                      |                                                                                                                                                 | Total cost of revenue                 |        |        | 40,282  |   |        |        | 41,663  |   |         |        | 38,066 | 
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Gross profit                                          |                                                                                                                                                 |                                       | 95,042 |        |         |   | 83,986 |        |         |   | 56,335  |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Operating expenses:                                   |                                                                                                                                                 |                                       |        |        |         |   |        |        |         |   |         |       
|                                                      | Research and development, excluding amortization of stock-based
    compensation of $165, $75, and $70 in 2005, 2004 and 2003,
    respectively |                                       |        | 22,603 |         |   |        | 23,337 |         |   |         | 19,864 |       
|                                                      | Sales and marketing, excluding amortization of stock-based
    compensation of $36, $0, and $398 in 2005, 2004 and 2003,
    respectively       |                                       |        | 53,367 |         |   |        | 47,353 |         |   |         | 40,139 |       
|                                                      | General and administrative, excluding amortization of
    stock-based compensation of $0, $0, and $225 in 2005, 2004 and
    2003, respectively |                                       |        | 15,535 |         |   |        | 14,365 |         |   |         | 11,893 |       
|                                                      | Amortization of purchased intangible assets                                                                                                     |                                       |        | 2,893  |         |   |        | 3,089  |         |   |         | 5,333  |       
|                                                      | Restructuring charges (reversals)                                                                                                               |                                       |        |       |         |   |        | (171   | )       |   |         | 1,833  |       
|                                                      | Stock-based compensation                                                                                                                        |                                       |        | 201    |         |   |        | 75     |         |   |         | 700    |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|                                                      |                                                                                                                                                 | Total operating expenses              |        |        | 94,599  |   |        |        | 88,048  |   |         |        | 79,762 | 
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Income (loss) from operations                         |                                                                                                                                                 |                                       | 443    |        |         |   | (4,062 | )      |         |   | (23,427 | )     
|Interest income and other expense, net                |                                                                                                                                                 |                                       | 6,867  |        |         |   | 4,050  |        |         |   | 4,169   |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Income (loss) before income taxes                     |                                                                                                                                                 |                                       | 7,310  |        |         |   | (12    | )      |         |   | (19,258 | )     
|Benefit from (provision for) income taxes             |                                                                                                                                                 |                                       | (1,034 | )      |         |   | (301   | )      |         |   | 1,590   |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Net income (loss)                                     |                                                                                                                                                 | $                                     | 6,276  |        |         | $ | (313   | )      |         | $ | (17,668 | )     
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Net income (loss) per share:                          |                                                                                                                                                 |                                       |        |        |         |   |        |        |         |   |         |       
|                                                      | Basic                                                                                                                                           |                                       | $      | 0.10   |         |   | $      | (0.00  | )       |   | $       | (0.26  | )     
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|                                                      | Diluted                                                                                                                                         |                                       | $      | 0.09   |         |   | $      | (0.00  | )       |   | $       | (0.26  | )     
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|Shares used in computing net income (loss) per share: |                                                                                                                                                 |                                       |        |        |         |   |        |        |         |   |         |       
|                                                      | Basic                                                                                                                                           |                                       |        | 64,684 |         |   |        | 70,850 |         |   |         | 67,895 |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        
|                                                      | Diluted                                                                                                                                         |                                       |        | 66,797 |         |   |        | 70,850 |         |   |         | 67,895 |       
|                                                      |                                                                                                                                                 |                                       |        |        |         |   |        |        |        



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SONICWALL, INC.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                                                                                        |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |   |          |         |   |   |         |         |         |  
|--------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------- | ---------- | - | ----------- | ----------- | ------- | ------------- | - | - | ------------- | - | ----- | ------------- | ------ | ---- | ------ | - | -------- | ------- | - | - | ------- | ------- | ------- | -
|                                                                                        |                                                    |                                       |            |   |             | Accumulated |         |               |   |   |              
|                                                                                        |                                                    | Common Stock                          |            |   | Deferred    |             |         | Other         |   |   |               |   | Total |              
|                                                                                        |                                                    |                                       |            |   | Stock-Based |             |         | Comprehensive |   |   | Accumulated   |   |       | Shareholders |       
|                                                                                        |                                                    | Shares                                |            |   | Amount      |             |         | Compensation  |   |   | Income (Loss) |   |       | Deficit       |        |      | Equity |  
|                                                                                        |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |  
|                                                                                        |                                                    | (In thousands, except for share data) |           
|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:                                                                     |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |   |          |         |   |   |         |        
|                                                                                        | Change in unrealized loss on investment securities |                                       |            |  |             |             |         |              |   |   |               |  |       |               |        | (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                                          |                                                    |                                       |           |   |             |             | 184     |               |   |   |              |   |       |               |       |      |        |   |         |         |   |   | 184     |        
|Comprehensive loss:                                                                     |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |   |          |         |   |   |         |        
|                                                                                        | Change in unrealized loss on investment securities |                                       |            |  |             |             |         |              |   |   |               |  |       |               |        | (808 | )      |   |          |        |   |   |         | (808    | )      
|                                                                                        | Net loss                                           |                                       |            |  |             |             |         |              |   |   |               |  |       |               |        |     |        |   |          | (313    | ) |   |         | (313    | )      
|                                                                                        |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |  
|                                                                                        |                                                    | Total comprehensive loss              |            |   |            |             |         |               |  |   |               |   |      |               |        |      |       |   |          |         |  |   |         |         | (1,121  | )
|                                                                                        |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |  
|Balance at December 31, 2004                                                            |                                                    |                                       | 68,623,042 |   |             | $           | 463,733 |               |   | $ |              |   |       | $             | (846   | )    |        | $ | (124,911 | )       |   | $ | 337,976 |        
|Issuance of common stock upon exercise of stock options                                 |                                                    |                                       | 1,072,878  |   |             |             | 4,702   |               |   |   |              |   |       |               |       |      |        |   |         |         |   |   | 4,702   |        
|Issuance of common stock in connection with the Employee Stock
    Purchase Plan (ESPP) |                                                    |                                       | 328,018    |   |             |             | 1,623   |               |   |   |              |   |       |               |       |      |        |   |         |         |   |   | 1,623   |        
|Stock options assumed in connection with acquisition                                    |                                                    |                                       |            |   |             |             | 426     |               |   |   | (316          | ) |       |               |        |      |        |   |          |         |   |   | 110     |        
|Stock-based compensation                                                                |                                                    |                                       |           |   |             |             | 166     |               |   |   | 35            |   |       |               |       |      |        |   |         |         |   |   | 201     |        
|Repurchase of common stock                                                              |                                                    |                                       | (4,997,800 | ) |             |             | (30,218 | )             |   |   |              |   |       |               |       |      |        |   |         |         |   |   | (30,218 | )      
|Income tax benefit from stock option exercises                                          |                                                    |                                       |           |   |             |             | 21      |               |   |   |              |   |       |               |       |      |        |   |         |         |   |   | 21      |        
|Comprehensive income (loss):                                                            |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |   |          |         |   |   |         |        
|                                                                                        | Change in unrealized loss on investment securities |                                       |            |  |             |             |         |              |   |   |               |  |       |               |        | (521 | )      |   |          |        |   |   |         | (521    | )      
|                                                                                        | Net income                                         |                                       |            |  |             |             |         |              |   |   |               |  |       |               |        |     |        |   |          | 6,276   |   |   |         | 6,276   |        
|                                                                                        |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |  
|                                                                                        |                                                    | Total comprehensive income            |            |   |            |             |         |               |  |   |               |   |      |               |        |      |       |   |          |         |  |   |         |         | 5,755   |  
|                                                                                        |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |  
|Balance at December 31, 2005                                                            |                                                    |                                       | 65,026,138 |   |             | $           | 440,453 |               |   | $ | (281          | ) |       | $             | (1,367 | )    |        | $ | (118,635 | )       |   | $ | 320,170 |        
|                                                                                        |                                                    |                                       |            |   |             |             |         |               |   |   |               |   |       |               |        |      |        |  



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SONICWALL, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |        |        |         |          |        |       |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------- | ----- | ------ | ------- | -------- | ------ | ------ | ------- | -------- | ------ | ----- | ------ | -
|                                                                            |                                                                                                                  | Year Ended December 31,                                                                 |                                          
|                                                                            |                                                                                                                  |                                                                                         |                                          
|                                                                            |                                                                                                                  | 2005                                                                                    |                                           |                                                     | 2004  |        |         | 2003     |       
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|                                                                            |                                                                                                                  | (In thousands)                                                                          |                                          
|Cash flows from operating activities:                                       |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |        |        |         |         
|                                                                            | Net income (loss)                                                                                                |                                                                                         | $                                         | 6,276                                               |       |        | $       | (313     | )      |        | $       | (17,668  | )     
|                                                                            | Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:                     |                                                                                         |                                           |                                                     |       |        |         |          |        |        |         |          |       
|                                                                            |                                                                                                                  | Depreciation and amortization                                                           |                                           |                                                     | 9,847 |        |         |          | 11,216 |        |         |          | 13,508 |      
|                                                                            |                                                                                                                  | Adjustment of goodwill                                                                  |                                           |                                                     | 885   |        |         |          |       |        |         |          |       |      
|                                                                            |                                                                                                                  | Income tax benefit from exercise of employee stock options                              |                                           |                                                     | 22    |        |         |          | 184    |        |         |          |       |      
|                                                                            |                                                                                                                  | Reduction in allowance for doubtful accounts and others                                 |                                           |                                                     | (110  | )      |         |          | (104   | )      |         |          | (575   | )    
|                                                                            |                                                                                                                  | Deferred income taxes                                                                   |                                           |                                                     |      |        |         |          |       |        |         |          | (1,960 | )    
|                                                                            |                                                                                                                  | Non-cash restructuring charges (reversals)                                              |                                           |                                                     |      |        |         |          | (171   | )      |         |          | 98     |      
|                                                                            |                                                                                                                  | Amortization of stock-based compensation                                                |                                           |                                                     | 201   |        |         |          | 75     |        |         |          | 700    |      
|                                                                            |                                                                                                                  | Changes in operating assets and liabilities, net of effects of
    businesses acquired: |                                           |                                                     |       |        |         |          |        |        |         |          |        |      
|                                                                            |                                                                                                                  |                                                                                         | Accounts receivable                       |                                                     |       | 1,158  |         |          |        | (4,936 | )       |          |        | 4,685 |       
|                                                                            |                                                                                                                  |                                                                                         | Inventories                               |                                                     |       | (1,342 | )       |          |        | (236   | )       |          |        | 3,810 |       
|                                                                            |                                                                                                                  |                                                                                         | Prepaid expenses and other current assets |                                                     |       | (3,099 | )       |          |        | 520    |         |          |        | 827   |       
|                                                                            |                                                                                                                  |                                                                                         | Other assets                              |                                                     |       | 315    |         |          |        | (284   | )       |          |        | 10    |       
|                                                                            |                                                                                                                  |                                                                                         | Accounts payable                          |                                                     |       | 1,592  |         |          |        | (1,639 | )       |          |        | 574   |       
|                                                                            |                                                                                                                  |                                                                                         | Accrued payroll and related benefits      |                                                     |       | 1,537  |         |          |        | 2,354  |         |          |        | 208   |       
|                                                                            |                                                                                                                  |                                                                                         | Accrued restructuring                     |                                                     |       | (398   | )       |          |        | (682   | )       |          |        | (191  | )     
|                                                                            |                                                                                                                  |                                                                                         | Other accrued liabilities                 |                                                     |       | 1,554  |         |          |        | 889    |         |          |        | (960  | )     
|                                                                            |                                                                                                                  |                                                                                         | Deferred revenue                          |                                                     |       | 14,469 |         |          |        | 10,993 |         |          |        | 5,786 |       
|                                                                            |                                                                                                                  |                                                                                         | Income taxes payable                      |                                                     |       | (405   | )       |          |        | (327   | )       |          |        | 363   |       
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|                                                                            |                                                                                                                  |                                                                                         |                                           | Net cash provided by operating activities           |       |        | 32,502  |          |        |        | 17,539  |          |        |       | 9,215  |  
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|Cash flows from investing activities:                                       |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |        |        |         |         
|                                                                            | Purchases of property and equipment                                                                              |                                                                                         |                                           | (1,440                                              | )     |        |         | (2,105   | )      |        |         | (2,458   | )     
|                                                                            | Cash paid for acquisitions, net of cash acquired                                                                 |                                                                                         |                                           | (16,637                                             | )     |        |         |         |        |        |         |         |       
|                                                                            | Increase in restricted cash in escrow                                                                            |                                                                                         |                                           | (2,163                                              | )     |        |         |         |        |        |         |         |       
|                                                                            | Sales/ maturities of short-term investments                                                                      |                                                                                         |                                           | 236,898                                             |       |        |         | 320,832  |        |        |         | 192,468  |       
|                                                                            | Purchases of short-term investments                                                                              |                                                                                         |                                           | (206,119                                            | )     |        |         | (337,856 | )      |        |         | (195,977 | )     
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|                                                                            |                                                                                                                  |                                                                                         |                                           | Net cash provided by (used in) investing activities |       |        | 10,539  |          |        |        | (19,129 | )        |        |       | (5,967 | )
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|Cash flows from financing activities:                                       |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |        |        |         |         
|                                                                            | Proceeds from exercise of stock options and warrants and
    issuance of common stock in connection with ESPP    |                                                                                         |                                           | 6,324                                               |       |        |         | 13,925   |        |        |         | 4,189    |       
|                                                                            | Repurchase of common stock                                                                                       |                                                                                         |                                           | (30,218                                             | )     |        |         | (19,356  | )      |        |         |         |       
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|                                                                            |                                                                                                                  |                                                                                         |                                           | Net cash provided by (used in) financing activities |       |        | (23,894 | )        |        |        | (5,431  | )        |        |       | 4,189  |  
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|Net increase (decrease) in cash and cash equivalents                        |                                                                                                                  |                                                                                         | 19,147                                    |                                                     |       |        | (7,021  | )        |        |        | 7,437   |         
|Cash and cash equivalents at beginning of year                              |                                                                                                                  |                                                                                         | 23,446                                    |                                                     |       |        | 30,467  |          |        |        | 23,030  |         
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|Cash and cash equivalents at end of year                                    |                                                                                                                  | $                                                                                       | 42,593                                    |                                                     |       | $      | 23,446  |          |        | $      | 30,467  |         
|                                                                            |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |       
|Supplemental disclosure of cash flow information:                           |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |        |        |         |         
|                                                                            | Cash paid for income taxes                                                                                       |                                                                                         | $                                         | 498                                                 |       |        | $       | 445      |        |        | $       | 270      |       
|Supplemental disclosure of non-cash investing and financing
    activities: |                                                                                                                  |                                                                                         |                                           |                                                     |       |        |         |          |        |        |         |         
|                                                                            | Reversal of unearned deferred stock-based compensation for
    terminated employees                              |                                                                                         | $                                         |                                                    |       |        | $       |         |        |        | $       | (216     | )     
|                                                                            | Issuance of common stock and assumption of stock options and
    warrants in connection with acquired businesses |                                                                                         | $                                         | 110                                                 |       |        | $       |         |        |        | $       | 243      |       
|                                                                            | Unrealized loss on short-term investments, net                                                                   |                                                                                         | $                                         | (521                                                | )     |        | $       | (808     | )      |        | $       | (305     | )     



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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





|             |  |      |     |  |      |  |     |      |  |  |     | 
|------------ |  | ---- | --- |  | ---- |  | --- | ---- |  |  | --- | 
|             |  | 2005 |     |  | 2004 |  |     | 2003 | 
|             |  |      |     |  |      |  |     |      | 
|Ingram Micro |  |      | 18% |  |      |  | 17% |      |  |  | 23% | 
|Tech Data    |  |      | 21% |  |      |  | 21% |      |  |  | 20% | 



|             |  |              |     |  |      |  |     | 
|------------ |  | ------------ | --- |  | ---- |  | --- | 
|             |  | December 31, |    
|             |  |              |    
|             |  | 2005         |     |  | 2004 | 
|             |  |              |     |  |      | 
|Ingram Micro |  |              | 15% |  |      |  | 6%  | 
|Tech Data    |  |              | 11% |  |      |  | 26% | 







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

first-in,


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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





| |                      
| | ---------------------
| | Purchased intangibles





| |                                    
| | -----------------------------------
| | Goodwill and Impairment of goodwill





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





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



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

Accounting for Stock Issued to Employees, Accounting
for Stock-Based Compensation.




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



|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                 |                                                                                                                                                                                    | Year Ended December 31,             |  
|                                                 |                                                                                                                                                                                    |                                     |  
|                                                 |                                                                                                                                                                                    | 2005                                |   |         | 2004 |  |   | 2003    |  
|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |  
|                                                 |                                                                                                                                                                                    | (In thousands, except for per share |  
|                                                 |                                                                                                                                                                                    | amounts)                            |  
|Net income (loss):                               |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |   |  |   |        
|                                                 | As reported                                                                                                                                                                        |                                     | $ | 6,276   |      |  | $ | (313    | ) |  | $ | (17,668 | )
|                                                 | Expensed stock compensation under the intrinsic value method,
    net of related tax effect                                                                                        |                                     |   | 201     |      |  |   | 75      |   |  |   | 700     |  
|                                                 | Stock-based compensation expense that would have been included
    in the determination of net income (loss) had the fair value
    method been applied, net of related tax effect |                                     |   | (14,431 | )    |  |   | (17,520 | ) |  |   | (24,388 | )
|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |  
|                                                 | Pro forma net loss                                                                                                                                                                 |                                     | $ | (7,954  | )    |  | $ | (17,758 | ) |  | $ | (41,356 | )
|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |  
|Net income (loss) per share  basic and diluted: |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |   |  |   |        
|                                                 | Basic  as reported                                                                                                                                                                |                                     | $ | 0.10    |      |  | $ | (0.00   | ) |  | $ | (0.26   | )
|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |  
|                                                 | Diluted  as reported                                                                                                                                                              |                                     | $ | 0.09    |      |  | $ | (0.00   | ) |  | $ | (0.26   | )
|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |  
|                                                 | Basic  pro forma                                                                                                                                                                  |                                     | $ | (0.12   | )    |  | $ | (0.25   | ) |  | $ | (0.61   | )
|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |  
|                                                 | Diluted  pro forma                                                                                                                                                                |                                     | $ | (0.12   | )    |  | $ | (0.25   | ) |  | $ | (0.61   | )
|                                                 |                                                                                                                                                                                    |                                     |   |         |      |  |   |         |  



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |      |                 |  |      |  |                |      |  |  |                | 
|----------------------- |  | ---- | --------------- |  | ---- |  | -------------- | ---- |  |  | -------------- | 
|                        |  | 2005 |                 |  | 2004 |  |                | 2003 | 
|                        |  |      |                 |  |      |  |                |      | 
|Expected volatility     |  |      | 48% to 71%      |  |      |  | 89%            |      |  |  | 90%            | 
|Risk-free interest rate |  |      | 3.46% to 4.43%  |  |      |  | 2.52% to 3.55% |      |  |  | 2.16% to 2.87% | 
|Expected life           |  |      | 3.1 to 4  years |  |      |  | 4 years        |      |  |  | 4 years        | 
|Dividend yield          |  |      | 0%              |  |      |  | 0%             |      |  |  | 0%             | 



|                        |  |      |                |  |      |  |                |      |  |  |                | 
|----------------------- |  | ---- | -------------- |  | ---- |  | -------------- | ---- |  |  | -------------- | 
|                        |  | 2005 |                |  | 2004 |  |                | 2003 | 
|                        |  |      |                |  |      |  |                |      | 
|Expected volatility     |  |      | 60%            |  |      |  | 60%            |      |  |  | 63%            | 
|Risk-free interest rate |  |      | 1.00% to 2.77% |  |      |  | 1.00% to 1.73% |      |  |  | 1.01% to 1.33% | 
|Expected life           |  |      | 0.5 year       |  |      |  | 0.5 year       |      |  |  | 1 year         | 
|Dividend yield          |  |      | 0%             |  |      |  | 0%             |      |  |  | 0%             | 

Accounting for Equity Investments
That Are Issued to Other Than Employees for Acquiring, or In
Conjunction with Selling, Goods or Services




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



00-21.


97-2, 03-05), 97-2




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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




















67



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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









| |                            
| | ---------------------------
| | Shipping and Handling Costs





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





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



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



Accounting for Consideration Given by a
Vendor to a Customer.




| |                                           
| | ------------------------------------------
| | Computation of net income (loss) per share





|                             |                                                     |                         |   |        |      |  |   |        |       |   |   |         |       |  
|---------------------------- | --------------------------------------------------- | ----------------------- | - | ------ | ---- |  | - | ------ | ----- | - | - | ------- | ----- | -
|                             |                                                     | Year Ended December 31, |  
|                             |                                                     |                         |  
|                             |                                                     | 2005                    |   |        | 2004 |  |   | 2003   |      
|                             |                                                     |                         |   |        |      |  |   |        |      
|Numerator:                   |                                                     |                         |   |        |      |  |   |        |       |   |   |        
|                             | Net income (loss)                                   |                         | $ | 6,276  |      |  | $ | (313   | )     |   | $ | (17,668 | )    
|                             |                                                     |                         |   |        |      |  |   |        |      
|Denominator:                 |                                                     |                         |   |        |      |  |   |        |       |   |   |        
|                             | Weighted average shares used to compute basic EPS   |                         |   | 64,684 |      |  |   | 70,850 |       |   |   | 67,895  |      
|                             | Effect of dilutive securities:                      |                         |   |        |      |  |   |        |       |   |   |         |      
|                             | Dilutive common stock equivalents                   |                         |   | 2,113  |      |  |   |       |       |   |   |        |      
|                             |                                                     |                         |   |        |      |  |   |        |      
|                             | Weighted average shares used to compute diluted EPS |                         |   | 66,797 |      |  |   | 70,850 |       |   |   | 67,895  |      
|                             |                                                     |                         |   |        |      |  |   |        |      
|Net income (loss) per share: |                                                     |                         |   |        |      |  |   |        |       |   |   |        
|                             |                                                     | Basic                   |   | $      | 0.10 |  |   | $      | (0.00 | ) |   | $       | (0.26 | )
|                             |                                                     |                         |   |        |      |  |   |        |      
|                             |                                                     | Diluted                 |   | $      | 0.09 |  |   | $      | (0.00 | ) |   | $       | (0.26 | )
|                             |                                                     |                         |   |        |      |  |   |        |      



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments.


Accounting Changes and Error
Corrections


Share-Based
Payment pro forma
stock-based compensation


Exchanges of Nonmonetary
Assets


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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |                          
|-------- | -------------------------
|Note 2  | Balance Sheet Components:

|                                             |                                |                |        |         |      |   |        |         |  
|-------------------------------------------- | ------------------------------ | -------------- | ------ | ------- | ---- | - | ------ | ------- | -
|                                             |                                | December 31,   |       
|                                             |                                |                |       
|                                             |                                | 2005           |        |         | 2004 |  
|                                             |                                |                |        |         |      |  
|                                             |                                | (In thousands) |       
|Property and equipment, net:                 |                                |                |        |         |      |   |        |        
|                                             | Equipment                      |                | $      | 9,610   |      |   | $      | 8,756   |  
|                                             | Office equipment and furniture |                |        | 1,913   |      |   |        | 1,896   |  
|                                             | Leasehold improvements         |                |        | 1,432   |      |   |        | 1,391   |  
|                                             | Software                       |                |        | 6,887   |      |   |        | 6,538   |  
|                                             |                                |                |        |         |      |  
|                                             |                                |                | 19,842 |         |      |   | 18,581 |        
|                                             | Less: accumulated depreciation |                |        | (17,247 | )    |   |        | (15,186 | )
|                                             |                                |                |        |         |      |  
|                                             |                                | $              | 2,595  |         |      | $ | 3,395  |        
|                                             |                                |                |        |         |      |  
|Purchased intangibles and other assets, net: |                                |                |        |         |      |   |        |        
|                                             | Purchased intangible assets    |                | $      | 57,400  |      |   | $      | 52,529  |  
|                                             | Other assets                   |                |        | 397     |      |   |        | 695     |  
|                                             |                                |                |        |         |      |  
|                                             |                                |                | 57,797 |         |      |   | 53,224 |        
|                                             | Less: accumulated amortization |                |        | (46,307 | )    |   |        | (38,863 | )
|                                             |                                |                |        |         |      |  
|                                             |                                | $              | 11,490 |         |      | $ | 14,361 |        
|                                             |                                |                |        |         |      |  



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



|                                                                      |  |              |         |   |      |   |        | 
|--------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------ | 
|                                                                      |  | December 31, |        
|                                                                      |  |              |        
|                                                                      |  | 2005         |         |   | 2004 |  
|                                                                      |  |              |         |   |      |  
|Balance as of beginning of the year                                   |  | $            | 97,953  |   |      | $ | 97,953 | 
|Acquisitions::                                                        |  |              |         |   |      |   |        | 
|enKoo                                                                 |  |              | 1,286   |   |      |   |       | 
|Lasso                                                                 |  |              | 10,651  |   |      |   |       | 
|Tax adjustment related to Phobos acquisition in 2000 (see
    Note 8) |  |              | (885    | ) |      |   |       | 
|                                                                      |  |              |         |   |      |  
|Balance as of end of the year                                         |  | $            | 109,005 |   |      | $ | 97,953 | 
|                                                                      |  |              |         |   |      |  



|                       |  |                  |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     |  |   |         |   |  |   |        | 
|---------------------- |  | ---------------- | --------- | ----------------- | -------- | - | ----------------- | ------------ |  | ----- | ------- | - | -------- | ------ | ------ | ----------- | ------------ | - | ------ | --- |  | - | ------- | - |  | - | ------ | 
|                       |  |                  |           | December 31, 2005 |          |   | December 31, 2004 |             
|                       |  |                  |           |                   |          |   |                   |             
|                       |  | Weighted Average |           |                   | Gross    |   |                   |              |  | Gross |         |   |         
|                       |  | Amortization     |           |                   | Carrying |   |                   | Accumulated  |  |       |         |   | Carrying |        |        | Accumulated |              |   |       
|                       |  | Period           |           |                   | Amount   |   |                   | Amortization |  |       | Net     |   |          | Amount |        |             | Amortization |   |        | Net | 
|                       |  |                  |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     | 
|Purchased technology   |  |                  | 70 months |                   |          | $ | 31,771            |              |  | $     | (23,190 | ) |          | $      | 8,581  |             |              | $ | 26,970 |     |  | $ | (18,567 | ) |  | $ | 8,403  | 
|Non-compete agreements |  |                  | 36 months |                   |          |   | 7,019             |              |  |       | (7,019  | ) |          |        |       |             |              |   | 7,019  |     |  |   | (7,019  | ) |  |   |       | 
|Customer base          |  |                  | 69 months |                   |          |   | 18,140            |              |  |       | (15,694 | ) |          |        | 2,446  |             |              |   | 18,140 |     |  |   | (12,904 | ) |  |   | 5,236  | 
|Other                  |  |                  | 17 months |                   |          |   | 470               |              |  |       | (404    | ) |          |        | 66     |             |              |   | 400    |     |  |   | (373    | ) |  |   | 27     | 
|                       |  |                  |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     | 
|Total intangibles      |  |                  |           |                   |          | $ | 57,400            |              |  | $     | (46,307 | ) |          | $      | 11,093 |             |              | $ | 52,529 |     |  | $ | (38,863 | ) |  | $ | 13,666 | 
|                       |  |                  |           |                   |          |   |                   |              |  |       |         |   |          |        |        |             |              |   |        |     | 

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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|            |       |   |       |       | 
|----------- | ----- | - | ----- | ----- | 
|Fiscal Year |       |  
|            |       |  
|2006        |       | $ | 4,821 |      
|2007        |       |   | 960   |      
|2008        |       |   | 960   |      
|2009        |       |   | 960   |      
|2010        |       |   | 880   |      
|            |       |   |      
|            | Total |   | $     | 8,581 | 
|            |       |   |      



|            |       |        |       
|----------- | ----- | ------ | ------
|Fiscal Year |       |       
|            |       |       
|2006        |       | $2,512
|            |       |       
|            | Total |        | $2,512
|            |       |       



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

Business Combinations,




Goodwill and Other
Intangible Assets.


|                             |  |   |        | 
|---------------------------- |  | - | ------ | 
|Net tangible assets          |  | $ | 1,351  | 
|Intangible assets            |  | $ | 14,421 | 
|                             |  |   |       
|Total purchase consideration |  | $ | 15,772 | 
|                             |  |   |       



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












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



|                           |                             |                              |         |            |            |   |            |         |  |  |          |    |  |   |      |        |  
|-------------------------- | --------------------------- | ---------------------------- | ------- | ---------- | ---------- | - | ---------- | ------- |  |  | -------- | -- |  | - | ---- | ------ | -
|                           |                             | Year Ended December 31, 2005 |        
|                           |                             |                              |        
|                           |                             |                              |         | Gross      |            |   | Gross      |        
|                           |                             |                              |         | Unrealized |            |   | Unrealized |        
|                           |                             | Fair Value                   |         |            | Book Value |   |            | Gains   |  |  | (Losses) |   
|                           |                             |                              |         |            |            |   |            |         |  |  |          |   
|Marketable securities      |                             |                              |         |            |            |   |            |         |  |  |          |    |  |   |      |       
|Corporate debt securities  |                             | $                            | 164,517 |            |            | $ | 165,416    |         |  |  | 80       |    |  | $ | (979 | )     
|U.S. government securities |                             |                              | 32,401  |            |            |   | 32,845     |         |  |  |         |    |  |   | (444 | )     
|Municipal bonds and notes  |                             |                              | 931     |            |            |   | 955        |         |  |  |         |    |  |   | (24  | )     
|                           |                             |                              |         |            |            |   |            |         |  |  |          |   
|                           | Total marketable securities |                              | $       | 197,849    |            |   | $          | 199,216 |  |  |          | 80 |  |   | $    | (1,447 | )
|                           |                             |                              |         |            |            |   |            |         |  |  |          |   

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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                           |                             |                                 |         |            |            |   |            |         |  |  |          |   |  |   |      |      |  
|-------------------------- | --------------------------- | ------------------------------- | ------- | ---------- | ---------- | - | ---------- | ------- |  |  | -------- | - |  | - | ---- | ---- | -
|                           |                             | Year Ended December 31, 2004(1) |        
|                           |                             |                                 |        
|                           |                             |                                 |         | Gross      |            |   | Gross      |        
|                           |                             |                                 |         | Unrealized |            |   | Unrealized |        
|                           |                             | Fair Value                      |         |            | Book Value |   |            | Gains   |  |  | (Losses) |  
|                           |                             |                                 |         |            |            |   |            |         |  |  |          |  
|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.

mark-to




|                           |                             |                        |        |            |                      |   |      |            |            |   |          |        |  |            |      |      |          |   |        |         |  |   |      |        |  
|-------------------------- | --------------------------- | ---------------------- | ------ | ---------- | -------------------- | - | ---- | ---------- | ---------- | - | -------- | ------ |  | ---------- | ---- | ---- | -------- | - | ------ | ------- |  | - | ---- | ------ | -
|                           |                             | Unrealized Losses Less |        |            | Unrealized Losses 12 |   |      |           
|                           |                             | Than 12 Months         |        |            | Months or Greater    |   |      | Total      |           
|                           |                             |                        |        |            |                      |   |      |            |           
|                           |                             |                        |        | Gross      |                      |   |      |            | Gross      |   |          |        |  | Gross      |     
|                           |                             |                        |        | Unrealized |                      |   |      |            | Unrealized |   |          |        |  | Unrealized |     
|                           |                             | Fair Value             |        |            | (Losses)             |   |      | Fair Value |            |   | (Losses) |        |  | Fair Value |      |      | (Losses) |  
|                           |                             |                        |        |            |                      |   |      |            |            |   |          |        |  |            |      |      |          |  
|December 31, 2005          |                             |                        |        |            |                      |   |      |            |            |   |          |        |  |            |      |      |          |   |        |         |  |   |      |       
|Marketable securities      |                             |                        |        |            |                      |   |      |            |            |   |          |        |  |            |      |      |          |   |        |         |  |   |      |       
|Corporate debt securities  |                             | $                      | 25,181 |            |                      | $ | (189 | )          |            | $ | 51,301   |        |  | $          | (790 | )    |          | $ | 76,482 |         |  | $ | (979 | )     
|U.S. government securities |                             |                        | 10,703 |            |                      |   | (332 | )          |            |   | 21,698   |        |  |            | (112 | )    |          |   | 32,401 |         |  |   | (444 | )     
|Municipal bonds and notes  |                             |                        |       |            |                      |   |     |            |            |   | 931      |        |  |            | (24  | )    |          |   | 931    |         |  |   | (24  | )     
|                           |                             |                        |        |            |                      |   |      |            |            |   |          |        |  |            |      |      |          |  
|                           | Total marketable securities |                        | $      | 35,884     |                      |   | $    | (521       | )          |   | $        | 73,930 |  |            | $    | (926 | )        |   | $      | 109,814 |  |   | $    | (1,447 | )
|                           |                             |                        |        |            |                      |   |      |            |            |   |          |        |  |            |      |      |          |  

74



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                               |  |      |         | 
|------------------------------ |  | ---- | ------- | 
|                               |  | 2005 |        
|                               |  |      |        
|Maturity                       |  |      |         | 
|Due within one year            |  | $    | 35,339  | 
|Due between one and five years |  |      | 58,826  | 
|Due between five and ten years |  |      | 12,885  | 
|Due after 10 years(1)          |  |      | 90,799  | 
|                               |  |      |        
|Total short-term investments   |  | $    | 197,849 | 
|                               |  |      |        






|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents auction rate securities of $70 million that have
    re-auction periods of 90 days or less but whose underlying
    agreements have original maturities of more than 90 days
    and asset backed securities of $21 million.



|         |                       
|-------- | ----------------------
|Note 6  | Restructuring Charges:







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





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |                                      |           |     |   |          |   |       |             |  |       |   |   |  |   |       |     | 
|------------------------------------ | ------------------------------------ | --------- | --- | - | -------- | - | ----- | ----------- |  | ----- | - | - |  | - | ----- | --- | 
|                                     |                                      | Employee  |     |   |          |   |       |             | 
|                                     |                                      | Severance |     |   | Facility |   |       | Asset       |  |      
|                                     |                                      | Benefits  |     |   | Costs    |   |       | Impairments |  | Total |  
|                                     |                                      |           |     |   |          |   |       |             |  |       |  
|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 | 
|Cash paid                            |                                      |           |    |   |          |   | (315  | )           |  |       |  |   |  |   | (315  | )  
|Adjustments                          |                                      |           |    |   |          |   |      |             |  |       |  |   |  |   |      |    
|                                     |                                      |           |     |   |          |   |       |             |  |       |   |  
|                                     | Reserve balance at December 31, 2005 |           | $   |  |          |   | $     |            |  |       | $ |  |  |   | $     |    | 
|                                     |                                      |           |     |   |          |   |       |             |  |       |   |  



| |                        
| | -----------------------
| | 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     |  
|                               | Cash paid                            |           |       |       |          |   |     | (83         | ) |   |       |    |   |   |       | (83    | )
|                               | Adjustments                          |           |       |       |          |   |     |            |   |   |       |    |   |   |       |       |  
|                               |                                      |           |       |        |          |   |     |             |   |   |       |    
|                               | Reserve balance at December 31, 2005 |           | $     |       |          |   | $   |            |   |   | $     |    |   |   | $     |       |  
|                               |                                      |           |       |        |          |   |     |             |   |   |       |    



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



|                               |                                      |           |        |    |          |  |      |             |  |  |       |   |  |  |        |       | 
|------------------------------ | ------------------------------------ | --------- | ------ | -- | -------- |  | ---- | ----------- |  |  | ----- | - |  |  | ------ | ----- | 
|                               |                                      | Employee  |        |    |          |  |      |             | 
|                               |                                      | Severance |        |    | Facility |  |      | Asset       |  |  |      
|                               |                                      | Benefits  |        |    | Costs    |  |      | Impairments |  |  | Total |  
|                               |                                      |           |        |    |          |  |      |             |  |  |       |  
|                               | 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   | 
|Cash paid                      |                                      |           |       |    |          |  | (398 | )           |  |  |      |   |  |  | (398   | )    
|Adjustments                    |                                      |           |       |    |          |  |     |             |  |  |      |   |  |  |       |      
|                               |                                      |           |        |    |          |  |      |             |  |  |       |  
|                               | Reserve balance at December 31, 2005 |           | $      |   |          |  | $    |            |  |  | $     |  |  |  | $      |      | 
|                               |                                      |           |        |    |          |  |      |             |  |  |       |  



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



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



77



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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





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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                       |  |               |             |                     |        |          |            |                |  |   |              |  |  |   |       | 
|-------------------------------------- |  | ------------- | ----------- | ------------------- | ------ | -------- | ---------- | -------------- |  | - | ------------ |  |  | - | ----- | 
|                                       |  |               |             | Options Outstanding |       
|                                       |  |               |             |                     |       
|                                       |  |               |             |                     |        | Weighted |           
|                                       |  |               |             |                     |        | Average  |           
|                                       |  | Available for |             |                     |        |          | Exercise   |               
|                                       |  | Grant         |             |                     | Shares |          |            | Exercise Price |  |   | Price        | 
|                                       |  |               |             |                     |        |          |            |                |  |   |              | 
|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  | 
|Authorized                             |  |               | 2,744,922   |                     |        |          |           |                |  |   |             |  |  |   |      | 
|Options assumed related to acquisition |  |               |             |                     |        |          | 59,589     |                |  | $ | 0.30 -  0.30 |  |  | $ | 0.30  | 
|Granted                                |  |               | (5,925,524  | )                   |        |          | 5,925,524  |                |  | $ | 5.10 -  7.71 |  |  | $ | 6.77  | 
|Exercised                              |  |               |            |                     |        |          | (1,072,878 | )              |  | $ | 0.06 -  7.73 |  |  | $ | 4.38  | 
|Canceled                               |  |               | 1,567,766   |                     |        |          | (1,643,509 | )              |  | $ | 1.42 - 31.94 |  |  | $ | 6.98  | 
|                                       |  |               |             |                     |        |          |            |                |  |   |              | 
|Balance at December 31, 2005           |  |               | 347,565     |                     |        |          | 16,823,438 |                |  | $ | 0.30 - 45.56 |  |  | $ | 6.33  | 
|                                       |  |               |             |                     |        |          |            |                |  |   |              | 

79



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##### Table of Contents



SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |                |           |  |  |   |       | 
|--------------- |  | ------------------- | ----- | ---------------- | ------------------- |  | ---------------- | ------- |  |  | ------ | ---------------- |  | -------------- | --------- |  |  | - | ----- | 
|                |  | Options Outstanding |       |                  | Options Exercisable | 
|                |  |                     |       |                  |                     | 
|                |  |                     |       | Weighted Average |                     |  |                 
|                |  |                     |       | Remaining        |                     |  |                 
|                |  | Weighted Average    |       |                  |                     |  | Contractual Life |         |  |  |        | Weighted Average | 
|Exercise Prices |  | Exercise Price      |       |                  | Shares              |  |                  | (Years) |  |  | Shares |                  |  | Exercise Price |          
|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |                |          
|$ 0.30 - $ 0.30 |  | $                   | 0.30  |                  |                     |  | 59,589           |         |  |  | 9.10   |                  |  |                | 11,765    |  |  | $ | 0.30  | 
|$ 1.42 - $ 1.42 |  | $                   | 1.42  |                  |                     |  | 5,506            |         |  |  | 3.60   |                  |  |                | 5,506     |  |  | $ | 1.42  | 
|$ 2.87 - $ 4.28 |  | $                   | 3.45  |                  |                     |  | 3,287,713        |         |  |  | 7.10   |                  |  |                | 2,285,776 |  |  | $ | 3.45  | 
|$ 4.48 - $ 6.61 |  | $                   | 5.69  |                  |                     |  | 6,747,393        |         |  |  | 8.10   |                  |  |                | 2,537,683 |  |  | $ | 5.56  | 
|$ 6.75 - $ 9.85 |  | $                   | 7.58  |                  |                     |  | 6,391,483        |         |  |  | 9.00   |                  |  |                | 1,512,136 |  |  | $ | 7.69  | 
|$10.57 - $12.75 |  | $                   | 11.28 |                  |                     |  | 88,144           |         |  |  | 5.00   |                  |  |                | 88,144    |  |  | $ | 11.28 | 
|$15.88 - $19.97 |  | $                   | 17.76 |                  |                     |  | 123,610          |         |  |  | 5.30   |                  |  |                | 123,610   |  |  | $ | 17.76 | 
|$29.75 - $29.75 |  | $                   | 29.75 |                  |                     |  | 20,000           |         |  |  | 4.40   |                  |  |                | 20,000    |  |  | $ | 29.75 | 
|$45.56 - $45.57 |  | $                   | 45.56 |                  |                     |  | 100,000          |         |  |  | 4.50   |                  |  |                | 100,000   |  |  | $ | 45.56 | 
|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |                |          
|$0.30 - $45.57  |  | $                   | 6.33  |                  |                     |  | 16,823,438       |         |  |  | 8.20   |                  |  |                | 6,684,620 |  |  | $ | 6.28  | 
|                |  |                     |       |                  |                     |  |                  |         |  |  |        |                  |  |                |          









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







80



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 8  Income Taxes:




|                                |         |                         |        |      |      |   |      |      |   |   |        |        |  
|------------------------------- | ------- | ----------------------- | ------ | ---- | ---- | - | ---- | ---- | - | - | ------ | ------ | -
|                                |         | Year Ended December 31, |       
|                                |         |                         |       
|                                |         | 2005                    |        |      | 2004 |   |      | 2003 |  
|                                |         |                         |        |      |      |   |      |      |  
|Current tax (expense) benefit:  |         |                         |        |      |      |   |      |      |   |   |        |       
|                                | Federal |                         | $      | 193  |      |   | $    | 39   |   |   | $      | 3,724  |  
|                                | State   |                         |        | (74  | )    |   |      | (77  | ) |   |        | (1     | )
|                                | Foreign |                         |        | (268 | )    |   |      | (263 | ) |   |        | (341   | )
|                                |         |                         |        |      |      |   |      |      |  
|                                |         |                         | (149   | )    |      |   | (301 | )    |   |   | 3,382  |       
|                                |         |                         |        |      |      |   |      |      |  
|Deferred tax (expense) benefit: |         |                         |        |      |      |   |      |      |   |   |        |       
|                                | Federal |                         |        | (885 | )    |   |      |     |   |   |        | (1,792 | )
|                                | State   |                         |        |     |      |   |      |     |   |   |        |       |  
|                                |         |                         |        |      |      |   |      |      |  
|                                |         |                         | (885   | )    |      |   |     |      |   |   | (1,792 | )     
|                                |         |                         |        |      |      |   |      |      |  
|                                |         | $                       | (1,034 | )    |      | $ | (301 | )    |   | $ | 1,590  |       
|                                |         |                         |        |      |      |   |      |      |  







|                          |                                  |                           |   |         |        |  |   |         |        | 
|------------------------- | -------------------------------- | ------------------------- | - | ------- | ------ |  | - | ------- | ------ | 
|                          |                                  | December 31,              |  
|                          |                                  |                           |  
|                          |                                  | 2005                      |   |         | 2004   | 
|                          |                                  |                           |   |         |        | 
|Deferred tax assets:      |                                  |                           |   |         |        |  |   |        
|                          | Net operating loss carryforwards |                           | $ | 27,173  |        |  | $ | 31,376  |       
|                          | Inventory reserves               |                           |   | 419     |        |  |   | 462     |       
|                          | Deferred revenue                 |                           |   | 316     |        |  |   | 442     |       
|                          | Tax credits                      |                           |   | 6,404   |        |  |   | 6,182   |       
|                          | Other reserves and accruals      |                           |   | 7,951   |        |  |   | 8,415   |       
|                          |                                  |                           |   |         |        | 
|                          |                                  | Total deferred tax assets |   |         | 42,263 |  |   |         | 46,877 | 
|                          | Valuation allowance              |                           |   | (38,197 | )      |  |   | (41,402 | )     
|                          |                                  |                           |   |         |        | 
|                          |                                  | Net deferred tax assets   |   | $       | 4,066  |  |   | $       | 5,475  | 
|                          |                                  |                           |   |         |        | 
|Deferred tax liabilities: |                                  |                           |   |         |        |  |   |        
|                          | Intangible assets                |                           | $ | (4,066  | )      |  | $ | (5,475  | )     
|                          |                                  |                           |   |         |        | 

81



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                    |  |                         |     |   |      |  |       |      |  |  |     |   
|----------------------------------- |  | ----------------------- | --- | - | ---- |  | ----- | ---- |  |  | --- | --
|                                    |  | Year Ended December 31, |    
|                                    |  |                         |    
|                                    |  | 2005                    |     |   | 2004 |  |       | 2003 | 
|                                    |  |                         |     |   |      |  |       |      | 
|Federal statutory rate (benefit)    |  |                         | 35  | % |      |  | (35   | )%   |  |  | (35 | )%
|State taxes, net of federal benefit |  |                         | 4   |   |      |  | (4    | )    |  |  | (5  | ) 
|Deferred compensation charge        |  |                         |    |   |      |  | 1,532 |      |  |  | 1   |   
|Tax credits                         |  |                         | (2  | ) |      |  | (922  | )    |  |  | (4  | ) 
|Change in valuation allowance       |  |                         | (18 | ) |      |  | 2,244 |      |  |  | 33  |   
|Other                               |  |                         | (5  | ) |      |  | 314   |      |  |  | 2   |   
|                                    |  |                         |     |   |      |  |       |      | 
|                                    |  |                         | 14  | % |      |  | 2501  | %    |  |  | (8  | )%
|                                    |  |                         |     |   |      |  |       |      | 





|         |  |                         |       |  |      |   |      |      |  |   |         |  
|-------- |  | ----------------------- | ----- |  | ---- | - | ---- | ---- |  | - | ------- | -
|         |  | Year Ended December 31, |      
|         |  |                         |      
|         |  | 2005                    |       |  | 2004 |   |      | 2003 | 
|         |  |                         |       |  |      |   |      |      | 
|Domestic |  | $                       | 6,479 |  |      | $ | (822 | )    |  | $ | (19,329 | )
|Foreign  |  |                         | 831   |  |      |   | 810  |      |  |   | 71      |  
|         |  |                         |       |  |      |   |      |      | 
|Total    |  | $                       | 7,310 |  |      | $ | (12  | )    |  | $ | (19,258 | )
|         |  |                         |       |  |      |   |      |      | 



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

Disclosures About
Segments of an Enterprise and Related Information.


82



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                    |  |                         |         |  |      |   |         |      |  |   |        | 
|------------------- |  | ----------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------ | 
|                    |  | Year Ended December 31, |        
|                    |  |                         |        
|                    |  | 2005                    |         |  | 2004 |   |         | 2003 | 
|                    |  |                         |         |  |      |   |         |      | 
|United States       |  | $                       | 90,432  |  |      | $ | 83,757  |      |  | $ | 64,983 | 
|All other countries |  |                         | 44,892  |  |      |   | 41,892  |      |  |   | 29,418 | 
|                    |  |                         |         |  |      |   |         |      | 
|Total               |  | $                       | 135,324 |  |      | $ | 125,649 |      |  | $ | 94,401 | 
|                    |  |                         |         |  |      |   |         |      | 



|              |  |                         |       |  |      |   |       |      |  |   |       | 
|------------- |  | ----------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|              |  | Year Ended December 31, |      
|              |  |                         |      
|              |  | 2005                    |       |  | 2004 |   |       | 2003 | 
|              |  |                         |       |  |      |   |       |      | 
|United States |  | $                       | 2,679 |  |      | $ | 3,381 |      |  | $ | 5,024 | 
|International |  |                         | 313   |  |      |   | 386   |      |  |   | 261   | 
|              |  |                         |       |  |      |   |       |      | 
|Total         |  | $                       | 2,992 |  |      | $ | 3,767 |      |  | $ | 5,285 | 
|              |  |                         |       |  |      |   |       |      | 



|             |  |              |     |  |      |  |     |      |  |  |     | 
|------------ |  | ------------ | --- |  | ---- |  | --- | ---- |  |  | --- | 
|             |  | Year Ended   |    
|             |  | December 31, |    
|             |  |              |    
|             |  | 2005         |     |  | 2004 |  |     | 2003 | 
|             |  |              |     |  |      |  |     |      | 
|Ingram Micro |  |              | 18% |  |      |  | 17% |      |  |  | 23% | 
|Tech Data    |  |              | 21% |  |      |  | 21% |      |  |  | 20% | 





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



|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year Ending December 31, |  |  
|                         |  |  
|2006                     |  | $ | 33    | 
|2007                     |  |   | 162   | 
|2008                     |  |   | 530   | 
|2009                     |  |   | 388   | 
|2010                     |  |   | 0     | 
|                         |  |   |      
|                         |  | $ | 1,113 | 
|                         |  |   |      

83



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##### Table of Contents



SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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

90-day


|                                   |  |                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                   |  | Year Ended December 31, |      
|                                   |  |                         |      
|                                   |  | 2005                    |       |   | 2004 |   |       | 2003 | 
|                                   |  |                         |       |   |      |   |       |      | 
|                                   |  | (In thousands)          |      
|Beginning balance                  |  | $                       | 1,071 |   |      | $ | 1,290 |      |  | $ | 1,168 |  
|Accruals for warranties issued     |  |                         | 402   |   |      |   | 386   |      |  |   | 933   |  
|Settlements made during the period |  |                         | (683  | ) |      |   | (605  | )    |  |   | (811  | )
|                                   |  |                         |       |   |      |   |       |      | 
|Ending balance                     |  | $                       | 790   |   |      | $ | 1,071 |      |  | $ | 1,290 |  
|                                   |  |                         |       |   |      |   |       |      | 



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





84



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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





85



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##### Table of Contents



SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




-05CV0572-K,






|          |                             
|--------- | ----------------------------
|Note 11  | Comprehensive Income (Loss):



|                                                                                         |  |                         |       |   |      |   |        |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                         |  | Year Ended December 31, |      
|                                                                                         |  |                         |      
|                                                                                         |  | 2005                    |       |   | 2004 |   |        | 2003 | 
|                                                                                         |  |                         |       |   |      |   |        |      | 
|Net income (loss)                                                                        |  | $                       | 6,276 |   |      | $ | ( 313  | )    |  | $ | (17,668 | )
|Change in unrealized (losses) on investment securities, net of
    tax benefit (expense) |  |                         | (521  | ) |      |   | (808   | )    |  |   | (305    | )
|                                                                                         |  |                         |       |   |      |   |        |      | 
|Comprehensive income (loss)                                                              |  | $                       | 5,755 |   |      | $ | (1,121 | )    |  | $ | (17,973 | )
|                                                                                         |  |                         |       |   |      |   |        |      | 



86



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SONICWALL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



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







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





|          |                             
|--------- | ----------------------------
|Note 13  | Pending Business Combination



87



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##### Table of Contents








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








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

Evaluation of Disclosure Controls and Procedures


13a-15(e) 15d-15(e)


Remediation of Prior Year Material Weaknesses


10-K.






Changes in Internal Control over Financial Reporting


13a-15(f)


88



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##### Table of Contents



Management Report on Internal Control over Financial
Reporting


13a-15(f). Internal Control  Integrated
Framework


10-K,





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



89



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##### Table of Contents










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






PART IV







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

The following documents are filed as part of this
report:




| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements  See Index to
    Consolidated Financial Statements in Part II, Item 8.                                                                                                                                                                                                                                               
|
| | 2. Financial Statement Schedules 
    Schedule II (Valuation and Qualifying Accounts) are
    included in this Annual Report on
    Form 10-K. All
    other financial statement schedules have been omitted because
    the information required is not applicable or is shown in the
    Consolidated Financial Statements or notes thereto.
|
| | 3. 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 Bylaws, as amended December 12, 2003.                                                                                                                                                                                                                                                                                        
|       | 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).                                                                                                                                  

90



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##### Table of Contents



|       |    |             |  |                                                                                                                                                                                                                                                                                                   
|------ | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 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).                                                                                         
|       | 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).                        

91



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|       |    |             |  |                                                                                                                                                                                                                                                                                                           
|------ | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 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).                
|       | 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 the 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 the
    Registrants Annual Report on Form 10-K (File
    No. 000-27723) for the year ended December 31, 2004).                    
|       | 10 | .36*        |  | Agreement and Plan of Merger and Reorganization, dated
    November 18, 2005, by and among the Registrant, Spectrum
    Acquisition Corporation and Lasso Logic, Inc., et al.                                                                                                                             

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|       |    |             |  |                                                                                                                                                                                          
|------ | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 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                                                                                                                                 
|       | 23 | .2*         |  | 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.

Exhibits




Financial Statement Schedules




93



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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) |  | March 15, 2006
|                                        
|/s/ Robert SelviRobert Selvi             |  | Chief Financial Officer
    (Principal Financial Officer)                         |  | March 15, 2006
|                                        
|/s/ Robert KnauffRobert Knauff           |  | Chief Accounting Officer
    (Principal Accounting Officer)                       |  | March 15, 2006
|                                        
|/s/ Charles KissnerCharles Kissner       |  | Chairman of the Board of Directors                                                |  | March 15, 2006
|                                        
|/s/ Charles BergerCharles Berger         |  | Director                                                                          |  | March 15, 2006
|                                        
|/s/ David W. GarrisonDavid W. Garrison   |  | Director                                                                          |  | March 15, 2006
|                                        
|/s/ Keyur A. PatelKeyur A. Patel         |  | Director                                                                          |  | March 15, 2006
|                                        
|/s/ John C. ShoemakerJohn C. Shoemaker   |  | Director                                                                          |  | March 15, 2006
|                                        
|/s/ Edward F. ThompsonEdward F. Thompson |  | Director                                                                          |  | March 15, 2006
|                                        
|/s/ Cary ThompsonCary Thompson           |  | Director                                                                          |  | March 15, 2006

94



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Schedule II


VALUATION AND QUALIFYING ACCOUNTS


|                             |                                 |                |   |       |       |  |            |          |  |              |          |       |         |         |   |        |   |  |   |       | 
|---------------------------- | ------------------------------- | -------------- | - | ----- | ----- |  | ---------- | -------- |  | ------------ | -------- | ----- | ------- | ------- | - | ------ | - |  | - | ----- | 
|                             |                                 | Balance at     |   |       |       |  | Charged to |          |  | Deductions/  |          |       | Balance |        
|                             |                                 | Beginning      |   |       |       |  | Cost and   |          |  | Write-off of |          |       | at End  |        
|                             |                                 | of Year        |   |       | Other |  |            | Expenses |  |              | Accounts |       |         | of Year |  
|                             |                                 |                |   |       |       |  |            |          |  |              |          |       |         |         |  
|                             |                                 | (In thousands) |  
|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 | 
|Year ended December 31, 2005 |                                 |                |   |       |       |  |            |          |  |              |          |       |         |         |   |        |   |  |   |      
|                             | Allowance for doubtful accounts |                |   | 188   |       |  |            |         |  |              |          | 27    |         |         |   | (92    | ) |  |   | 123   | 
|                             | Inventory reserves              |                |   | 1,177 |       |  |            |         |  |              |          | 171   |         |         |   | (283   | ) |  |   | 1,065 | 

95



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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 Bylaws, as amended December 12, 2003.                                                                                                                                                                                                                                                                                        
|       | 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).                                                                                                                                 



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##### 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 the 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 the
    Registrants Annual Report on Form 10-K (File
    No. 000-27723) for the year ended December 31, 2004).
|       | 10 | .36*        |  | Agreement and Plan of Merger and Reorganization, dated
    November 18, 2005, by and among the Registrant, Spectrum
    Acquisition Corporation and Lasso Logic, Inc., et al.                                                                                                         
|       | 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                                                                                                                                                                                                                              
|       | 23 | .2*         |  | 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.