##### 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, 2007
 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:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, no par value
    
    The NASDAQ Stock Market LLC
(The Nasdaq Global Select Market)
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IITEM 1. BusinessITEM 1A. Risk FactorsITEM 1B. Unresolved Staff CommentsITEM 2. PropertiesITEM 3. Legal ProceedingsITEM 4. Submission of Matters to a Vote of Security HoldersPART IIITEM 5. Market for Registrants Common Equity and Related Stockholder MattersITEM 5c. Issuer Purchases of Equity Securities (in thousands, except per-share amounts)ITEM 6. Selected Consolidated Financial DataITEM 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 7A. Quantitative and Qualitative Disclosures about Market RiskITEM 8. Financial Statements and Supplementary DataITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureITEM 9A. Controls and ProceduresITEM 9B. Other InformationPART IIIITEM 10. Directors, Executive Officers and Corporate GovernanceITEM 11. Executive CompensationITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersITEM 13. Certain Relationships and Related Transactions, and Director IndependenceITEM 14. Principal Accounting Fees and ServicesPART IVITEM 15. Exhibits and Financial Statement SchedulesSIGNATURESExhibit IndexEXHIBIT 10.40EXHIBIT 10.41EXHIBIT 21EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1    Table of Contents  CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
   
 PART I
 
 ITEM 1. Business
 Overview
    Industry Background
  2




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Increasing Use of Broadband Access Technologies
  Importance of Data Security
      Integrated Solutions for Internet Security
   The Advent of Secure Virtual Private Networks (VPNs)
  3




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Changing Mobile Computing Environment and Demand for SSL-VPN
   Need for Anti-Virus, Intrusion Prevention and Content Filtering Solutions
  Rising Value of Data and Demand for Business Continuity
  Increases in Unsolicited E-Mail
  4




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Strategy
   
    
    Global Growth.We plan to focus our investment in those geographical areas that can
sustain rates of growth consistent with our business objectives. Part of our 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 use our internal product design and
development and integration expertise to produce solutions that deliver value to our
end-users.
    
    Cost Reduction.We intend to be vigorous in our pursuit to lower costs in all
aspects of our business. Supply chain improvements and continual business process
improvement are key components of this initiative. We believe that the associated cost
reductions will strengthen our market position and assist us in penetrating new markets.
    
    Strengthen Our Indirect Channel.Our global target markets are generally served by a
two-tier distribution model. We have achieved varying degrees of regional penetration in
these markets with large-scale distributors at the hub of our model fulfilling the needs
of authorized resellers and systems integrators and creating a distribution web that
covers over 50 countries. We intend to continue to implement programs designed to enhance
our competitive position through distributors and authorized resellers.
    
    Increase Services and Software Revenue.We intend to continue to develop new
services and licensed software offerings to generate additional revenue from our installed
base and to provide additional sources of revenue ancillary to our product sales. We
currently offer a selection of integrated functionality including gateway anti-virus,
client anti-virus, anti-spyware, anti-spam protection, intrusion prevention, offsite data
backup, email security, and content filtering subscription services. We also offer
fee-based customer support services and training. 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, such as
our acquisitions of Lasso Logic, Mail Frontier, and Aventail, 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.
 The SonicWALL Solutions
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Security Appliances
   SonicWALL Unified Threat Management (UTM) appliances.
 SonicWALL SSL VPN appliances.
 SonicWALL Email security appliances.
 SonicWALL Content filtering appliances.
 SonicWALL Data backup appliances.
 Security Application and Services
  SonicWALL Global VPN Client.
 SonicWALL Content Filtering Service.
 SonicWALL Enforced Anti-Virus and Anti-Spyware Client
 SonicWALL Gateway Anti-Virus, Anti-Spyware, and Intrusion Prevention.
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SonicWALL Backup and Recovery Offsite Services.
 Global Security Management Applications
   Value proposition
  
    
    High-Performance, Scalable, and Robust Access Security.We offer our customers a
comprehensive integrated security solution that includes firewall, VPN, gateway anti-virus,
anti-spyware, intrusion prevention, content security, and content filtering. Specifically, we
offer the following values:
 -
    
    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 and VPN
Certification.-
    
    Our SSL-VPN product family provides organizations of various sizes with an
affordable, simple and 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 shield networks
from infection from malicious code by blocking transmissions through the gateway and
disrupting 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.-
    
    Our Secure Content Management solutions provide and end-to-end comprehensive protection
against spam, virus, Spyware, intrusion and other vulnerabilities.-
    
    Our products can serve customer sites ranging from a network of sub-10 user segments to
large enterprise with tens of thousands of users. Each of our solutions, (e.g., Email
Security, Content Security Manager, Client Anti-Virus & Anti-Spyware) work as a standalone
solution, but also together to provide layered protection against a rapidly changing threat
environment.
 
    
    Ease of Installation and Use.The SonicWALL product line of Internet security solutions
delivers plug-and-play appliances designed for easy installation and use. SonicWALL
products are configured and managed through a web browser-based interface or through our GMS
with no required reconfiguration of personal computer applications. Specifically, we offer
the following values:
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-
    
    Our UTM and SSL-VPN 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 CSM product can work behind most existing firewalls and VPN appliances.-
    
    Our Email security solution works with most Email servers.
 
    
    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
security solutions start below $400 and scale up to over $35,000.
 
    
    Reliability.The SonicWALL products are designed for reliability and uptime. Our products
use an embedded single purpose operating system.
 Technology
  Appliance Platforms
   
    
    Deep Packet Inspection UTM and IPSec VPN.The core technology is the deep packet inspection
UTM software that 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.Our appliances manage the complexity of IP addressing through Network
Address Translation (NAT) tools which allow networks to share a small number of valid public
IP addresses with an equal or larger number of client computers on the LAN.
  
    
    VPN Technology. Users can easily and securely access e-mail, files, intranets, remote
desktops (includes both full desktop and individual application access) and other resources on
the corporate LAN from any location utilizing a standard web browser. Our VPN technology
solutions integrate seamlessly into virtually any network topology to deliver powerful,
scalable and affordable remote access to corporate resources.
 
    
    Web Browser-Based Management Interface.This interface is designed to provide an intuitive
and easy-to-use web-based management interface for rapid installation, configuration, and
maintenance. This interface can be accessed from any web browser on the internal, private
network. This interface can also be accessed remotely in a secure manner.
 
    
    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.
 
    
    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
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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.
  
    
    SonicWALL Email Security solutions provide inbound and outbound e-mail management, content
compliance capabilities, anti-spam and Time Zero anti-virus technology, DHA, DoS and Zombie
attack protection, end-user spam management, seamless LDAP integration, and robust reporting.
 
    
    SonicWALL Content Security Manager products are appliance-based gateway security and content
filtering solutions that integrate real-time gateway anti-virus, anti-spyware, and intrusion
prevention to deliver network protection from Internet threats.
  
    
    SonicWALL CDP is a proprietary software / hardware appliance that continuously search
servers, mobile laptops, and connected desktops for file changes. Our unique Adaptive
Replication Engine (ARE) coordinates protection of multiple networked client PCs and servers,
updates client servers with latest versions, and coordinates updates with the SonicWALL web
infrastructure.
 Applications and Services
  
    
    Content Filtering. Our Internet content filter blocks objectionable content using a list of
prohibited URLs and keywords as well as cookies, Java and ActiveX scripts.
 
    
    Gateway Anti-Virus.Our gateway anti-virus service is intended to provide anti-virus
protection throughout a business and across a distributed network and delivers protection for
high threat viruses and malaria by conducting inspections over the most common protocols used
in todays networked environments. Automatic anti-virus updates are available for all network
nodes to protect them from new virus outbreaks.
 
    
    Anti-Spyware.Our gateway anti-spyware service is intended to provide anti-spyware
protection throughout a business and across a distributed network and delivers protection for
intrusive and unwanted applications, from being loaded onto users computers without their
knowledge. Automatic anti-spyware updates are available for all network nodes to protect them
from new virus outbreaks.
 
    
    Intrusion Prevention.Our intrusion prevention service utilizes a configurable, ultra-high
performance deep packet inspection engine to deliver network protection while preventing known
buffer overflow vulnerabilities in software. This service also defends against various worms,
Trojans, and backdoor exploits. 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.
 
    
    Anti-spam Protection.Our anti-spam protection service offers end-to-end attack monitoring
through a response network consisting of over one million nodes worldwide. Feedback from this
service provides SonicWALL with daily information on the latest spam attacks, new spam domains
and other e-mail threats, which in turn is used to deliver the most current, updated anti-spam
engine on the market.
 
    
    Offsite Data Backup.Our offsite data backup service uses SSL encryption, advanced
compression, and backup of only binary differences. Data can be sent to a secure datacenter,
via SonicWALL CDP Offsite Service, or to another CDP Appliance, via SonicWALL CDP Site-to-Site
Backup. This offsite feature protects data against the risks of fire, theft, misplacement and
other issues relating to tape or CD-based backup.
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Competition
    
    
    Enterprise firewall software vendors such as Check Point, Microsoft, and Symantec;
    
    Network equipment manufacturers such as Cisco Systems, Lucent Technologies, Nortel
Networks and Nokia;
    
    Security appliance suppliers such as WatchGuard Technologies and Juniper Networks.
    
    Content security suppliers such as Barracuda Networks and Secure Computing
Corporation.
  Customer Service and Technical Support
   Customers
  Sales and Marketing
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Domestic Channel.
  International Channel.
 Original Equipment Manufacturer Channel.
 Research and Development
  Intellectual Property
  11




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U.S. Government Export Regulation Compliance
  Manufacturing
    Information about Segments and Geographic Areas
  Employees
  Where You Can Find More Information
 www.sonicwall.com
  12




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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.
  Sales to three major distributors account for a significant amount of our revenue, and if they or
others cancel or delay purchase orders, and we are unable to offset these cancellations our
revenue may decline and the price of our stock may fall.
  2007
    
    2006
    
    2005Distributors/Resellers
    
    
    98
    %
    
    
    98
    %
    
    
    97
    %
  Customers
    
    2007
    
    2006
    
    2005Alternative Technology
    
    
    18
    %
    
    
    18
    %
    
    
    13
    %Tech Data
    
    
    17
    %
    
    
    18
    %
    
    
    21
    %Ingram Micro
    
    
    16
    %
    
    
    17
    %
    
    
    18
    %
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December 31,2007
    
    2006Alternative Technology
    
    $
    1.1M
    
    
    
    4
    %
    
    $
    5.3M
    
    
    
    23
    %Tech Data
    
    $
    3.1M
    
    
    
    12
    %
    
    $
    1.9M
    
    
    
    8
    %Ingram Micro
    
    $
    3.6M
    
    
    
    14
    %
    
    $
    4.0M
    
    
    
    17
    %
  If we are unable to compete successfully in the highly competitive market for Internet security
products, software, and services, our business could be adversely affected.
   Difficulty predicting our future operating results or profitability due to volatility in general
economic conditions and in the security, productivity, mobility, and data protection markets may
result in a misallocation in spending, and a shortfall in revenue which would harm our operating
results.
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The selling prices of our solution offerings may decrease, which may reduce our gross profits.
  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.
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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.
  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 solutions may be adversely affected by various factors which would adversely
affect our revenue.
  The failure to successfully implement and conduct offshore activities could adversely affect
results of operations.
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Environmental and safety 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 compliant
products our revenue would decline and our operating results would be adversely affected.
  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 shareholders 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.
   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.
  Our Financial Statements could be affected by the need to restate previously issued annual or
interim financial statements.
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Changes in our effective tax rate or tax liability may have an adverse effect on our results of
operations.
  If our estimates or judgments relating to our critical accounting policies are based on
assumptions that change or prove to be incorrect, our operating results could fall below
expectations of securities analysts and investors, resulting in a decline in our stock price.
   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.
  Changes to our senior management may have an adverse effect on our ability to execute our business
strategy.
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Our ability to attract, retain, and motivate key qualified employees is vital to our success.
  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.
  
    
    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.
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Any alleged or actual failure of our products, software or services to operate as warranted may
require us to defend product liability or breach of warranty claims.
  A security breach of our internal systems could harm our business.
  If our solutions 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.
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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.
  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.
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The long sales and implementation cycles for our solutions may cause revenue and operating results
to vary significantly.
   The inability to obtain any third-party license required to develop new products or software or
enhancements to our products or software 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.
  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.
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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.
  We are exposed to various risks associated with the credit and capital markets.
  
 ITEM 1B. Unresolved Staff Comments
  
 ITEM 2. Properties
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ITEM 3. Legal Proceedings
    
 ITEM 4. Submission of Matters to a Vote of Security Holders
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PART II
 
 ITEM 5. Market for Registrants Common Equity and Related Stockholder Matters
  High
    
    LowFiscal 2006First Quarter
    
    $
    8.74
    
    
    $
    6.52Second Quarter
    
    $
    9.17
    
    
    $
    7.20Third Quarter
    
    $
    11.00
    
    
    $
    8.71Fourth Quarter
    
    $
    11.31
    
    
    $
    8.42Fiscal 2007First Quarter
    
    $
    9.09
    
    
    $
    8.01Second Quarter
    
    $
    8.78
    
    
    $
    7.77Third Quarter
    
    $
    9.20
    
    
    $
    7.67Fourth Quarter
    
    $
    11.03
    
    
    $
    8.92
  STOCK PERFORMANCE GRAPH
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ITEM 5c. Issuer Purchases of Equity Securities (in thousands, except per-share amounts)
    26




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(in thousands except per share amounts)Value of SharesTotal
    
    
    
    
    
    Total Number of Shares
    
    That May Yet beNumber of
    
    Average
    
    Purchased as Part of
    
    Purchased UnderShares
    
    Price Paid
    
    Publicly Announced
    
    the Plans orPeriod
    
    Purchased
    
    per Share
    
    Plans or Programs
    
    ProgramsJanuary 1, 2005 to
December 31, 2005
    
    
    4,998
    
    
    $
    6.05
    
    
    
    4,998
    
    
    $
    50,426January 1, 2006 to
December 31, 2006
    
    
    2,417
    
    
    $
    8.73
    
    
    
    2,417
    
    
    $
    29,326January 1, 2007 to
December 31, 2007
    
    
    5,557
    
    
    $
    8.98
    
    
    
    5,557
    
    
    $
    78,009Total
    
    
    12,972
    
    
    
    
    
    
    
    12,972
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ITEM 6. Selected Consolidated Financial Data
  Year Ended December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands, except per share data)Statements of Operations Data:Revenue:Product
    
    $
    98,936
    
    
    $
    92,797
    
    
    $
    75,525
    
    
    $
    82,994
    
    
    $
    65,931License and service
    
    
    100,263
    
    
    
    82,741
    
    
    
    59,799
    
    
    
    42,655
    
    
    
    28,470Total revenue
    
    
    199,199
    
    
    
    175,538
    
    
    
    135,324
    
    
    
    125,649
    
    
    
    94,401Cost of revenue:Product
    
    
    40,555
    
    
    
    39,164
    
    
    
    27,699
    
    
    
    30,118
    
    
    
    27,913License and service
    
    
    15,894
    
    
    
    12,287
    
    
    
    8,031
    
    
    
    7,002
    
    
    
    5,617Amortization of purchased technology
    
    
    2,232
    
    
    
    5,387
    
    
    
    4,552
    
    
    
    4,543
    
    
    
    4,543Total cost of revenue
    
    
    58,681
    
    
    
    56,838
    
    
    
    40,282
    
    
    
    41,663
    
    
    
    38,073Gross profit
    
    
    140,518
    
    
    
    118,700
    
    
    
    95,042
    
    
    
    83,986
    
    
    
    56,328Operating expenses:Research and development
    
    
    39,410
    
    
    
    33,670
    
    
    
    22,768
    
    
    
    23,412
    
    
    
    19,934Sales and marketing
    
    
    77,741
    
    
    
    71,256
    
    
    
    53,403
    
    
    
    47,353
    
    
    
    40,537General and administrative
    
    
    21,473
    
    
    
    20,324
    
    
    
    15,535
    
    
    
    14,365
    
    
    
    12,118Amortization of purchased intangible assets
    
    
    715
    
    
    
    2,721
    
    
    
    2,893
    
    
    
    3,089
    
    
    
    5,333Restructuring charges (reversals)
    
    
    
    
    
    
    1,409
    
    
    
    
    
    
    
    (171
    )
    
    
    1,833In-process research and development
    
    
    1,930
    
    
    
    1,580
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    141,269
    
    
    
    130,960
    
    
    
    94,599
    
    
    
    88,048
    
    
    
    79,755Income (loss) from operations
    
    
    (751
    )
    
    
    (12,260
    )
    
    
    443
    
    
    
    (4,062
    )
    
    
    (23,427
    )Interest income and other expense, net
    
    
    11,771
    
    
    
    9,713
    
    
    
    6,867
    
    
    
    4,050
    
    
    
    4,169Income (loss) before income taxes
    
    
    11,020
    
    
    
    (2,547
    )
    
    
    7,310
    
    
    
    (12
    )
    
    
    (19,258
    )Benefit (provision) for income taxes
    
    
    17,601
    
    
    
    (8,206
    )
    
    
    (1,034
    )
    
    
    (301
    )
    
    
    1,590Net income (loss)
    
    $
    28,621
    
    
    $
    (10,753
    )
    
    $
    6,276
    
    
    $
    (313
    )
    
    $
    (17,668
    )Net income (loss) per share:Basic
    
    $
    0.45
    
    
    $
    (0.17
    )
    
    $
    0.10
    
    
    $
    (0.00
    )
    
    $
    (0.26
    )Diluted
    
    $
    0.43
    
    
    $
    (0.17
    )
    
    $
    0.09
    
    
    $
    (0.00
    )
    
    $
    (0.26
    )Shares used in computing net income (loss) per share:Basic
    
    
    64,305
    
    
    
    65,117
    
    
    
    64,684
    
    
    
    70,850
    
    
    
    67,895Diluted
    
    
    67,099
    
    
    
    65,117
    
    
    
    66,797
    
    
    
    70,850
    
    
    
    67,895
 2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands, except per share data)Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    33,324
    
    
    $
    25,927
    
    
    $
    42,593
    
    
    $
    23,446
    
    
    $
    30,467Short-term investments
    
    
    195,647
    
    
    
    209,251
    
    
    
    197,849
    
    
    
    229,226
    
    
    
    213,010Total assets
    
    
    472,635
    
    
    
    416,291
    
    
    
    387,683
    
    
    
    386,845
    
    
    
    381,721Total shareholders equity
    
    
    327,704
    
    
    
    318,068
    
    
    
    320,170
    
    
    
    337,976
    
    
    
    344,269Long-term liabilities
    
    
    17,495
    
    
    
    6,269
    
    
    
    636
    
    
    
    
    
    
    
    
 28




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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 the dedication of resources to develop new products and services and marketing
those products and services to channel partners and customers, the introduction of more service
offerings on our platforms as a vehicle to generate additional revenue from our installed base of
products; our ability to deliver comprehensive and profitable solutions to our channel partners,
the growth opportunity associated with sales through our indirect channel to larger distributed
enterprises, the level of comfort of our channel partners in offering our solutions to their
customers, the growth of the Network Security, Secure Content Management and Business Continuity
markets, the impact of a failure to achieve greater international sales ,our ability to maintain
and enhance current product lines, develop new products, maintain technological competitiveness and
meet the expanding range of customer requirements; the market opportunity for license and service
revenue growth; our ability to deliver comprehensive solutions to channel partners, the positive
characteristics of our software license and service revenue model on future revenue growth and the
predictability of our revenue stream, the continuing assessment of our inventory valuation, the
impact on gross margin from factors such as competitive product offerings, product and service mix,
new product introductions and enhancements, fluctuations in manufacturing volume, the cost of
components and manufacturing labor; the direction of sales and marketing expenses toward expansion
of markets, introduction of products and establishment and expansion of new distribution channels;
expected growth in license and subscription service revenue; the impact on revenue of the
combination of subscription services sold in conjunction with new product offerings; expected
competition in the Internet security market and our ability to compete in markets in which we
participate; impact of service renewal rates on lowering selling and marketing expense, our ability
to achieve increased incremental revenue per transaction through success of our software license
and service revenue model, the impact of IT spending on demand for our products and services, the
current and likely future impact of share based compensation expense as required by SFAS 123R on
reported operating results, anticipated revenue contributions of new products including continuous
data protection, email security and SSL-VPN products and related services; the anticipation that
relatively few distributors and resellers will continue to account for a significant portion of our
revenue; our ability to successfully introduce new products and services; pricing pressures on our
solution based offerings; anticipated higher gross margins associated with our license and service
offerings; the probability of realization of all deferred tax assets; assessment of future
effective tax rates and the continued need for a valuation allowance; the potential for product
gross margins to erode based upon changes in product mix, downward pressure on product pricing or
upward pressure on production costs, the impact of product mix on product gross profits; our
ability to maintain investment in current and future product development and enhancement efforts,
the introduction of new products and the broadening of existing product offerings, the rate of
change of general and administrative expenses, the impact of geopolitical and macro-economic
conditions on demand for our 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; factors
potentially impacting operating cash flows in future periods; and expected fluctuations in day
sales outstanding. 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 and also under the heading Risk Factors.
References to we, our, and us refer to SonicWALL, Inc. and its subsidiaries.
 Overview
    29




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Key Success Factors of our Business
  Channel
  Product and Service Platform
  Distributed Architecture
  Market Acceptance
  Integrated Design
  30




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##### Table of Contents



Our Opportunities, Challenges, and Risks
  International Growth
   Growth in Enterprises
   License and Services Revenue
  Macro-Economic Factors Affecting IT Spending
  Critical Accounting Policies and Critical Accounting Estimates
  31




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Revenue recognition
  Revenue Recognition, Software Revenue Recognition
       32




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Sales returns and other allowances, allowance for doubtful accounts, and warranty reserve
    Valuation of inventory
  Accounting for income taxes
  33




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##### Table of Contents



Valuation of long-lived and intangible assets and goodwill
  Goodwill and Other Intangible Assets
  Share-based compensation
 Accounting
for Stock-Based Compensation (Revised)
 34




---



##### Table of Contents



Accounting for Stock Issued to Employees
  Accounting for Stock-Based Compensation
   Share-based Compensation
 Significant Transactions
 Acquisitions
  35




---



##### Table of Contents



Business Combinations
    Business Combinations Goodwill and Other Intangible Assets
 36




---



##### Table of Contents



Restructuring
  37




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##### Table of Contents



Results of Operations
  Year Ended December 31,2007
    
    2006
    
    2005Revenue:Product
    
    
    49.7
    %
    
    
    52.9
    %
    
    
    55.8
    %License and service
    
    
    50.3
    %
    
    
    47.1
    %
    
    
    44.2
    %Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue:Product
    
    
    20.4
    %
    
    
    22.3
    %
    
    
    20.5
    %License and service
    
    
    8.0
    %
    
    
    7.0
    %
    
    
    5.9
    %Amortization of purchased technology
    
    
    1.1
    %
    
    
    3.1
    %
    
    
    3.4
    %Total cost of revenue
    
    
    29.5
    %
    
    
    32.4
    %
    
    
    29.8
    %Gross profit
    
    
    70.5
    %
    
    
    67.6
    %
    
    
    70.2
    %Operating expenses:Research and development
    
    
    19.8
    %
    
    
    19.2
    %
    
    
    16.8
    %Sales and marketing
    
    
    39.0
    %
    
    
    40.5
    %
    
    
    39.5
    %General and administrative
    
    
    10.8
    %
    
    
    11.6
    %
    
    
    11.5
    %Amortization of purchased intangible assets
    
    
    0.4
    %
    
    
    1.6
    %
    
    
    2.1
    %Restructuring charges (reversals)
    
    
    0.0
    %
    
    
    0.8
    %
    
    
    0.0
    %In-process research and development
    
    
    1.0
    %
    
    
    0.9
    %
    
    
    0.0
    %Total operating expenses
    
    
    71.0
    %
    
    
    74.6
    %
    
    
    69.9
    %Income (loss) from operations
    
    
    (0.5
    %)
    
    
    (7.0
    %)
    
    
    0.3
    %Interest income and other expense, net
    
    
    5.9
    %
    
    
    5.5
    %
    
    
    5.1
    %Income (loss) before income taxes
    
    
    5.4
    %
    
    
    (1.5
    %)
    
    
    5.4
    %Benefit (provision) for income taxes
    
    
    8.8
    %
    
    
    (4.6
    %)
    
    
    (0.8
    %)Net income (loss)
    
    
    14.2
    %
    
    
    (6.1
    %)
    
    
    4.6
    %
   Revenue (in thousands)
 Year ended December 31,
    
    Dollar Change
    
    Percent Change2007
    
    2006
    
    2005
    
    2007 vs. 2006
    
    2006 vs. 2005
    
    2007 vs. 2006
    
    2006 vs. 2005Product
    
    $
    98,936
    
    
    $
    92,797
    
    
    $
    75,525
    
    
    $
    6,139
    
    
    $
    17,272
    
    
    
    7
    %
    
    
    23
    %% of total revenue
    
    
    50
    %
    
    
    53
    %
    
    
    56
    %License and service
    
    
    100,263
    
    
    
    82,741
    
    
    
    59,799
    
    
    
    17,522
    
    
    
    22,942
    
    
    
    21
    %
    
    
    38
    %% of total revenue
    
    
    50
    %
    
    
    47
    %
    
    
    44
    %Total revenue
    
    $
    199,199
    
    
    $
    175,538
    
    
    $
    135,324
    
    
    $
    23,661
    
    
    $
    40,214
    
    
    
    13
    %
    
    
    30
    %
 38




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##### Table of Contents



Product revenue
    License and Service Revenue
    Channel data
  39




---



##### Table of Contents



Geographic revenue data (in thousands)
 Year ended December 31,
    
    
    Dollar Change
    
    
    Percent Change2007
    
    
    2006
    
    
    2005
    
    
    2007 vs. 2006
    
    
    2006 vs. 2005
    
    
    2007 vs. 2006
    
    
    2006 vs. 2005Americas
    
    $
    138,678
    
    
    $
    124,806
    
    
    $
    94,956
    
    
    $
    13,872
    
    
    $
    29,850
    
    
    
    11
    %
    
    
    31
    %Percentage of
total revenues
    
    
    70
    %
    
    
    71
    %
    
    
    70
    %EMEA
    
    
    40,420
    
    
    
    32,865
    
    
    
    23,725
    
    
    
    7,555
    
    
    
    9,140
    
    
    
    23
    %
    
    
    39
    %Percentage of total
revenues
    
    
    20
    %
    
    
    19
    %
    
    
    18
    %APAC
    
    
    20,101
    
    
    
    17,867
    
    
    
    16,643
    
    
    
    2,234
    
    
    
    1,224
    
    
    
    13
    %
    
    
    7
    %Percentage of total
revenues
    
    
    10
    %
    
    
    10
    %
    
    
    12
    %Total revenues
    
    $
    199,199
    
    
    $
    175,538
    
    
    $
    135,324
    
    
    $
    23,661
    
    
    $
    40,214
    
    
    
    13
    %
    
    
    30
    %
   Cost of Revenue and Gross Profit
  Year ended December 31,
    
    
    Percent Variance2007
    
    
    2006
    
    
    2005
    
    
    2007 vs. 2006
    
    
    2006 vs. 2005(in thousands)Product
    
    $
    40,555
    
    
    $
    39,164
    
    
    $
    27,699
    
    
    
    4
    %
    
    
    41
    %License and service
    
    
    15,894
    
    
    
    12,287
    
    
    
    8,031
    
    
    
    29
    %
    
    
    53
    %Amortization of purchased technology
    
    
    2,232
    
    
    
    5,387
    
    
    
    4,552
    
    
    
    (59
    %)
    
    
    18
    %Total cost of revenue
    
    $
    58,681
    
    
    $
    56,838
    
    
    $
    40,282
    
    
    
    3
    %
    
    
    41
    %
  40




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##### Table of Contents



Gross Profit Amount
    
    Gross MarginYear ended December 31,
    
    Year ended December 31,2007
    
    2006
    
    2005
    
    2007
    
    2006
    
    2005(in thousands)Product
    
    $
    58,381
    
    
    $
    53,633
    
    
    $
    47,826
    
    
    
    59
    %
    
    
    58
    %
    
    
    63
    %License and service
    
    
    84,369
    
    
    
    70,454
    
    
    
    51,768
    
    
    
    84
    %
    
    
    85
    %
    
    
    87
    %Amortization of purchased technology
    
    
    (2,232
    )
    
    
    (5,387
    )
    
    
    (4,552
    )Total gross profit
    
    $
    140,518
    
    
    $
    118,700
    
    
    $
    95,042
    
    
    
    71
    %
    
    
    68
    %
    
    
    70
    %
 Cost of Product Revenue and Gross Profit/Margin
     Cost of License and Service Revenue and Gross Profit
   41




---



##### Table of Contents



Amortization of purchased technology
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Expenses
    
    $
    2,232
    
    
    $
    5,387
    
    
    $
    4,552Percentage of total revenue
    
    
    1
    %
    
    
    3
    %
    
    
    3
    %Year over year change in Dollars
    
    
    (3,155
    )
    
    
    835Year over year change in Percent
    
    
    -59
    %
    
    
    18
    %
    AmortizationAmount toCost ofFiscal Year
    
    Revenue2008
    
    $
    3,0172009
    
    
    3,0172010
    
    
    2,3742011
    
    
    1,3822012
    
    
    1,382Thereafter
    
    
    1,234Total
    
    $
    12,406
  Operating Expenses
 Research and development
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Expenses
    
    $
    39,410
    
    
    $
    33,670
    
    
    $
    22,768Percentage of total revenue
    
    
    20
    %
    
    
    19
    %
    
    
    17
    %Year over year change in Dollars
    
    
    5,740
    
    
    
    10,902Year over year change in Percent
    
    
    17
    %
    
    
    48
    %
 42




---



##### Table of Contents



Sales and marketing
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Expenses
    
    $
    77,741
    
    
    $
    71,256
    
    
    $
    53,403Percentage of total revenue
    
    
    39
    %
    
    
    41
    %
    
    
    39
    %Year over year change in Dollars
    
    
    6,485
    
    
    
    17,853Year over year change in Percent
    
    
    9
    %
    
    
    33
    %
    43




---



##### Table of Contents



General and administrative
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Expenses
    
    $
    21,473
    
    
    $
    20,324
    
    
    $
    15,535Percentage of total revenue
    
    
    11
    %
    
    
    12
    %
    
    
    12
    %Year over year change in Dollars
    
    
    1,149
    
    
    
    4,789Year over year change in Percent
    
    
    6
    %
    
    
    31
    %
    Amortization of purchased intangible assets included in operating expenses
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Expenses
    
    $
    715
    
    
    $
    2,721
    
    
    $
    2,893Percentage of total revenue
    
    
    0.4
    %
    
    
    2
    %
    
    
    2
    %Year over year change in Dollars
    
    
    (2,006
    )
    
    
    (172
    )Year over year change in Percent
    
    
    (74
    %)
    
    
    (6
    %)
   44




---



##### Table of Contents



AmortizationAmount toOperatingFiscal Year
    
    Expenses2008
    
    $
    1,1142009
    
    
    1,0952010
    
    
    1,0952011
    
    
    1,0952012
    
    
    1,007Thereafter
    
    
    2,475Total
    
    $
    7,881
 Restructuring charges
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Expenses
    
    $
    
    
    
    $
    1,409
    
    
    $
    Percentage of total revenue
    
    
    0
    %
    
    
    1
    %
    
    
    Year over year change in Dollars
    
    
    (1,409
    )
    
    
    1,409Year over year change in Percent
    
    
    (100
    %)
    
    
    100
    %
   In-Process Research and Development
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Expenses
    
    $
    1,930
    
    
    $
    1,580
    
    
    $
    Percentage of total revenue
    
    
    1
    %
    
    
    1
    %
    
    
    Year over year change in Dollars
    
    
    350
    
    
    
    1,580Year over year change in Percent
    
    
    22
    %
    
    
    0
    %
   45




---



##### Table of Contents



Interest income and other expense, net
  Benefit (Provision) for income taxes
 Year ended December 31,2007
    
    2006
    
    2005(in thousands)Benefit (Provision) for income taxes
    
    $
    17,601
    
    
    $
    (8,206
    )
    
    $
    (1,034
    )Percentage of income (loss) before taxes
    
    
    160
    %
    
    
    322
    %
    
    
    14
    %Percentage of total revenue
    
    
    8.8
    %
    
    
    (4.7
    %)
    
    
    (0.8
    %)Year over year change in Dollars
    
    
    25,807
    
    
    
    (7,172
    )Year over year change in Percent
    
    
    (314
    %)
    
    
    694
    %
   46




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##### Table of Contents



47




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##### Table of Contents



Quarterly Results of Operations
  Year Ended December 31, 2007
    
    Year Ended December 31, 2006Q4
    
    Q3
    
    Q2
    
    Q1
    
    Q4
    
    Q3
    
    Q2
    
    Q1(in thousands, except per share data)
    
    (in thousands, except per share data)Revenue:Product
    
    $
    27,295
    
    
    $
    25,389
    
    
    $
    23,575
    
    
    $
    22,677
    
    
    $
    24,917
    
    
    $
    24,087
    
    
    $
    22,709
    
    
    $
    21,084License and service
    
    
    28,719
    
    
    
    25,597
    
    
    
    23,489
    
    
    
    22,458
    
    
    
    21,794
    
    
    
    21,103
    
    
    
    21,105
    
    
    
    18,739Total revenue
    
    
    56,014
    
    
    
    50,986
    
    
    
    47,064
    
    
    
    45,135
    
    
    
    46,711
    
    
    
    45,190
    
    
    
    43,814
    
    
    
    39,823Cost of revenue:Product
    
    
    11,842
    
    
    
    10,148
    
    
    
    9,353
    
    
    
    9,212
    
    
    
    10,487
    
    
    
    10,210
    
    
    
    9,571
    
    
    
    8,896License and service
    
    
    4,742
    
    
    
    4,167
    
    
    
    3,790
    
    
    
    3,195
    
    
    
    3,257
    
    
    
    3,228
    
    
    
    3,314
    
    
    
    2,488Amortization of purchased technology
    
    
    716
    
    
    
    698
    
    
    
    409
    
    
    
    409
    
    
    
    963
    
    
    
    1,501
    
    
    
    1,558
    
    
    
    1,365Total cost of revenue
    
    
    17,300
    
    
    
    15,013
    
    
    
    13,552
    
    
    
    12,816
    
    
    
    14,707
    
    
    
    14,939
    
    
    
    14,443
    
    
    
    12,749Gross profit
    
    
    38,714
    
    
    
    35,973
    
    
    
    33,512
    
    
    
    32,319
    
    
    
    32,004
    
    
    
    30,251
    
    
    
    29,371
    
    
    
    27,074Operating expenses:Research and development
    
    
    10,479
    
    
    
    10,838
    
    
    
    9,077
    
    
    
    9,016
    
    
    
    8,191
    
    
    
    8,391
    
    
    
    8,758
    
    
    
    8,330Sales and marketing
    
    
    23,194
    
    
    
    20,023
    
    
    
    17,205
    
    
    
    17,319
    
    
    
    16,789
    
    
    
    17,782
    
    
    
    18,858
    
    
    
    17,827General and administrative
    
    
    5,632
    
    
    
    5,808
    
    
    
    4,750
    
    
    
    5,283
    
    
    
    5,116
    
    
    
    5,418
    
    
    
    4,976
    
    
    
    4,814Amortization of purchased intangible assets
    
    
    303
    
    
    
    302
    
    
    
    55
    
    
    
    55
    
    
    
    419
    
    
    
    767
    
    
    
    734
    
    
    
    801Restructuring charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    1,392In-process research and development
    
    
    
    
    
    
    1,930
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,580Total operating expenses
    
    
    39,608
    
    
    
    38,901
    
    
    
    31,087
    
    
    
    31,673
    
    
    
    30,515
    
    
    
    32,358
    
    
    
    33,343
    
    
    
    34,744Income (loss) from operations
    
    
    (894
    )
    
    
    (2,928
    )
    
    
    2,425
    
    
    
    646
    
    
    
    1,489
    
    
    
    (2,107
    )
    
    
    (3,972
    )
    
    
    (7,670
    )Interest income and other expense, net
    
    
    2,926
    
    
    
    2,974
    
    
    
    3,053
    
    
    
    2,818
    
    
    
    2,783
    
    
    
    2,621
    
    
    
    2,143
    
    
    
    2,166Income (loss) before income taxes
    
    
    2,032
    
    
    
    46
    
    
    
    5,478
    
    
    
    3,464
    
    
    
    4,272
    
    
    
    514
    
    
    
    (1,829
    )
    
    
    (5,504
    )Provision for income taxes
    
    
    20,974
    
    
    
    (342
    )
    
    
    (1,864
    )
    
    
    (1,167
    )
    
    
    (3,831
    )
    
    
    (2,756
    )
    
    
    (1,543
    )
    
    
    (76
    )Net income (loss)
    
    $
    23,006
    
    
    $
    (296
    )
    
    $
    3,614
    
    
    $
    2,297
    
    
    $
    441
    
    
    $
    (2,242
    )
    
    $
    (3,372
    )
    
    $
    (5,580
    )Net income (loss) per share:Basic
    
    $
    0.37
    
    
    $
    (0.00
    )
    
    $
    0.06
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )Diluted
    
    $
    0.35
    
    
    $
    (0.00
    )
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )Shares used in computing net income (loss) per
share:Basic
    
    
    62,678
    
    
    
    64,458
    
    
    
    64,777
    
    
    
    65,336
    
    
    
    65,855
    
    
    
    65,329
    
    
    
    64,479
    
    
    
    64,828Diluted
    
    
    66,141
    
    
    
    64,458
    
    
    
    67,258
    
    
    
    67,815
    
    
    
    69,174
    
    
    
    65,329
    
    
    
    64,479
    
    
    
    64,828
 Liquidity and Capital Resources
  48




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##### Table of Contents



Operating Activities
  §
    
    Accounts receivable decreased due to the timing of collections. Our DSO in accounts
receivable was 42 days at December 31, 2007 compared to 45 days at December 31, 2006. The
decrease in DSO at December 31, 2007 as compared to December 31, 2006 was primarily due to the
timing of shipments and billings, combined with an increase in revenue. Collection of
accounts receivable and related DSO will continue to fluctuate in future periods due to the
timing and amount of our future shipments and billings, the payment terms that we extend to
our customers, and the effectiveness of our collection efforts.§
    
    The increase in prepaid expenses and other current assets was primarily due to (1) an
increase in our Deferred Compensation asset primarily from participant contributions; and (2)
an increase in the amount of deferred cost of goods sold associated with products shipped on
deferred revenue arrangements.§
    
    The increase in accounts payable is primarily due to an increase in the level of cost of
goods sold and operating expenses and the timing of payments to our vendors.§
    
    The increase in accrued payroll and related benefits was primarily attributed to (1) an
increase in the accrual related to our Deferred Compensation plan; (2) an increase in amount
accrued under payroll, commissions, and payroll taxes payable; and (3) an increase in our
vacation accrual.§
    
    Deferred revenue increased due to increased sales of subscription services as well as an
increase related to shipments to distributors whereby revenue is recognized on a sell-through
basis. In addition, as of December 31, 2007 there was approximately $3.7 million remaining in
deferred revenue derived through the acquisition of Aventail.§
    
    The decrease in other accrued liabilities was primarily due to final settlement of the
restricted cash in escrow in connection with the acquisition of MailFrontier.
  §
    
    Accounts receivable increased due to higher sales and the normalization of our collection
cycle. Our DSO in accounts receivable was 45 days at December 31, 2006 compared to 32 days at
December 31, 2005. The increase in DSO at December 31, 2006 as compared to December 31, 2005
was primarily due to the timing of shipments and billings combined with the increase in
revenue. Collection of accounts receivable and related DSO will fluctuate in future periods
due to the timing and amount of our future shipments and billings, the payment terms that we
extend to our customers and the effectiveness of our collection efforts.§
    
    Deferred revenue increased due to increased sales of subscription services as well as an
increase related to shipments to distributors whereby revenue is recognized on a sell-through
basis. In addition, there was approximately $2.2 million in deferred revenue derived through
the acquisition of MailFrontier.§
    
    The increase in prepaid expenses and other current assets was primarily due to (1) an
increase in our restricted cash in escrow in connection with the acquisition; (2) an increase
in our Deferred Compensation asset primarily from participant contributions; and (3) an
increase in the amount of deferred cost of goods sold associated with products shipped on
deferred revenue arrangements.§
    
    The increase in accrued payroll and related benefits was primarily attributed to (1) an
increase in the accrual of bonuses; (2) an increase in the accrual related to our Deferred
Compensation plan; (3) an increase in the amount withheld and accrued under our employee stock
purchase plan (ESPP); and (4) an increase in our vacation accrual.§
    
    The decrease in accrued restructuring was caused by the payment of employee severance
benefits and facility costs for space no longer needed in connection with the 2006
Restructuring Plan.
 49




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##### Table of Contents



§
    
    The increase in other accrued liabilities was primarily due to (1) an increase in the
accrual related to the restricted cash in escrow in connection with the acquisition of
MailFrontier; (2) an increase in the accrual related to royalty contracts; and (3) an increase
in the accrual related to travel expenses.
  §
    
    Accounts receivable decreased due to enhanced collection effectiveness, the timing of
shipments and billings combined with increase in revenue. Our DSO in accounts receivable was
32 days at December 31, 2005 as compared to 49 days at December 31, 2004.§
    
    Deferred revenue increased primarily due to increased sales of subscription services as
well as an increase related to shipments to distributors where revenue is recognized on a sell
through basis.§
    
    Prepaid expenses and other current assets increased mainly due to the increase in
restricted cash in escrow in connection with the acquisition and the increase in the trust
assets of the deferred compensation plan as fully described in Note 11 of the Notes to the
Consolidated Financial Statements.
  Investing Activities
   Financing Activities
    Liquidity and Capital Resource Requirements
  50




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##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations
  Payments Due by PeriodLess Than
    
    1 to 3
    
    3 to 5Contractual Obligations
    
    Total
    
    One Year
    
    Years
    
    YearsOperating lease obligations
    
    $
    8,146
    
    
    $
    2,515
    
    
    $
    3,579
    
    
    $
    2,052Non-Cancelable Purchase obligations
    
    $
    9,611
    
    
    $
    9,611
    
    
    $
    
    
    
    $
    
  Stock Repurchase Program
    Recent Accounting Pronouncements
  51




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##### Table of Contents



ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
 Interest rate risk
      Maturing in2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    Total
    
    
    Fair ValueCorporate debt securities
    
    $
    37,891
    
    
    $
    6,617
    
    
    $
    
    
    
    $
    443
    
    
    $
    115
    
    
    $
    61,102
    
    
    $
    106,169
    
    
    $
    103,876Weighted Average Interest Rate
    
    
    5.1
    %
    
    
    5.0
    %
    
    
    
    
    
    
    4.9
    %
    
    
    4.5
    %
    
    
    5.6
    %
    
    
    5.4
    %U.S. government securities
    
    
    2,034
    
    
    
    5,103
    
    
    
    5,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,450
    
    
    
    12,459Weighted Average Interest Rate
    
    
    5.2
    %
    
    
    5.0
    %
    
    
    4.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.7
    %Auction rate securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,312
    
    
    
    79,312
    
    
    
    79,312Weighted Average Interest Rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.1
    %
    
    
    6.1
    %Total marketable securities
    
    $
    39,925
    
    
    $
    11,720
    
    
    $
    5,314
    
    
    $
    443
    
    
    $
    115
    
    
    $
    140,414
    
    
    $
    197,931
    
    
    $
    195,647
 Foreign currency risk
   52




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Financial Market Risk
   53




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##### Table of Contents



ITEM 8. Financial Statements and Supplementary Data
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
 PageReports of Independent Registered Public Accounting Firm
    
    
    55Consolidated Balance Sheets
    
    
    57Consolidated Statements of Operations
    
    
    58Consolidated Statements of Shareholders Equity
    
    
    59Consolidated Statements of Cash Flows
    
    
    60Notes to Consolidated Financial Statements
    
    
    61Financial Statement Schedule  Valuation and Qualifying Accounts
    
    
    96
 54




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##### Table of Contents



REPORT OF ARMANINO McKENNA LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 The Board of Directors and Shareholders, SonicWALL, Inc.
     Internal Control-Integrated Framework
 
 55




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##### Table of Contents



REPORT OF ARMANINO McKENNA LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 The Board of Directors and Shareholders, SonicWALL, Inc.
 Internal Control  Integrated
Framework
    Internal Control -
Integrated Framework
  
 56




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##### Table of Contents



SONICWALL, INC.
CONSOLIDATED BALANCE SHEETS
 December 31,2007
    
    2006(In thousands, except share data)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    33,324
    
    
    $
    25,927Short-term investments
    
    
    195,647
    
    
    
    209,251Accounts receivable, net of allowance for doubtful accounts
of $177 and $152 in 2007 and 2006, respectively
    
    
    26,255
    
    
    
    23,205Inventories
    
    
    6,057
    
    
    
    5,210Deferred tax assets
    
    
    11,107
    
    
    
    Prepaid expenses and other current assets
    
    
    9,447
    
    
    
    10,888Total current assets
    
    
    281,837
    
    
    
    274,481Property and equipment, net
    
    
    9,357
    
    
    
    4,085Goodwill
    
    
    138,753
    
    
    
    130,399Deferred tax assets, non-current
    
    
    16,367
    
    
    
    Purchased intangibles and other assets, net
    
    
    26,321
    
    
    
    7,326Total assets
    
    $
    472,635
    
    
    $
    416,291LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    10,875
    
    
    $
    6,677Accrued payroll and related benefits
    
    
    20,388
    
    
    
    13,593Other accrued liabilities
    
    
    7,355
    
    
    
    10,062Deferred revenue
    
    
    88,818
    
    
    
    61,622Total current liabilities
    
    
    127,436
    
    
    
    91,954Other accrued liabilities, non-current
    
    
    5,076
    
    
    
    Deferred revenue, non-current
    
    
    12,419
    
    
    
    6,269Total liabilities
    
    
    144,931
    
    
    
    98,223Commitments and contingencies (Note 10)Shareholders Equity:Common stock, no par value; 200,000,000 shares authorized;
62,477,590 and 65,385,629 shares issued and outstanding
    
    
    446,431
    
    
    
    453,409Accumulated other comprehensive loss, net
    
    
    (2,284
    )
    
    
    (1,197
    )Accumulated deficit
    
    
    (116,443
    )
    
    
    (134,144
    )Total shareholders equity
    
    
    327,704
    
    
    
    318,068Total liabilities and shareholders equity
    
    $
    472,635
    
    
    $
    416,291
 The accompanying notes are an integral part of these consolidated financial statements.
 57




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##### Table of Contents



SONICWALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2007
    
    2006
    
    2005(In thousands, except per share data)Revenue:Product
    
    $
    98,936
    
    
    $
    92,797
    
    
    $
    75,525License and service
    
    
    100,263
    
    
    
    82,741
    
    
    
    59,799Total revenue
    
    
    199,199
    
    
    
    175,538
    
    
    
    135,324Cost of revenue:Product
    
    
    40,555
    
    
    
    39,164
    
    
    
    27,699License and service
    
    
    15,894
    
    
    
    12,287
    
    
    
    8,031Amortization of purchased technology
    
    
    2,232
    
    
    
    5,387
    
    
    
    4,552Total cost of revenue
    
    
    58,681
    
    
    
    56,838
    
    
    
    40,282Gross profit
    
    
    140,518
    
    
    
    118,700
    
    
    
    95,042Operating expenses:Research and development
    
    
    39,410
    
    
    
    33,670
    
    
    
    22,768Sales and marketing
    
    
    77,741
    
    
    
    71,256
    
    
    
    53,403General and administrative
    
    
    21,473
    
    
    
    20,324
    
    
    
    15,535Amortization of purchased intangible assets
    
    
    715
    
    
    
    2,721
    
    
    
    2,893Restructuring charges
    
    
    
    
    
    
    1,409
    
    
    
    In-process research and development
    
    
    1,930
    
    
    
    1,580
    
    
    
    Total operating expenses
    
    
    141,269
    
    
    
    130,960
    
    
    
    94,599Income (loss) from operations
    
    
    (751
    )
    
    
    (12,260
    )
    
    
    443Interest income and other expense, net
    
    
    11,771
    
    
    
    9,713
    
    
    
    6,867Income (loss) before income taxes
    
    
    11,020
    
    
    
    (2,547
    )
    
    
    7,310Benefit (provision) for income taxes
    
    
    17,601
    
    
    
    (8,206
    )
    
    
    (1,034
    )Net income (loss)
    
    $
    28,621
    
    
    $
    (10,753
    )
    
    $
    6,276Net income (loss) per share:Basic
    
    $
    0.45
    
    
    $
    (0.17
    )
    
    $
    0.10Diluted
    
    $
    0.43
    
    
    $
    (0.17
    )
    
    $
    0.09Shares used in computing net income (loss) per
share:Basic
    
    
    64,305
    
    
    
    65,117
    
    
    
    64,684Diluted
    
    
    67,099
    
    
    
    65,117
    
    
    
    66,797
 The accompanying notes are an integral part of these consolidated financial statements.
 58




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##### Table of Contents



SONICWALL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands, except for share data)
 AccumulatedOther
    
    
    
    
    
    TotalCommon Stock
    
    Comprehensive
    
    Accumulated
    
    ShareholdersShares
    
    Amount
    
    Income (Loss)
    
    Deficit
    
    EquityBalance at December 31, 2004
    
    
    68,623,042
    
    
    
    463,733
    
    
    
    (846
    )
    
    
    (124,911
    )
    
    
    337,976Issuance of common stock upon exercise of
stock options
    
    
    1,072,878
    
    
    
    4,701
    
    
    
    
    
    
    
    
    
    
    
    4,701Issuance of common stock in connection with the
Employee Stock Purchase Plan (ESPP)
    
    
    328,018
    
    
    
    1,623
    
    
    
    
    
    
    
    
    
    
    
    1,623Stock options assumed in connection with
acquisition
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    110Stock-based compensation
    
    
    
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    201Repurchase of common stock
    
    
    (4,997,800
    )
    
    
    (30,218
    )
    
    
    
    
    
    
    
    
    
    
    (30,218
    )Income tax benefit from stock option exercises
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Comprehensive income:Change in unrealized loss on investment
securities
    
    
    
    
    
    
    
    
    
    
    (521
    )
    
    
    
    
    
    
    (521
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,276
    
    
    
    6,276Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,755Balance at December 31, 2005
    
    
    65,026,138
    
    
    
    440,172
    
    
    
    (1,367
    )
    
    
    (118,635
    )
    
    
    320,170Issuance of common stock upon exercise of
stock options
    
    
    2,362,576
    
    
    
    14,123
    
    
    
    
    
    
    
    
    
    
    
    14,123Issuance of common stock in connection with
ESPP
    
    
    414,156
    
    
    
    2,146
    
    
    
    
    
    
    
    
    
    
    
    2,146Stock options assumed in connection with
acquisition
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    109Share-based compensation
    
    
    
    
    
    
    13,202
    
    
    
    
    
    
    
    
    
    
    
    13,202Repurchase of common stock
    
    
    (2,417,241
    )
    
    
    (16,343
    )
    
    
    
    
    
    
    (4,756
    )
    
    
    (21,099
    )Comprehensive loss:Change in unrealized gain on investment
securities
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,753
    )
    
    
    (10,753
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,583
    )Balance at December 31, 2006
    
    
    65,385,629
    
    
    
    453,409
    
    
    
    (1,197
    )
    
    
    (134,144
    )
    
    
    318,068Cumulative effect of adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89
    )
    
    
    (89
    )Adjusted Balance at December 31, 2006
    
    
    65,385,629
    
    
    
    453,409
    
    
    
    (1,197
    )
    
    
    (134,233
    )
    
    
    317,979Issuance of common stock upon exercise of
stock options
    
    
    2,269,940
    
    
    
    14,305
    
    
    
    
    
    
    
    
    
    
    
    14,305Issuance of common stock in connection with
ESPP
    
    
    378,908
    
    
    
    2,730
    
    
    
    
    
    
    
    
    
    
    
    2,730Share-based compensation
    
    
    
    
    
    
    13,542
    
    
    
    
    
    
    
    
    
    
    
    13,542Repurchase of common stock
    
    
    (5,556,887
    )
    
    
    (39,085
    )
    
    
    
    
    
    
    (10,831
    )
    
    
    (49,916
    )Income tax benefit from stock option exercises
    
    
    
    
    
    
    1,530
    
    
    
    
    
    
    
    
    
    
    
    1,530Comprehensive loss:Change in unrealized loss on investment
securities
    
    
    
    
    
    
    
    
    
    
    (1,087
    )
    
    
    
    
    
    
    (1,087
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,621
    
    
    
    28,621Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,534Balance at December 31, 2007
    
    
    62,477,590
    
    
    
    446,431
    
    
    
    (2,284
    )
    
    
    (116,443
    )
    
    
    327,704
 The accompanying notes are an integral part of these consolidated financial statements.
 59




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SONICWALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2007
    
    2006
    
    2005(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    28,621
    
    
    $
    (10,753
    )
    
    $
    6,276Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,961
    
    
    
    10,246
    
    
    
    9,847Adjustment of goodwill
    
    
    7,100
    
    
    
    6,826
    
    
    
    885In process research and development
    
    
    1,930
    
    
    
    1,580
    
    
    
    Share-based compensation expense related to employee
stock options and ESPP
    
    
    13,542
    
    
    
    13,202
    
    
    
    201Income tax benefit from exercise of employee stock options
    
    
    1,530
    
    
    
    0
    
    
    
    22Change in allowance for doubtful accounts and others
    
    
    (169
    )
    
    
    61
    
    
    
    (110
    )Deferred income taxes
    
    
    (27,474
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of
effects of businesses acquired:Accounts receivable
    
    
    902
    
    
    
    (8,899
    )
    
    
    1,158Inventories
    
    
    (606
    )
    
    
    (1,543
    )
    
    
    (1,342
    )Prepaid expenses and other current assets
    
    
    (1,596
    )
    
    
    (2,039
    )
    
    
    (3,099
    )Other assets
    
    
    28
    
    
    
    (346
    )
    
    
    315Accounts payable
    
    
    3,781
    
    
    
    (2,331
    )
    
    
    1,592Accrued payroll and related benefits
    
    
    3,366
    
    
    
    4,071
    
    
    
    1,537Other accrued liabilities
    
    
    (1,427
    )
    
    
    2,643
    
    
    
    751Deferred revenue
    
    
    28,201
    
    
    
    20,854
    
    
    
    14,469Net cash provided by operating activities
    
    
    63,690
    
    
    
    33,572
    
    
    
    32,502Cash flows from investing activities:Purchase of property and equipment
    
    
    (7,481
    )
    
    
    (3,378
    )
    
    
    (1,440
    )Purchase of intangible asset
    
    
    (1,800
    )
    
    
    
    
    
    
    Cash paid for acquisitions, net of cash acquired
    
    
    (25,269
    )
    
    
    (29,501
    )
    
    
    (16,637
    )Net increase in restricted cash in escrow
    
    
    (1,379
    )
    
    
    (1,296
    )
    
    
    (2,163
    )Maturity and sale of short-term investments
    
    
    325,747
    
    
    
    229,888
    
    
    
    236,898Purchase of short-term investments
    
    
    (313,230
    )
    
    
    (241,121
    )
    
    
    (206,119
    )Net cash provided by (used in) investing activities
    
    
    (23,412
    )
    
    
    (45,408
    )
    
    
    10,539Cash flows from financing activities:Issuance of common stock under employee stock options and
purchase plans
    
    
    17,035
    
    
    
    16,269
    
    
    
    6,324Repurchase of common stock
    
    
    (49,916
    )
    
    
    (21,099
    )
    
    
    (30,218
    )Net cash used in financing activities
    
    
    (32,881
    )
    
    
    (4,830
    )
    
    
    (23,894
    )Net increase (decrease) in cash and cash equivalents
    
    
    7,397
    
    
    
    (16,666
    )
    
    
    19,147Cash and cash equivalents at beginning of year
    
    
    25,927
    
    
    
    42,593
    
    
    
    23,446Cash and cash equivalents at end of year
    
    $
    33,324
    
    
    $
    25,927
    
    
    $
    42,593Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    1,700
    
    
    $
    1,220
    
    
    $
    498
 The accompanying notes are an integral part of these consolidated financial statements.
 60




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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
 Accounting for Certain Investments in Debt and Equity
Securities
 Fair value
  Concentration of credit risk, foreign operations, and significant customers
  61




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Customers
    
    2007
    
    2006
    
    2005Alternative Technology
    
    
    18
    %
    
    
    18
    %
    
    
    13
    %Tech Data
    
    
    17
    %
    
    
    18
    %
    
    
    21
    %Ingram Micro
    
    
    16
    %
    
    
    17
    %
    
    
    18
    %
  December 31,2007
    
    2006Alternative Technology
    
    
    4
    %
    
    
    23
    %Tech Data
    
    
    12
    %
    
    
    8
    %Ingram Micro
    
    
    14
    %
    
    
    17
    %
   Inventories
  Property and equipment
  62




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Purchased intangibles
  Goodwill and impairment of goodwill
  Impairment of other long-lived assets
  Interest income and other expense, net
  Share-based compensation
 Accounting for Stock Issued to Employees
  63




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Accounting for Stock-Based Compensation
    64




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Year Ended December 31,2007
    
    2006
    
    2005Cost of sales  Product
    
    $
    377
    
    
    $
    470
    
    
    $
    Cost of sales  License and service
    
    
    147
    
    
    
    144
    
    
    
    Share-based compensation expense included in cost of sales
    
    
    524
    
    
    
    614
    
    
    
    Research and development
    
    
    4,642
    
    
    
    4,368
    
    
    
    Sales and marketing
    
    
    4,824
    
    
    
    4,959
    
    
    
    General and administrative
    
    
    3,987
    
    
    
    4,474
    
    
    
    Share-based compensation expense included in operating expenses
    
    
    13,453
    
    
    
    13,801
    
    
    
    Share-based compensation expense included in income before taxes
    
    
    13,977
    
    
    
    14,415
    
    
    
    Income tax benefit at statutory rates
    
    
    (1,215
    )
    
    
    (623
    )
    
    
    Share-based compensation expense included in net income
    
    $
    12,762
    
    
    $
    13,792
    
    
    $
    Share-based compensation effect on net income (loss) per share:Basic
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    Diluted
    
    $
    0.19
    
    
    $
    0.21
  Year EndedDecember 31, 2005Net income  as reported
    
    $
    6,276Add: Stock compensation expensed under the intrinsic
value method, net of related tax effect
    
    
    201Less: 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
    )Pro forma net loss
    
    $
    (7,954
    )Net income (loss) per sharebasic and diluted:Basic  as reported
    
    $
    0.10Diluted  as reported
    
    $
    0.09Basic  pro forma
    
    $
    (0.12
    )Diluted  pro forma
    
    $
    (0.12
    )
 Revenue recognition
  65




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Revenue Recognition, Software Revenue Recognition
         66




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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
  67




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Reclassifications
  Advertising costs
  Accounting for Consideration Given by a Vendor to a Customer,
 Computation of net income (loss) per share
   Year Ended December 31,2007
    
    2006
    
    2005Numerator:Net income (loss)
    
    $
    28,621
    
    
    $
    (10,753
    )
    
    $
    6,276Denominator:Weighted average shares used to
compute basic EPS
    
    
    64,305
    
    
    
    65,117
    
    
    
    64,684Effect of dilutive securities:Dilutive common stock equivalents
    
    
    2,794
    
    
    
    
    
    
    
    2,113Weighted average shares used to
compute diluted EPS
    
    
    67,099
    
    
    
    65,117
    
    
    
    66,797Net income (loss) per share:Basic
    
    $
    0.45
    
    
    
    ($0.17
    )
    
    $
    0.10Diluted
    
    $
    0.43
    
    
    
    ($0.17
    )
    
    $
    0.09
  Recent accounting pronouncements
 The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 68




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Fair Value Measurements
  69




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 2Balance Sheet Components:
 December 31,2007
    
    2006(in thousands)Prepaid expenses and other current assets:Cash in escrow
    
    $
    1,402
    
    
    $
    5,100Deferred compensation asset
    
    
    4,030
    
    
    
    2,567Other prepaid expenses
    
    
    4,015
    
    
    
    3,221$
    9,447
    
    
    $
    10,888Property and equipment, net:Equipment
    
    $
    17,426
    
    
    $
    11,815Office equipment and furniture
    
    
    3,801
    
    
    
    2,078Leasehold improvements
    
    
    2,024
    
    
    
    1,648Software
    
    
    10,405
    
    
    
    7,67133,656
    
    
    
    23,212Less: accumulated depreciation
    
    
    (24,299
    )
    
    
    (19,127
    )$
    9,357
    
    
    $
    4,085Purchased intangibles and other assets, net:Purchased intangible assets
    
    $
    77,650
    
    
    $
    60,990Cash in escrow- non-current
    
    $
    5,076
    
    
    $
    Other assets
    
    
    957
    
    
    
    75183,683
    
    
    
    61,741Less: accumulated amortization
    
    
    (57,362
    )
    
    
    (54,415
    )$
    26,321
    
    
    $
    7,326Other accrued liabilities:Accrued acquisition costs
    
    $
    1,414
    
    
    $
    4,683Warranty reserves
    
    
    741
    
    
    
    811Income taxes (receivable) payable
    
    
    (22
    )
    
    
    162Other accrued liabilities
    
    
    5,222
    
    
    
    4,406$
    7,355
    
    
    $
    10,062
 Note 3Goodwill and Purchased Intangibles:
  December 31,2007
    
    2006Balance as of beginning of the year
    
    $
    130,399
    
    
    $
    109,005Acquisitions:Aventail
    
    
    15,454
    
    
    
    MailFrontier
    
    
    
    
    
    
    28,220Adjustments (1)
    
    
    
    
    
    
    94Tax adjustment related to acquisitions (see Note 8)
    
    
    (7,100
    )
    
    
    (6,920
    )Balance as of end of the year
    
    $
    138,753
    
    
    $
    130,399
 
 Note:(1)
    
    The adjustments represent the true-up of costs estimated at the time of the acquisition
related to Lasso Logic. 70




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  WeightedAverage
    
    
    December 31, 2007
    
    
    December 31, 2006Amortization
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Gross
    
    
    AccumulatedPeriod
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    Carrying Amount
    
    
    Amortization
    
    
    NetPurchased technology
    
    70 month
    
    $
    43,211
    
    
    $
    (30,805
    )
    
    $
    12,406
    
    
    $
    34,471
    
    
    $
    (28,573
    )
    
    $
    5,898Non-compete agreements
    
    36 month
    
    
    7,249
    
    
    
    (7,230
    )
    
    
    19
    
    
    
    7,249
    
    
    
    (7,115
    )
    
    
    134Customer base
    
    77 month
    
    
    26,690
    
    
    
    (18,827
    )
    
    
    7,863
    
    
    
    18,770
    
    
    
    (18,227
    )
    
    
    543Other
    
    16 month
    
    
    500
    
    
    
    (500
    )
    
    
    
    
    
    
    500
    
    
    
    (500
    )
    
    
    Total intangibles
    
    69 month
    
    $
    77,650
    
    
    $
    (57,362
    )
    
    $
    20,288
    
    
    $
    60,990
    
    
    $
    (54,415
    )
    
    $
    6,575
   Amortization
    
    AmortizationAmount to
    
    Amount toCost of
    
    OperatingFiscal Year
    
    Revenue
    
    Expenses2008
    
    $
    3,017
    
    
    $
    1,1142009
    
    
    3,017
    
    
    
    1,0952010
    
    
    2,374
    
    
    
    1,0952011
    
    
    1,382
    
    
    
    1,0952012
    
    
    1,382
    
    
    
    1,007Thereafter
    
    
    1,234
    
    
    
    2,476Total
    
    $
    12,406
    
    
    $
    7,882
 Note 4Acquisitions:
 Business Combinations
 Goodwill and Other Intangible Assets
 71




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Fair Market Values(in thousands)Cash and cash equivalents
    
    $
    352Accounts receivable, net
    
    
    3,764Inventories
    
    
    241Prepaid expenses and other current assets
    
    
    661Property and equipment, net
    
    
    825In-process research and development
    
    
    1,930Goodwill
    
    
    15,454Intangible assets:Existing technology
    
    
    6,940Customer relationships
    
    
    7,920Other Assets
    
    
    235Total assets acquired
    
    
    38,322Accounts payable and other current liabilities
    
    
    1,253Accrued compensation
    
    
    3,695Deferred revenue
    
    
    5,146Loan payable
    
    
    2,607Total liabilities assumed
    
    
    12,701Net assets acquired
    
    $
    25,621
    72




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Year Ended December 31,(unaudited)
    
    2007
    
    2006Total revenue
    
    $
    209,458
    
    
    $
    193,976Pro forma net income (loss)
    
    $
    24,649
    
    
    $
    (19,556
    )Pro forma net income (loss) per share -
basic
    
    $
    0.38
    
    
    $
    (0.30
    )Pro forma net income (loss) per share -
diluted
    
    $
    0.37
    
    
    $
    (0.30
    )Reported net income (loss)
    
    $
    28,621
    
    
    $
    (10,753
    )Reported net income (loss) per share  basic
    
    $
    0.45
    
    
    $
    (0.17
    )Reported net income (loss) per share 
diluted
    
    $
    0.43
    
    
    $
    (0.17
    )
  Business Combinations
  73




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Fair Market Values(in thousands)Cash and cash equivalents
    
    $
    97Accounts receivable, net
    
    
    1,203Prepaid expenses and other current assets
    
    
    181Property and equipment, net
    
    
    303In-process research and development
    
    
    1,580Goodwill
    
    
    28,220Intangible assets:Existing technology
    
    
    2,700Customer relationships
    
    
    630Technology license
    
    
    30Non-compete covenants
    
    
    230Other Assets
    
    
    8Total assets acquired
    
    
    35,182Accounts payable and other current liabilities
    
    
    1,450Accrued compensation
    
    
    749Deferred revenue
    
    
    2,395Accrued restructuring
    
    
    792Total liabilities assumed
    
    
    5,386Net assets acquired
    
    $
    29,796
    Year Ended December 31,(unaudited)
    
    2006
    
    2005Total revenue
    
    $
    176,970
    
    
    $
    141,633Pro forma net loss
    
    $
    (11,291
    )
    
    $
    (3,555
    )Pro forma net loss per share  basic and diluted
    
    $
    (0.17
    )
    
    $
    (0.05
    )Reported net income (loss)
    
    $
    (10,753
    )
    
    $
    6,276Reported net income (loss) per share  basic
    
    $
    (0.17
    )
    
    $
    0.10Reported net income (loss) per share  diluted
    
    $
    (0.17
    )
    
    $
    0.09
 74




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Note 5Financial Instruments:
  Year ended December 31, 2007Gross
    
    GrossUnrealized
    
    UnrealizedMarketable securities
    
    Fair Value
    
    Gains
    
    (losses)
    
    Book ValueCorporate debt securitiesAuction rate securities
    
    $
    79,312
    
    
    $
    
    
    
    $
    
    
    
    $
    79,312Asset backed securities
    
    
    59,441
    
    
    
    13
    
    
    
    (2,327
    )
    
    
    61,755Corporate bonds
    
    
    44,435
    
    
    
    48
    
    
    
    (26
    )
    
    
    44,414Total corporate debt securities
    
    
    183,188
    
    
    
    61
    
    
    
    (2,353
    )
    
    
    185,481U.S. government securities
    
    
    12,459
    
    
    
    8
    
    
    
    
    
    
    
    12,450Total marketable securities
    
    $
    195,647
    
    
    $
    69
    
    
    $
    (2,353
    )
    
    $
    197,931
 Year ended December 31, 2006Gross
    
    GrossUnrealized
    
    UnrealizedMarketable securities
    
    Fair Value
    
    Gains
    
    (losses)
    
    Book ValueCorporate debt securitiesAuction rate securities
    
    $
    53,131
    
    
    $
    
    
    
    $
    
    
    
    $
    53,131Asset backed securities
    
    
    35,913
    
    
    
    
    
    
    
    (731
    )
    
    
    36,644Corporate bonds
    
    
    105,388
    
    
    
    
    
    
    
    (258
    )
    
    
    105,646Total corporate debt securities
    
    
    194,432
    
    
    
    
    
    
    
    (989
    )
    
    
    195,421U.S. government securities
    
    
    13,846
    
    
    
    
    
    
    
    (197
    )
    
    
    14,043Municipal bonds and notes
    
    
    973
    
    
    
    
    
    
    
    (11
    )
    
    
    984Total marketable securities
    
    $
    209,251
    
    
    $
    
    
    
    $
    (1,197
    )
    
    $
    210,448
    75




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SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
     Unrealized Losses
    
    Unrealized Losses 12December 31, 2007
    
    Less Than 12 Months
    
    Months or Greater
    
    TotalGross
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedMarketable securities
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesCorporate debt securitiesAsset backed securities
    
    $
    42,338
    
    
    $
    (1,024
    )
    
    $
    16,102
    
    
    $
    (1,303
    )
    
    $
    58,440
    
    
    $
    (2,327
    )Corporate bonds
    
    
    4,252
    
    
    
    (14
    )
    
    
    10,385
    
    
    
    (12
    )
    
    
    14,637
    
    
    
    (26
    )Total corporate debt securities
    
    
    46,590
    
    
    
    (1,038
    )
    
    
    26,487
    
    
    
    (1,315
    )
    
    
    73,077
    
    
    
    (2,353
    )Total marketable securities
    
    $
    46,590
    
    
    $
    (1,038
    )
    
    $
    26,487
    
    
    $
    (1,315
    )
    
    $
    73,077
    
    
    $
    (2,353
    )
 Unrealized Losses
    
    Unrealized Losses 12December 31, 2006
    
    Less Than 12 Months
    
    Months or Greater
    
    TotalGross
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedMarketable securities
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesCorporate debt securities
Asset backed securities
    
    $
    15,286
    
    
    $
    (629
    )
    
    $
    11,647
    
    
    $
    (101
    )
    
    $
    26,933
    
    
    $
    (730
    )Corporate bonds
    
    
    69,389
    
    
    
    (109
    )
    
    
    32,449
    
    
    
    (150
    )
    
    
    101,838
    
    
    
    (259
    )Total corporate debt securities
    
    
    84,675
    
    
    
    (738
    )
    
    
    44,096
    
    
    
    (251
    )
    
    
    128,771
    
    
    
    (989
    )U.S. government securities
    
    
    5,551
    
    
    
    (9
    )
    
    
    6,266
    
    
    
    (187
    )
    
    
    11,817
    
    
    
    (196
    )Municipal bonds and notes
    
    
    
    
    
    
    
    
    
    
    973
    
    
    
    (12
    )
    
    
    973
    
    
    
    (12
    )Total marketable securities
    
    $
    90,226
    
    
    $
    (747
    )
    
    $
    51,335
    
    
    $
    (450
    )
    
    $
    141,561
    
    
    $
    (1,197
    )
 76




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Maturity
    
    2007Due within one year
    
    $
    39,947Due between one and five years
    
    
    17,606Due between five and ten years
    
    
    6,660Due after 10 years (1)
    
    
    131,434Total short-term investments
    
    $
    195,647
 
 Note:(1)
    
    Represents auction rate securities of $79.3 million that have scheduled 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 $52.1 million. The scheduled re-auction periods are subject to
market conditions, which in illiquid or unstable markets could lead to longer periods between
re-auction periods. Note 6Restructuring Charges:
 2006 Restructuring Plan
 Accounting for
Costs Associated with Exit or Disposal Activities Employees Accounting for Postemployment Benefits
  EmployeeSeverance
    
    FacilityBenefits
    
    Costs
    
    TotalAccrual balance at December 31, 2005
    
    $
    
    
    
    $
    (7
    )
    
    $
    (7
    )Restructuring charges incurred
    
    
    1,409
    
    
    
    
    
    
    
    1,409Amount charged to goodwill
    
    
    553
    
    
    
    282
    
    
    
    835Cash payments
    
    
    (1,962
    )
    
    
    (275
    )
    
    
    (2,237
    )Accrual balance at Decenber 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    
  Note 7Shareholders Equity:
 1999 Employee Stock Purchase Plan
  77




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Stock Option Plans
   Options OutstandingWeightedOptions Available
    
    Number
    
    Average Exercisefor Grant
    
    Outstanding
    
    Price per ShareBalance at December 31, 2004
    
    
    1,960,401
    
    
    
    13,554,712
    
    
    $
    6.05Authorized
    
    
    2,744,922
    
    
    
    
    
    
    
    Options assumed related to acquisition
    
    
    
    
    
    
    59,589
    
    
    $
    0.30Granted
    
    
    (5,925,524
    )
    
    
    5,925,524
    
    
    $
    6.77Exercised
    
    
    
    
    
    
    (1,072,878
    )
    
    $
    4.38Canceled
    
    
    1,567,766
    
    
    
    (1,643,509
    )
    
    $
    6.98Balance at December 31, 2005
    
    
    347,565
    
    
    
    16,823,438
    
    
    $
    6.33Authorized
    
    
    2,601,046
    
    
    
    
    
    
    
    Options assumed related to acquisition
    
    
    
    
    
    
    76,848
    
    
    $
    1.46Granted
    
    
    (3,726,000
    )
    
    
    3,726,000
    
    
    $
    8.63Exercised
    
    
    
    
    
    
    (2,362,576
    )
    
    $
    5.98Canceled
    
    
    1,568,952
    
    
    
    (1,606,190
    )
    
    $
    6.62Balance at December 31, 2006
    
    
    791,563
    
    
    
    16,657,520
    
    
    $
    6.85Authorized
    
    
    2,615,425
    
    
    
    
    
    
    
    Options assumed related to acquisition
    
    
    
    
    
    
    744,043
    
    
    $
    8.44Granted
    
    
    (3,295,880
    )
    
    
    3,295,880
    
    
    $
    8.82Exercised
    
    
    
    
    
    
    (2,269,940
    )
    
    $
    6.30Canceled
    
    
    1,186,970
    
    
    
    (1,234,350
    )
    
    $
    7.74Balance at December 31, 2007
    
    
    1,298,078
    
    
    
    17,193,153
    
    
    $
    7.30
 78




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Options Outstanding
    
    
    Option ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageRemaining
    
    
    Exercise
    
    
    
    
    
    
    
    
    
    
    ExerciseRange of Exercise
    
    Number
    
    
    Contractual
    
    
    Price per
    
    
    Aggregate
    
    
    Number
    
    
    Price per
    
    
    AggregatePrices
    
    Outstanding
    
    
    Life (in Years)
    
    
    Share
    
    
    Intrinsic Value
    
    
    Exercisable
    
    
    Share
    
    
    Intrinsic Value$  0.30  $0.30
    
    
    484
    
    
    
    7.6
    
    
    $
    0.30
    
    
    $
    5,043
    
    
    
    75
    
    
    $
    0.30
    
    
    $
    782$  0.94  $1.41
    
    
    17,774
    
    
    
    2.3
    
    
    
    1.40
    
    
    
    165,647
    
    
    
    8,087
    
    
    
    1.39
    
    
    
    75,448$  1.42  $1.42
    
    
    3,094
    
    
    
    1.8
    
    
    
    1.42
    
    
    
    28,774
    
    
    
    3,094
    
    
    
    1.42
    
    
    
    28,774$  2.87  $4.28
    
    
    2,941,712
    
    
    
    5.1
    
    
    
    3.44
    
    
    
    21,426,623
    
    
    
    2,941,712
    
    
    
    3.44
    
    
    
    21,426,623$  4.93  $7.34
    
    
    3,836,903
    
    
    
    6.5
    
    
    
    5.89
    
    
    
    18,531,433
    
    
    
    2,795,818
    
    
    
    5.87
    
    
    
    13,559,286$  7.47  $11.09
    
    
    10,126,576
    
    
    
    8.4
    
    
    
    8.41
    
    
    
    23,385,910
    
    
    
    3,731,177
    
    
    
    8.16
    
    
    
    9,568,349$11.26  $16.49
    
    
    43,000
    
    
    
    2.9
    
    
    
    13.77
    
    
    
    
    
    
    
    43,000
    
    
    
    13.77
    
    
    
    $17.03  $18.79
    
    
    103,610
    
    
    
    3.6
    
    
    
    17.94
    
    
    
    
    
    
    
    103,610
    
    
    
    17.94
    
    
    
    $29.75  $29.75
    
    
    20,000
    
    
    
    2.4
    
    
    
    29.75
    
    
    
    
    
    
    
    20,000
    
    
    
    29.75
    
    
    
    $45.56  $45.57
    
    
    100,000
    
    
    
    2.5
    
    
    
    45.56
    
    
    
    
    
    
    
    100,000
    
    
    
    45.56
    
    
    
    Total
    
    
    17,193,153
    
    
    
    7.3
    
    
    $
    7.30
    
    
    $
    63,543,430
    
    
    
    9,746,573
    
    
    $
    6.63
    
    
    $
    44,659,262
     79




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  2007
    
    2006
    
    2005Expected volatility
    
    39.4% to 43.9%
    
    42.4% to 48.4%
    
    48.0% to 71.0%Risk-free interest rate
    
    3.2% to 5.1%
    
    4.4% to 5.2%
    
    3.5% to 4.4%Expected life
    
    2.9 to 3.5 years
    
    2.9 to 3.1 years
    
    3.1 to 4.0 yearsDividend yield
    
    
    0%
    
    
    
    0%
    
    
    
    0%
  2007
    
    2006
    
    2005Expected volatility
    
    30.3% to 34.3%
    
    32.1% to 44.7%
    
    
    60
    %Risk-free interest rate
    
    4.1% to 5.2%
    
    3.7% to 5.3%
    
    1.0% to 2.8%Expected life
    
    0.5 year to 1 year
    
    0.5 year to 1 year
    
    0.5 yearDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  Expected Volatility:
 Risk-Free Interest Rate
 Expected Term
 Expected Dividend:
 Stock Repurchase Program
   80




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Note 8Income Taxes:
  Year Ended December 31,2007
    
    2006
    
    2005Current tax expense:Federal
    
    $
    (1,710
    )
    
    $
    (762
    )
    
    $
    193State
    
    
    (583
    )
    
    
    (445
    )
    
    
    (74
    )Foreign
    
    
    (399
    )
    
    
    (79
    )
    
    
    (268
    )(2,692
    )
    
    
    (1,286
    )
    
    
    (149
    )Deferred tax benefit (expense):Federal
    
    
    11,920
    
    
    
    (6,920
    )
    
    
    (885
    )State
    
    
    8,373
    
    
    
    
    
    
    
    20,293
    
    
    
    (6,920
    )
    
    
    (885
    )$
    17,601
    
    
    $
    (8,206
    )
    
    $
    (1,034
    )
    81




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    December 31,2007
    
    
    2006Deferred tax assets:Net operating loss carryforwards
    
    $
    19,591
    
    
    $
    16,714Inventory reserves
    
    
    623
    
    
    
    520Deferred revenue
    
    
    1,893
    
    
    
    3,591Tax credits
    
    
    6,996
    
    
    
    8,260Share-based compensation
    
    
    3,781
    
    
    
    2,101Other reserves and accruals
    
    
    13,373
    
    
    
    8,07946,257
    
    
    
    39,265Deferred tax liabilities:Intangible assets
    
    
    (8,089
    )
    
    
    (2,920
    )Net deferred tax assets before valuation allowance
    
    
    38,168
    
    
    
    36,345Valuation allowance
    
    
    (10,694
    )
    
    
    (36,345
    )Net deferred tax assets:
    
    $
    27,474
    
    
    $
    
     82




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Year Ended December 31,2007
    
    2006
    
    2005Federal statutory rate (benefit)
    
    
    35
    %
    
    
    (35
    %)
    
    
    35
    %State taxes, net of federal benefit
    
    
    5
    
    
    
    (4
    )
    
    
    4IPR&D
    
    
    7
    
    
    
    
    
    
    
    Share-based compensation
    
    
    22
    
    
    
    100
    
    
    
    Tax credits
    
    
    (21
    )
    
    
    (59
    )
    
    
    (2
    )Change in valuation allowance
    
    
    (213
    )
    
    
    283
    
    
    
    (18
    )Other
    
    
    5
    
    
    
    37
    
    
    
    (5
    )(160
    %)
    
    
    322
    %
    
    
    14
    %
   Year Ended December 31,2007
    
    
    2006
    
    
    2005Domestic
    
    $
    9,529
    
    
    $
    (2,191
    )
    
    $
    6,479Foreign
    
    
    1,491
    
    
    
    (356
    )
    
    
    831Total
    
    $
    11,020
    
    
    $
    (2,547
    )
    
    $
    7,310
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 83




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Gross unrecognized tax benefits at January 1, 2007
    
    $
    3,124Increases in tax positions for prior years
    
    
    726Decreases in tax positions for prior years
    
    
    (2,443
    )Increases in tax positions for current years
    
    
    250Settlements
    
    
    Lapse in statute of limitations
    
    
    Gross unrecognized tax benefits at December 31, 2007
    
    $
    1,657
   Note 9Segment Reporting:
 Disclosures About Segments of an Enterprise and Related Information
  Year Ended December 31,2007
    
    
    2006
    
    
    2005United States
    
    $
    135,000
    
    
    $
    120,405
    
    
    $
    90,432All other countries
    
    
    64,199
    
    
    
    55,133
    
    
    
    44,892Total
    
    $
    199,199
    
    
    $
    175,538
    
    
    $
    135,324
  Year Ended December 31,2007
    
    
    2006
    
    
    2005United States
    
    $
    8,558
    
    
    $
    3,997
    
    
    $
    2,679All other countries
    
    
    1,756
    
    
    
    838
    
    
    
    313Total
    
    $
    10,314
    
    
    $
    4,835
    
    
    $
    2,992
 84




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Customers
    
    2007
    
    2006
    
    2005Alternative Technology
    
    
    18
    %
    
    
    18
    %
    
    
    13
    %Tech Data
    
    
    17
    %
    
    
    18
    %
    
    
    21
    %Ingram Micro
    
    
    16
    %
    
    
    17
    %
    
    
    18
    %
  Note 10Commitments and Contingencies:
     Year Ending December 31,2008
    
    
    2,5152009
    
    
    2,1942010
    
    
    1,3852011
    
    
    1,3322012
    
    
    720$
    8,146
  Purchase commitments
  85




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Product warranties
  Year Ended December 31,(in thousands)2007
    
    
    2006
    
    
    2005Beginning balance
    
    $
    811
    
    
    $
    790
    
    
    $
    1,071Accruals for warranties issued
    
    
    854
    
    
    
    599
    
    
    
    402Settlements made during the period
    
    
    (924
    )
    
    
    (578
    )
    
    
    (683
    )Ending balance
    
    $
    741
    
    
    $
    811
    
    
    $
    790
 Guarantees and Indemnification Agreements
     86




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Legal Proceedings
    87




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##### Table of Contents



SONICWALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 11Employee Benefits:
 Pension Plan
  Deferred Compensation Plan
  Note 12Subsequent Event:
  
 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 ITEM 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Management Report on Internal Control over Financial Reporting
  88




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##### Table of Contents



Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting
  Inherent Limitations on Effectiveness of Controls
  
 ITEM 9B. Other Information
  89




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##### Table of Contents



PART III
 
 ITEM 10. Directors, Executive Officers and Corporate Governance
  www.sonicwall.com
 
 ITEM 11. Executive Compensation
  
 ITEM 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
  
 ITEM 13. Certain Relationships and Related Transactions, and
Director Independence
  
 ITEM 14. Principal Accounting Fees and Services
  90




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##### Table of Contents



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
    
    Description2.1
    
    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).2.5
    
    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. (Incorporated by
reference to the Registrants Annual Report on Form 10-K (File No.
000-27723) for the year ended December 31, 2005).2.6
    
    Agreement and Plan of Merger, dated February 7, 2006, by and among
the Registrant, Meridian Acquisition Corporation, MailFrontier,
Inc., and Anne Bonaparte and Sonja Hoel, as the Representatives.
(Filed on Form 8-K (File No. 0000950134-06-003922) dated February
28, 2007).2.7
    
    Agreement and Plan of Merger by and among SonicWALL, Avalon
Acquisition Corp. and Aventail, dated June 12, 2007, including
amendment number one thereto effective July 5, 2007. (Filed on
Form 8-K (File No. 0001093885-07-000004) dated July 7,
2007).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 (Incorporated by
reference to the Registrants Annual Report on Form 10-K (File No.
000-27723) for the year ended December 31, 2005).3.3
    
    Bylaws of SonicWALL, Inc., as Amended July 24, 2007. (Filed on
Form 8-K (File No. 0001093885-07-000008) dated July 30, 2007.)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).
 91




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##### Table of Contents



Number
    
    Description10.6
    
    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).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).
 92




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##### Table of Contents



Number
    
    Description10.25
    
    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
    
    Lease dated December 19, 2006 between Registrant, as Tenant, and
Kolte Patil Developers Limited, as Landlord (Incorporated by
reference to the Registrants Annual Report on Form 10-K (File No.
0000950134-07-005644) for the year ended December 31, 2006).10.37
    
    Amended and Restated Issuer Repurchase Plan Agreement dated
November 3, 2006 between SonicWALL, Inc. and RBC Dain Rauscher
Inc. (Incorporated by reference to the Registrants Annual Report
on Form 10-K (File No. 0000950134-07-005644) for the year ended
December 31, 2006).10.38
    
    SonicWALL, Inc. Employee Stock Purchase Plan, dated August 24,
1999, as amended August 1, 2006 (Incorporated by reference to the
Registrants Annual Report on Form 10-K (File No.
0000950134-07-005644) for the year ended December 31, 2006).10.39
    
    Lease dated September 25, 2007 between Registrant, as Tenant, and
TMC-3011 S 52nd ST, LLC, as Landlord. (Incorporated by
reference to the Registrants Quarterly Report on Form 10-Q (File
No. 0001093885-07-000021) for the quarter ended September 30,
2007).10.40*
    
    Lease dated February 1, 2008 between Aventail Info Tech Private
Limited, a subsidiary of the Registrant, as Tenant, and Salarpuria
Softzone, as Landlord, and SPPL Property Management Private
Limited, as Maintenance Service Provider.10.41*
    
    Limited Licensed Materials License Agreement dated December
14,2007 between Registrant, as Licensee, and Linkbit, Inc.21*
    
    List of Subsidiaries.23.1*
    
    Consent of Independent Registered Public Accounting Firm31.1*
    
    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.
 93




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##### Table of Contents



Number
    
    Description31.2*
    
    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
  94




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##### Table of Contents



SIGNATURES
   SonicWALL, Inc.By:
    /s/ Matthew MedeirosMatthew MedeirosChief Executive Officer  Signature
    
    Title
    
    Date/s/ Matthew Medeiros
    
    President, Chief Executive Officer and
    
    March 10, 2008Matthew Medeiros
    
    Director (Principal
Executive Officer)/s/ Robert Selvi
    
    Chief Financial Officer
    
    March 10, 2008Robert Selvi
    
    (Principal Financial Officer)/s/ Robert Knauff
    
    Chief Accounting Officer
    
    March 10, 2008Robert Knauff
    
    (Principal Accounting Officer)/s/ John C. Shoemaker
    
    Chairman of the Board of Directors
    
    March 10, 2008John C. Shoemaker/s/ Charles Berger
    
    Director
    
    March 10, 2008Charles Berger/s/ David W. Garrison
    
    Director
    
    March 10, 2008David W. Garrison/s/ Charles Kissner
    
    Director
    
    March 10, 2008Charles Kissner/s/ Edward F. Thompson
    
    Director
    
    March 10, 2008Edward F. Thompson/s/ Cary Thompson
    
    Director
    
    March 10, 2008Cary Thompson/s/ Clark Masters
    
    Director
    
    March 10, 2008Clark Masters
 95




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##### Table of Contents



Schedule II
 VALUATION AND QUALIFYING ACCOUNTS
 Balance at
    
    
    
    
    
    Charged to
    
    Deductions/Beginning of
    
    
    
    
    
    Cost and
    
    Write-off of
    
    Balance atYear
    
    Other
    
    Expenses
    
    Accounts
    
    End of Year(in thousands)Year ended December 31, 2005Allowance for doubtful accounts
    
    
    188
    
    
    
    
    
    
    
    27
    
    
    
    (92
    )
    
    
    123Inventory reserves
    
    
    1,177
    
    
    
    
    
    
    
    171
    
    
    
    (283
    )
    
    
    1,065Year ended December 31, 2006Allowance for doubtful accounts
    
    
    123
    
    
    
    
    
    
    
    53
    
    
    
    (24
    )
    
    
    152Inventory reserves
    
    
    1,065
    
    
    
    
    
    
    
    742
    
    
    
    (506
    )
    
    
    1,301Year ended December 31, 2007Allowance for doubtful accounts
    
    
    152
    
    
    
    213
    
    
    
    87
    
    
    
    (275
    )
    
    
    177Inventory reserves
    
    
    1,301
    
    
    
    
    
    
    
    1,183
    
    
    
    (927
    )
    
    
    1,557
 96




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##### Table of Contents



Exhibit Index
 Number
    
    Description2.1
    
    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).2.5
    
    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. (Incorporated by
reference to the Registrants Annual Report on Form 10-K (File No.
000-27723) for the year ended December 31, 2005).2.6
    
    Agreement and Plan of Merger, dated February 7, 2006, by and among
the Registrant, Meridian Acquisition Corporation, MailFrontier,
Inc., and Anne Bonaparte and Sonja Hoel, as the Representatives.
(Filed on Form 8-K (File No. 0000950134-06-003922) dated February
28, 2007).2.7
    
    Agreement and Plan of Merger by and among SonicWALL, Avalon
Acquisition Corp. and Aventail, dated June 12, 2007, including
amendment number one thereto effective July 5, 2007. (Filed on
Form 8-K (File No. 0001093885-07-000004) dated July 7,
2007).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 (Incorporated by
reference to the Registrants Annual Report on Form 10-K (File No.
000-27723) for the year ended December 31, 2005).3.3
    
    Bylaws of SonicWALL, Inc., as Amended July 24, 2007. (Filed on
Form 8-K (File No. 0001093885-07-000008) dated July 30, 2007.)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).




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##### Table of Contents



Number
    
    Description10.6
    
    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).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).




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##### Table of Contents



Number
    
    Description10.25
    
    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
    
    Lease dated December 19, 2006 between Registrant, as Tenant, and
Kolte Patil Developers Limited, as Landlord (Incorporated by
reference to the Registrants Annual Report on Form 10-K (File No.
0000950134-07-005644) for the year ended December 31, 2006).10.37
    
    Amended and Restated Issuer Repurchase Plan Agreement dated
November 3, 2006 between SonicWALL, Inc. and RBC Dain Rauscher
Inc. (Incorporated by reference to the Registrants Annual Report
on Form 10-K (File No. 0000950134-07-005644) for the year ended
December 31, 2006).10.38
    
    SonicWALL, Inc. Employee Stock Purchase Plan, dated August 24,
1999, as amended August 1, 2006 (Incorporated by reference to the
Registrants Annual Report on Form 10-K (File No.
0000950134-07-005644) for the year ended December 31, 2006).10.39
    
    Lease dated September 25, 2007 between Registrant, as Tenant, and
TMC-3011 S 52nd ST, LLC, as Landlord. (Incorporated by
reference to the Registrants Quarterly Report on Form 10-Q (File
No. 0001093885-07-000021) for the quarter ended September 30,
2007).10.40*
    
    Lease dated February 1, 2008 between Aventail Info Tech Private
Limited, a subsidiary of the Registrant, as Tenant, and Salarpuria
Softzone, as Landlord, and SPPL Property Management Private
Limited, as Maintenance Service Provider.10.41*
    
    Limited Licensed Materials License Agreement dated December
14,2007 between Registrant, as Licensee, and Linkbit, Inc.21*
    
    List of Subsidiaries.23.1*
    
    Consent of Independent Registered Public Accounting Firm31.1*
    
    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.




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##### Table of Contents



Number
    
    Description31.2*
    
    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