WATCHGUARD TECHNOLOGIES INC
S-1/A, 2000-02-14
PREPACKAGED SOFTWARE
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<PAGE>


 As filed with the Securities and Exchange Commission on February 14, 2000
                                                      Registration No. 333-95049

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                              AMENDMENT NO. 2
                                       TO
                                    FORM S-1
                             REGISTRATION STATEMENT
                        UNDER THE SECURITIES ACT OF 1933

                                ---------------
                         WATCHGUARD TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                    7372                    91-1712427
     (State or other          (Primary Standard           (I.R.S. Employer
     jurisdiction of      Industrial Classification     Identification No.)
     incorporation or            Code Number)
      organization)
                     316 Occidental Avenue South, Suite 200
                           Seattle, Washington 98104
                                 (206) 521-8340
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

                                ---------------
                              CHRISTOPHER G. SLATT
          President, Chief Executive Officer and Chairman of the Board
                         WatchGuard Technologies, Inc.
                     316 Occidental Avenue South, Suite 200
                           Seattle, Washington 98104
                                 (206) 521-8340
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                ---------------
                                   Copies to:


           Stephen M. Graham                        David A. Hubb
             Alan C. Smith                           Mark P. Cawley
             Ann L. McGuire                         Warren C. Jones
            Perkins Coie LLP                Gray Cary Ware & Freidenrich LLP
     1201 Third Avenue, 48th Floor                400 Hamilton Avenue
       Seattle, Washington 98101              Palo Alto, California 94301
             (206) 583-8888                          (650) 328-6561
                                ---------------
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
                                ---------------
  If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]_______________

  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]_______________

  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]_______________

  If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

                                ---------------
  The registrant hereby amends this registration statement on such dates as may
be necessary to delay its effective date until the registrant files a further
amendment which specifically states that this registration statement will
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until this registration statement becomes effective on such date
as the Commission, acting pursuant to Section 8(a), may determine.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

              SUBJECT TO COMPLETION, DATED FEBRUARY 14, 2000

                                3,000,000 Shares

                    [LOGO OF WATCHGUARD TECHNOLOGIES, INC.]

                                  Common Stock

                                   --------

  We are selling 1,500,000 shares of common stock and the selling stockholders
are selling an additional 1,500,000 shares of common stock. We will not receive
any of the proceeds from the shares of common stock sold by the selling
stockholders.

  Our common stock is quoted on The Nasdaq Stock Market's National Market under
the symbol WGRD. The last reported price of our common stock on February 10,
2000 was $50.00 per share.

  The selling stockholders have granted the underwriters an option to purchase
a maximum of 450,000 additional shares to cover over-allotments of shares.

  Investing in the common stock involves risks. See "Risk Factors" on page 6.

<TABLE>
<CAPTION>
                                       Underwriting   Proceeds  Proceeds to
                              Price to Discounts and     to       Selling
                               Public   Commissions  WatchGuard Stockholders
                              -------- ------------- ---------- ------------
<S>                           <C>      <C>           <C>        <C>
Per Share...................    $          $            $           $
Total.......................   $          $            $           $
</TABLE>

  Delivery of the shares of common stock will be made on or about          ,
2000.

  Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

  Credit Suisse First Boston                     Dain Rauscher Wessels


                               Wit SoundView

               The date of this prospectus is            , 2000.
<PAGE>


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

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                      Page
                                      ----
<S>                                   <C>
Prospectus Summary..................    3
Risk Factors........................    6
Forward-Looking Statements..........   14
Use of Proceeds.....................   15
Price Range of Common Stock.........   15
Dividend Policy.....................   15
Capitalization......................   16
Dilution............................   17
Selected Financial Data.............   18
Management's Discussion and Analysis
 of Financial Condition and Results
 of Operations......................   19
Business............................   31
Management..........................   53
Related-Party Transactions..........   61
Principal and Selling Stockholders..   63
Description of Capital Stock........   66
Shares Eligible for Future Sale.....   69
Underwriting........................   71
Notice to Canadian Residents........   73
Legal Matters.......................   74
Experts.............................   74
Where You Can Find More
 Information........................   74
Index to Financial Statements.......  F-1
</TABLE>

                                 ------------
<PAGE>

                               PROSPECTUS SUMMARY

  This summary highlights information that we present more fully in the rest of
this prospectus. This summary does not contain all the information you should
consider before buying shares in this offering. You should read the entire
prospectus carefully.

                         WatchGuard Technologies, Inc.

  WatchGuard is a leading provider of Internet security solutions designed to
protect enterprises or telecommuters using the Internet for electronic commerce
and communications. Our core market is small- to medium-sized enterprises, or
SMEs, those businesses, governmental entities and educational institutions with
fewer than 1,000 employees. We have recently expanded our marketing focus,
however, to include larger enterprises as well as small offices and home
offices, or SOHOs, and telecommuters, particularly those using broadband
Internet connections. Our innovative subscription-based LiveSecurity solution
enables enterprises to keep their security systems current with minimal effort
through our broadcast over the Internet of threat responses, software updates,
information alerts, expert editorials, support flashes and virus alerts.
LiveSecurity is made possible through an updatable security appliance that
executes software sent from a remote management system that receives our
LiveSecurity broadcasts. Our LiveSecurity solution is a fully integrated,
comprehensive, easy-to-install package. Our solution for SMEs and larger
enterprises features a firewall, encryption, virtual private networking, user
authentication, web surfing control and our LiveSecurity broadcast service. In
January 2000, we announced the introduction of our security solutions for SOHOs
and telecommuters, which we expect to begin shipping in the first quarter of
2000. Our solutions for SOHOs and telecommuters will feature a firewall,
virtual private networking, Internet protocol sharing and our LiveSecurity
broadcast service.

  We provide enterprises a security management choice through our two product
offerings, the LiveSecurity System and LiveSecurity for MSS, or managed
security service. Our LiveSecurity System enables enterprises to manage their
own Internet security with an easy-to-configure solution that provides point-
and-click security management. The LiveSecurity System allows enterprises to
rapidly distribute security protection from a desktop personal computer to all
security appliances on their corporate network, while retaining centralized
control and administration. Alternatively, SMEs, larger enterprises and, in the
near future, SOHOs and telecommuters, can outsource their security management
to Internet service providers, or ISPs, that have implemented our LiveSecurity
for MSS. Through LiveSecurity for MSS, enterprises can sign up with an ISP to
centrally configure, monitor and update their network security. For the ISP,
our technology greatly improves the economics of managed security services
through a scalable delivery platform that enables the ISP to remotely configure
and manage thousands of customer sites quickly, easily and economically.

  We initially incorporated in Washington in 1996 and reincorporated in
Delaware in 1997. References to "we," "our," "us" and "WatchGuard" in this
prospectus refer to WatchGuard Technologies, Inc. and its predecessor. Our
executive offices are located at 316 Occidental Avenue South, Suite 200,
Seattle, Washington 98104, and our telephone number is (206) 521-8340. Our web
site is located at http://www.watchguard.com. Any information that is included
on or linked to our web site is not a part of this prospectus.

  We own or have rights to various trademarks and trade names used in our
business. These include WatchGuard(R), Firebox(TM) and LiveSecurity(TM). This
prospectus also includes trademarks, service marks and trade names of other
companies, which remain the property of their owners.

                                       3
<PAGE>

                                  The Offering

<TABLE>
<S>                                         <C>
Common stock offered by WatchGuard......... 1,500,000 shares
Common stock offered by the selling         1,500,000 shares
 stockholders..............................
Common stock to be outstanding after this
 offering.................................. 21,136,752 shares
Use of proceeds............................ For working capital, corporate facilities
                                            relocation or expansion, possible repayment
                                            of indebtedness and other general corporate
                                            purposes, as well as the possible
                                            acquisition of or investment in
                                            complementary businesses or technologies
Nasdaq National Market symbol.............. WGRD
</TABLE>

  The number of shares of outstanding common stock is based on shares
outstanding as of December 31, 1999, and excludes

  .  524,999 shares available for grant under our stock option plan as of
     December 31, 1999;

  .  6,502,680 shares of common stock issuable upon exercise of options
     outstanding under our stock option plan as of December 31, 1999, at a
     weighted average exercise price of $4.60 per share, of which options to
     purchase 2,359,707 shares were exercisable and of which options to
     purchase 125,000 shares will be exercised by a selling stockholder in
     connection with this offering;

  .  225,000 shares of common stock issuable upon exercise of warrants
     outstanding as of December 31, 1999, at a weighted average exercise
     price of $0.92 per share, all of which were exercisable; and

  .  600,000 shares of common stock available for issuance under our employee
     stock purchase plan as of December 31, 1999.

  Except where stated otherwise, the information we present in this prospectus
assumes (1) no exercise by the underwriters of their over-allotment option, (2)
a public offering price of $56.50 per share, which is based on the average of
the high and low trading prices of our common stock on February 10, 2000, as
reported on The Nasdaq National Market, and (3) the exercise by a selling
stockholder of an option to purchase 125,000 shares, all of which will be sold
in this offering at an exercise price of $0.13 per share.

  You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may be accurate only
on the date of this document.

                                       4
<PAGE>

                             Summary Financial Data

<TABLE>
<CAPTION>
                                      Period From
                                   February 14, 1996       Year Ended
                                      (Inception)         December 31,
                                    to December 31,  -------------------------
                                         1996         1997     1998     1999
                                   ----------------- -------  -------  -------
                                     (In thousands, except per share data)
<S>                                <C>               <C>      <C>      <C>
Statement of Operations Data:
 Total revenues ..................       $ 331       $ 5,098  $11,379  $20,619
 Operating loss ..................        (462)       (4,396)  (9,000) (16,173)
 Net loss ........................        (468)       (4,334)  (9,119) (16,018)
 Basic and diluted net loss per
  share ..........................         N/A       $(17.17) $(11.34) $ (1.80)
 Shares used in calculation of
  basic and diluted net loss per
  share ..........................         N/A           252      804    8,903
 Pro forma basic and diluted net
  loss per share (unaudited)......                                     $ (0.96)
 Shares used in calculation of pro
  forma basic and diluted net loss
  per share (unaudited)...........                                      16,664
</TABLE>

  See note 7 of Notes to Financial Statements for information concerning the
calculation of pro forma basic and diluted net loss per share.

<TABLE>
<CAPTION>
                                                              December 31, 1999
                                                             -------------------
                                                             Actual  As Adjusted
                                                             ------- -----------
                                                               (In thousands)
<S>                                                          <C>     <C>
Balance Sheet Data:
 Cash, cash equivalents and marketable securities........... $26,401  $105,573
 Working capital............................................  24,395   103,950
 Total assets...............................................  41,311   120,483
 Long-term debt, less current portion.......................     --        --
 Total stockholders' equity.................................  32,245   111,800
</TABLE>

  The preceding table summarizes

    .  actual balance sheet data; and

    .  balance sheet data as adjusted to give effect to the sale by
       WatchGuard of 1,500,000 shares of common stock offered through this
       prospectus at an assumed public offering price of $56.50 per share,
       after deducting underwriting discounts and commissions and estimated
       offering expenses, the assumed exercise of 125,000 stock options by a
       selling shareholder at an exercise price of $0.13 per share, and
       WatchGuard's repayment of notes payable in the amount of $383,000.

                                       5
<PAGE>

                                  RISK FACTORS

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

We have incurred losses since inception and may never be profitable, which
could result in a decline in the value of our common stock and a loss of your
investment.

  We expect our operating losses and negative cash flows to continue. Although
our revenues have increased each year since we began operations, we do not
believe that the historical percentage growth rate of our revenues will be
sustainable as our revenue base increases. Moreover, we currently expect to
increase our operating expenses significantly in connection with

  .  expanding into new geographic markets;

  .  expanding into new product markets;

  .  continuing to develop our technology;

  .  hiring additional personnel;

  .  relocating or expanding our corporate facilities in the next six to
     eight months;

  .  upgrading our information and internal control systems; and

  .  pursuing potential strategic acquisitions.

We may never generate profits, and if we do become profitable, we may be unable
to sustain or increase profitability on a quarterly or annual basis. As a
result, the trading price of our common stock could decline and you could lose
all or part of your investment. We have incurred net losses and experienced
negative cash flows in each quarter since we began doing business. As of
December 31, 1999, we had an accumulated deficit of approximately $29.9
million.

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

  Our quarterly and yearly operating results have varied widely in the past and
will probably continue to fluctuate. For this reason, we believe that period-
to-period comparisons of our operating results are not meaningful. In addition,
our limited operating history makes predicting our future performance
difficult. As a result of these factors, our operating results for a particular
quarter or year may fall below the expectations of securities analysts and
investors, which could result in a decrease in our stock price.

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

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

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

                                       6
<PAGE>

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

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

If potential customers do not accept our LiveSecurity products and services,
our business will not succeed.

  We currently expect all future revenues to be generated through sales of our
LiveSecurity Internet security products and related services, particularly
subscription and license fees. Our success depends on market acceptance of our
LiveSecurity products and services and our ability and the ability of our ISP
partners to obtain and retain LiveSecurity customers. Our LiveSecurity products
and services, however, are relatively new and unproven. The broadcast portion
of our LiveSecurity products has been available only since February 1999 and
our LiveSecurity for MSS product has been available only since September 1998.
To receive our broadcasts, enterprises will be required to pay an annual
subscription fee, either to us or, if they obtain LiveSecurity through an ISP,
to the ISP. We are not aware of any other Internet security product that allows
enterprises to keep their security solution current by receiving broadcasts of
software updates and related information over the Internet. Enterprises may be
unwilling to pay a subscription fee to keep their Internet security up to date.
Because our broadcast service is relatively new, we cannot predict the rate at
which our customers will renew their annual subscriptions. In addition, most
businesses implementing security services have traditionally managed their own
Internet security rather than seeking the services of third-party service
providers. As a result, our products and services and the outsourcing of
Internet security to third parties may not achieve significant market
acceptance.

If our relationships with ISPs are unsuccessful, our ability to market and sell
our products and services will be limited.

  We expect a significant percentage of our revenues to be derived from our
relationships with domestic and international ISPs that implement our
LiveSecurity for MSS solution. If these ISPs are unsuccessful in marketing and
implementing our LiveSecurity for MSS solution, our operating results will be
materially harmed. Because our relationships with ISPs are relatively new, we
cannot predict the degree to which the ISPs will succeed in marketing and
selling services based on our products and services. Many of the ISPs with
which we have established relationships have not had an opportunity to fully
develop and implement service offerings incorporating LiveSecurity. We cannot
predict how long our current or potential ISP partners will take to complete
this development and implementation. Until and unless this development and
implementation is achieved, our revenues from ISPs will be limited. If the ISPs
fail to provide adequate installation, deployment and support of our products
and services, end-users could decide not to subscribe, or cease subscribing,
for managed services that use our solution. The ISPs will offer our products
and services in combination with other products and services, some of which may
be competitive with our products and services.

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

  We sell most of our products and services through value-added resellers and
distributors, and we expect our success to continue to depend in large part on
their performance. Our resellers and distributors have the ability to sell
products and services that are competitive with ours, to devote more resources
to those competitive products or to cease selling our products and services
altogether. While no single reseller or

                                       7
<PAGE>

distributor currently accounts for more than 10% of our total revenues, the
loss of or reduction in sales to several value-added resellers or a
distributor, particularly to competitive products offered by other companies,
could adversely affect our revenues.

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

  We provide some of our distributors and resellers with product return rights
for stock rotation. We also provide some of our distributors and resellers with
price protection rights for inventories of our products held by those
distributors or resellers if we lower our prices for those products. We may
experience significant returns and price adjustments for which we may not have
adequate allowances. The short life cycles of our products and the difficulty
of predicting future sales increase the risk that new product introductions or
price reductions by us or our competitors could result in significant product
returns or price adjustments. In September 1998, when we introduced the Firebox
II security appliance, we experienced an increase in returns of previous
products and product versions. Provisions for returns and allowances for the
years ended December 31, 1997, 1998 and 1999 were $0, $1,655,000 and
$1,083,000, or 0%, 13% and 5% of total revenues before returns and allowances.

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

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

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

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

                                       8
<PAGE>

have on occasion experienced delays in the scheduled introduction of new and
enhanced products and services, and we may experience delays in the future.
When we do introduce new or enhanced products and services, we may be unable to
manage the transition from the older products and services to minimize
disruption in customer ordering patterns, avoid excessive inventories of older
products and deliver enough new products and services to meet customer demand.

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

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

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

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

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

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

Failure to address strain on our resources caused by our rapid growth will
result in our inability to effectively manage our business.

  Our current systems, management and resources will be inadequate if we
continue to grow. Our business has grown rapidly in size and complexity in the
last three years. This rapid expansion has placed significant strain on our
administrative, operational and financial resources and has resulted in ever-
increasing responsibilities for our management personnel. We will be unable to
effectively manage our business if we are unable to timely and successfully
alleviate the strain on our resources caused by our rapid growth.

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

  Our operational systems have not been tested at the customer volumes that may
be required in the future. We may encounter performance difficulties when
operating with a substantially greater number of customers. In implementing our
LiveSecurity products, we have experienced periodic interruptions affecting all
or a portion

                                       9
<PAGE>

of our systems, and we believe that interruptions will continue to occur from
time to time. These interruptions could harm our ability to deliver our
products and services. An inability to add software and hardware or to develop
and upgrade existing technology or operational systems to handle increased
traffic may cause unanticipated system disruptions, slower response times and
poor customer service, including problems filling customer orders.

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

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

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

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

We may be unable to deliver our products and services if our single-source
manufacturers fail to supply hardware with acceptable quality, quantity and
cost.

  We outsource all of our hardware manufacturing and assembly for each of our
SME and larger-enterprise solutions and our SOHO and telecommuter solutions to
single-source motherboard manufacturers and assembly houses. While the single-
source vendors for our SME and larger-enterprise products have produced
hardware with acceptable quality, quantity and cost in the past, they may be
unable to meet our future demands. Our relationships with the single-source
vendor for our SOHO and telecommuter products are new and unproven. Although we
believe that we could find another manufacturer and assembly house for each of
our product lines, our operations could be disrupted if we have to switch to a
replacement vendor or if our hardware supply is interrupted for an extended
period. This could result in loss of customer orders and revenue.

We may have to reduce or cease operations if we are unable to obtain the
funding necessary to meet our working capital requirements.

  Our future revenues may be insufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable to generate
sufficient cash flow from operations or obtain funds through additional
financing, we may have to reduce some or all of our development and sales and
marketing efforts or cease operations. We believe that the net proceeds from
this offering, together with our existing cash balances and our existing lines
of credit, should be sufficient to meet our capital requirements for at least
the next 18 months. Our capital requirements depend on several factors,
however, including the rate of market acceptance of our products and services,
our ability to expand our customer base and the growth of our sales and
marketing capabilities. If our capital requirements vary from our current
plans, we may require additional financing sooner than we anticipate. Financing
may be unavailable to us when needed or on acceptable terms.

                                       10
<PAGE>

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

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

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

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

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

  .  pay damages;

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

  .  redesign products or services that incorporate infringing technology.

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

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

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

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

  Any additional governmental regulation of imports or exports or failure to
obtain required export approval of our encryption technologies could adversely
affect our international and domestic sales. The United States and various
foreign governments have imposed controls, export license requirements and
restrictions on the import or export of some technologies, especially
encryption technology. In addition, from time to time governmental agencies
have proposed additional regulation of encryption technology, such as requiring
the escrow and governmental recovery of private encryption keys. Additional
regulation of encryption technology could delay or prevent the acceptance and
use of encryption products and public networks for secure communications. This,
in turn, could result in decreased demand for our products and services.

  In addition, some foreign competitors are subject to less stringent controls
on exporting their encryption technologies. As a result, they may be able to
compete more effectively than we can in the U.S. and international Internet
security markets.

                                       11
<PAGE>

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

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

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

  Our ability to grow will depend in part on the expansion of our international
sales and operations, which are expected to continue to account for a
significant portion of our revenues. Sales to customers outside of North
America accounted for approximately 56% of our net revenues in 1997, 35% in
1998 and 50% in 1999. The failure of our resellers and distributors to sell our
products internationally would limit our ability to increase our revenues. In
addition, our international sales are subject to the risks inherent in
international business activities, including

  .  cost of customizing products for foreign countries;

  .  export and import restrictions, such as those affecting encryption
     commodities and software;

  .  difficulties in acquiring and authenticating customer information;

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

  .  regional economic and political conditions.

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

Undiscovered year 2000-related computer problems could disrupt our operations.

  We believe that the current versions of the internally developed software
technologies incorporated in our products and services, as well as our internal
management and other administrative and external information systems, are year
2000 compliant. When the century changed, we experienced no disruption to our
business operations and no product failures as a result of year 2000 compliance
issues or otherwise. Nonetheless, some year 2000 problems may not appear until
several months after January 1, 2000. As a result, we may still face claims for
undiscovered year 2000 errors in our own products or for year 2000 issues
arising from third-party products that we integrate into our products and
services or with which our systems and products exchange data. In addition, if
our suppliers, vendors or distributors encounter year 2000 software, firmware
and hardware problems, our ability to deliver our products and services could
be disrupted.

The integration of BeadleNet, LLC and any future acquisitions may be difficult
and disruptive.

  In October 1999, we acquired BeadleNet, LLC, a privately held developer of
Internet security solutions for small offices and home offices. We are
currently in the process of integrating the BeadleNet business with our
business. This integration is subject to risks commonly encountered in making
acquisitions, including

  .  loss of key personnel;

  .  difficulties in assimilating BeadleNet's technologies, products,
     personnel and operations;

  .  disruption of our ongoing business; and

  .  the inability of our sales force, consultants and development staff to
     adapt to the new product line.

  We may not successfully overcome these or any other problems encountered in
connection with the integration of BeadleNet. As part of our business strategy,
we expect to consider acquiring other companies. We may be unable to
successfully integrate the technologies, products, personnel or operation of
companies that we may acquire in the future.

                                       12
<PAGE>

The concentrated ownership of our common stock could delay or prevent a change
of control, which could reduce the market price of our common stock.

  After this offering, our directors, executive officers and their affiliates
will beneficially own, in the aggregate, approximately 57.37% of our
outstanding common stock, or 55.96% if the underwriters exercise their over-
allotment option in full. As a result, these stockholders are able to exercise
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions such as
acquisitions, and to block unsolicited tender offers. This concentration of
ownership therefore could have the effect of delaying or preventing a third
party from acquiring control over us at a premium over the then-current market
price of our common stock, which could result in a decrease in our stock price.

You may be unable to resell your shares at or above the public offering price,
and the price of our stock is volatile.

  You may be unable to resell your shares at or above the public offering price
for a number of reasons, including

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

  .  changes in analysts' earning projections or analysts' recommendations;

  .  our inability to successfully implement our business strategy;

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

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

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

Future sales of our common stock may depress our stock price.

  Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of our
common stock. After this offering, we will have outstanding 21,136,752 shares
of common stock. All the shares sold in this offering will be freely tradable.
Of the remaining 18,136,752 shares of common stock that will be outstanding
after this offering, 14,010,545 are restricted as a result of securities laws
or lock-up agreements signed by the holder and will be available for sale in
the public market as follows:

<TABLE>
<CAPTION>
                                                                    Number of
                   Date of Availability for Sale                      Shares
                   -----------------------------                    ----------
<S>                                                                 <C>
On the date of this prospectus.....................................  1,110,053
90 days after the date of this prospectus.......................... 12,491,185
At various times thereafter on the expiration of one-year holding
 periods...........................................................    409,307
</TABLE>

Credit Suisse First Boston Corporation may, in its sole discretion and at any
time without prior notice, release all or any portion of the common stock
subject to lock-up agreements.

                                       13
<PAGE>

                           FORWARD-LOOKING STATEMENTS

  Some of our statements in this prospectus, including those under the captions
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," are forward-looking statements that involve risks and
uncertainties. These forward-looking statements include statements about our
plans, objectives, expectations, intentions, future financial performance and
other statements that are not historical facts. We use words such as
anticipates, believes, expects, future and intends, and similar expressions, to
identify forward-looking statements, but the absence of these words does not
mean that the statement is not forward-looking. You should not unduly rely on
these forward-looking statements, which apply only as of the date of this
prospectus. Our actual results could differ materially from those anticipated
in the forward-looking statements for many reasons, including the risks
described under "Risk Factors."

                                       14
<PAGE>

                                USE OF PROCEEDS

  We estimate that we will receive approximately $79.5 million in net proceeds
from the sale of the 1,500,000 shares of common stock we sell in this offering
at an assumed public offering price of $56.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses we
expect to pay. We will not receive any proceeds from any shares sold by the
selling stockholders.

  We intend to use the net proceeds from this offering primarily for additional
working capital, relocation or expansion of our corporate facilities, possible
repayment of debt and other general corporate purposes, as well as the possible
acquisition of or investment in complementary businesses or technologies. We
expect to use up to $2.5 million of the net proceeds for initial leasehold
improvements and acquisition of furniture and fixtures associated with the
expected relocation and expansion of our corporate headquarters within the next
six to eight months. We may use approximately $400,000 of the net proceeds from
this offering to repay the entire outstanding balance on our term loan
facilities. As of December 31, 1999, the outstanding balances on our two term
loans were $95,000 and $288,000. The first of these term loans bears interest
at prime plus 1.5% per year, which was 10.0% as of December 31, 1999, and
matures on March 5, 2001. The second of these term loans bears interest at
prime plus 1% per year, which was 9.5% as of December 31, 1999, and matures on
December 31, 2002. The amounts that we actually spend for working capital
purposes will vary significantly depending on a number of factors, including
any future revenue growth, the amount of cash we generate from operations and
the progress of our product development efforts. Although we have no present
plans, agreements or proposals to do so, we may also use a portion of the net
proceeds to license or acquire new products or technologies or to acquire or
invest in businesses complementary to our own. As a result, we will retain
broad discretion in allocating the net proceeds from this offering. Pending
their use, we will invest the net proceeds in interest-bearing, investment-
grade securities.

                          PRICE RANGE OF COMMON STOCK

  Our common stock began trading on The Nasdaq National Market on July 30, 1999
under the symbol WGRD. The following table lists, for the periods indicated,
the high and low sales prices per share of our common stock as reported on The
Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                Price Range of
                                                                 Common Stock
                                                                ---------------
                                                                 High     Low
                                                                ------- -------
     <S>                                                        <C>     <C>
     Year Ended December 31, 1999
     Third quarter (beginning July 30, 1999)................... $ 18.38 $ 10.38
     Fourth quarter............................................   40.00   13.81
     Year Ending December 31, 2000
     First quarter (through February 10, 2000)................. $ 65.00 $ 22.63
</TABLE>

  The last reported sale price of our common stock on The Nasdaq National
Market was $50.00 per share on February 10, 2000. As of January 31, 2000, there
were approximately 80 holders of record of our common stock. This does not
include the number of persons whose stock is in nominee or "street name"
accounts through brokers.

                                DIVIDEND POLICY

  We have never paid cash dividends on our common stock. We currently intend to
retain any future earnings to fund the development and growth of our business
and therefore do not anticipate paying any cash dividends in the foreseeable
future. Furthermore, our line of credit agreement prohibits the payment of
dividends without the bank's prior written consent.

                                       15
<PAGE>

                                 CAPITALIZATION

  The following table shows

  .  our actual capitalization on December 31, 1999; and

  .  our capitalization as adjusted to reflect the sale by us of 1,500,000
     shares of common stock at an assumed public offering price of $56.50 per
     share, after deducting underwriting discounts and commissions and
     estimated offering expenses we expect to pay, the assumed exercise of
     options to purchase 125,000 shares of common stock by a selling
     shareholder at an exercise price of $0.13 per share, and our repayment
     of notes payable in the amount of $383,000.

  You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our historical
financial statements and the notes to the financial statements included in this
prospectus.

<TABLE>
<CAPTION>
                                                           December 31, 1999
                                                          ---------------------
                                                           Actual   As Adjusted
                                                          --------  -----------
                                                              (unaudited)
                                                             (In thousands)
<S>                                                       <C>       <C>
Stockholders' equity:
  Preferred stock: 10,000,000 shares authorized; no
   shares issued and outstanding......................... $    --    $    --
  Common stock: 80,000,000 shares authorized; 19,511,752
   shares issued and outstanding, actual; 21,136,752
   shares issued and outstanding, as adjusted............       19         21
  Additional paid-in capital.............................   63,694    143,247
  Stock-based compensation...............................   (1,452)    (1,452)
  Accumulated other comprehensive loss...................      (77)       (77)
  Accumulated deficit....................................  (29,939)   (29,939)
                                                          --------   --------
    Total capitalization and stockholders' equity........ $ 32,245   $111,800
                                                          ========   ========
</TABLE>

  The number of shares of common stock issued and outstanding excludes

  .  524,999 shares available for grant under our stock option plan as of
     December 31, 1999;

  .  6,502,680 shares of common stock issuable upon exercise of options
     outstanding under our stock option plan as of December 31, 1999, at a
     weighted average exercise price of $4.60 per share, of which options to
     purchase 2,359,707 shares were exercisable and of which options to
     purchase 125,000 shares will be exercised by a selling stockholder in
     connection with this offering;

  .  225,000 shares of common stock issuable upon exercise of warrants
     outstanding as of December 31, 1999, at a weighted average exercise
     price of $0.92 per share, all of which were exercisable; and

  .  600,000 shares of common stock available for issuance under our employee
     stock purchase plan as of December 31, 1999.

  The number of shares of common stock issued and outstanding, as adjusted,
includes 125,000 shares of common stock that will be issued to a selling
stockholder upon exercise of stock options immediately before this offering and
that will be sold in this offering.

                                       16
<PAGE>

                                    DILUTION

  If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share and the
net tangible book value per share after this offering. We calculate net
tangible book value per share by dividing the net tangible book value, which is
total assets less intangible assets and total liabilities, by the number of
outstanding shares of common stock.

  Our net tangible book value at December 31, 1999 was $26.4 million, or $1.35
per share of common stock. After giving effect to the sale by us of 1,500,000
shares of common stock in this offering at an assumed public offering price of
$56.50 per share, less underwriting discounts and commissions and estimated
offering expenses we expect to pay, and after giving effect to the issuance of
125,000 shares of common stock to a selling stockholder upon the exercise of
stock options at an exercise price of $0.13 per share in connection with this
offering, our net tangible book value at December 31, 1999 would have been
$105.9 million, or $5.01 per share. This represents an immediate increase in
the net tangible book value of $3.66 per share to existing stockholders and an
immediate dilution of $51.49 per share to new investors, or approximately 91%
of an assumed public offering price of $56.50 per share. The following table
illustrates this per-share dilution:

<TABLE>
   <S>                                                              <C>   <C>
   Assumed public offering price per share.........................       $56.50
     Net tangible book value per share as of December 31, 1999..... $1.35
     Increase per share attributable to new investors..............  3.66
                                                                    -----
   Net tangible book value per share after this offering...........         5.01
                                                                          ------
   Dilution per share to new investors.............................       $51.49
                                                                          ======
</TABLE>

  The following table shows, as of December 31, 1999, the number of shares of
common stock purchased from us, the total cash consideration paid to us and the
average price per share paid by existing stockholders and by new investors
purchasing common stock in this offering at the assumed public offering price.
The number of shares purchased by new investors includes 125,000 shares of
common stock to be issued to and sold by a selling stockholder upon the
exercise of stock options in connection with this offering.

<TABLE>
<CAPTION>
                                Shares Purchased  Total Consideration   Average
                               ------------------ -------------------- Price Per
                                 Number   Percent    Amount    Percent   Share
                               ---------- ------- ------------ ------- ---------
   <S>                         <C>        <C>     <C>          <C>     <C>
   Existing stockholders...... 19,511,752   92.3% $ 59,059,000   41.1%  $ 3.03
   New investors..............  1,625,000    7.7    84,766,000   58.9    52.16
                               ----------  -----  ------------  -----
     Total.................... 21,136,752  100.0% $143,825,000  100.0%
                               ==========  =====  ============  =====
</TABLE>

  The foregoing table assumes that no options or warrants were exercised after
December 31, 1999, other than the exercise by the selling stockholder of
options to purchase 125,000 shares of common stock in connection with this
offering. As of December 31, 1999, we had outstanding options and warrants to
purchase shares of common stock as follows, which includes an option to
purchase 125,000 shares of common stock that will be exercised in connection
with this offering:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                              Number of Exercise
                                                               Shares    Price
                                                              --------- --------
       <S>                                                    <C>       <C>
       Stock option plan..................................... 6,502,680  $ 4.60
       Warrants..............................................   225,000    0.92
                                                              ---------
                                                              6,727,680    4.48
                                                              =========
</TABLE>

  Additionally, there were 524,999 option shares available for future grant
under our stock option plan and 600,000 shares available for issuance under our
employee stock purchase plan. There will be further dilution to new investors
to the extent that option and warrant holders exercise these outstanding
options and warrants or any options or warrants we grant in the future.

                                       17
<PAGE>

                            SELECTED FINANCIAL DATA

  The statement of operations data for the years ended December 31, 1997, 1998
and 1999, and the balance sheet data as of December 31, 1998 and 1999 are
derived from our financial statements, which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the period from February 14, 1996 (inception)
to December 31, 1996 and the balance sheet data as of December 31, 1996 and
1997 are derived from audited financial statements not included in this
prospectus. When you read this selected financial data, it is important that
you also read the historical financial statements and related notes included in
this prospectus, as well as the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The historical results are not necessarily indicative of future
results. See note 7 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing pro forma basic
and diluted net loss per share.

<TABLE>
<CAPTION>
                                   Period From            Year Ended
                                February 14, 1996        December 31,
                                 (Inception) to   ----------------------------
                                December 31, 1996   1997      1998      1999
                                ----------------- --------  --------  --------
                                   (In thousands, except per share data)
<S>                             <C>               <C>       <C>       <C>
Statement of Operations Data:
 Revenues, net:
 Product.......................      $  329       $  4,975  $ 10,678  $ 17,329
 Service.......................           2            123       701     3,290
                                     ------       --------  --------  --------
   Total revenues..............         331          5,098    11,379    20,619
 Cost of revenues..............         104          1,610     3,925     7,964
                                     ------       --------  --------  --------
 Gross margin..................         227          3,488     7,454    12,655
 Operating expenses:
 Sales and marketing...........         224          4,369     8,519    13,512
 Research and development......         274          2,192     4,442     7,118
 General and administrative....         191          1,323     2,454     3,646
 Stock-based compensation......         --             --      1,039       926
 Acquired in-process
  technology and amortization
  of intangible assets
  acquired.....................         --             --        --      3,626
                                     ------       --------  --------  --------
   Total operating expenses....         689          7,884    16,454    28,828
                                     ------       --------  --------  --------
 Operating loss................        (462)        (4,396)   (9,000)  (16,173)
 Interest income (expense),
  net..........................          (6)            62      (119)      155
                                     ------       --------  --------  --------
 Net loss......................      $ (468)      $ (4,334) $ (9,119) $(16,018)
                                     ======       ========  ========  ========
 Basic and diluted net loss per
  share........................         N/A       $ (17.17) $ (11.34) $  (1.80)
                                     ======       ========  ========  ========
 Shares used in calculation of
  basic and diluted net loss
  per share....................         N/A            252       804     8,903
                                     ======       ========  ========  ========
 Pro forma basic and diluted
  net loss per share
  (unaudited)..................                                       $  (0.96)
                                                                      ========
 Shares used in calculation of
  pro forma basic and diluted
  net loss per share
  (unaudited)..................                                         16,664
                                                                      ========
</TABLE>

<TABLE>
<CAPTION>
                                                        December 31,
                                                -------------------------------
                                                 1996    1997   1998     1999
                                                ------  ------ -------  -------
                                                       (In thousands)
<S>                                             <C>     <C>    <C>      <C>
Balance Sheet Data:
 Cash, cash equivalents and marketable
  securities................................... $  232  $  603 $ 1,712  $26,401
 Working capital (deficit) ....................   (464)    658    (274)  24,395
 Total assets..................................    597   3,303   9,032   41,311
 Total stockholders' equity (deficit)..........   (318)  1,382     881   32,245
</TABLE>

                                       18
<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

  WatchGuard is a leading provider of Internet security solutions designed to
protect enterprises or telecommuters using the Internet for electronic commerce
and communications. Our core market is small- to medium-sized enterprises, or
SMEs, and we have recently expanded our marketing focus to include larger
enterprises as well as small offices and home offices, or SOHOs, and
telecommuters, particularly those using broadband Internet connections. Our
innovative subscription-based LiveSecurity solution broadcasts threat
responses, software updates, information alerts, expert editorials, support
flashes and virus alerts over the Internet, enabling enterprises to keep their
security systems current with minimal effort.

  Since our inception, we have invested heavily in the development of our
products and services. In September 1996, we introduced our initial Internet
security appliance and began selling our products both domestically and
internationally. In 1997, we significantly expanded our sales force, adding 12
sales employees to recruit indirect channel partners around the world, and
expanded our distribution efforts in the European and Asia/Pacific markets. In
September 1998, we launched our managed security service offering for ISPs. We
also continued to recruit and hire additional employees in marketing,
development, technical support and finance and invested in our operational
infrastructure to support our growth. In February 1999, we launched the
broadcast portion of our LiveSecurity products. In July 1999, we completed the
initial public offering of our common stock. In October 1999, we acquired
BeadleNet, LLC, a developer of Internet security solutions for SOHOs, and
formed our new broadband Internet security division. In January 2000, we
announced the introduction of our security solutions for SOHOs and
telecommuters, which we expect to begin shipping in the first quarter of 2000,
and in the second quarter of 2000, we expect to introduce MSS solutions for
SOHOs and telecommuters.

  Our revenues were $5.1 million in 1997, our first full year of operations.
Our revenues totaled $11.4 million in 1998, representing a 123% increase over
1997, and grew to $20.6 million in 1999, representing an 81% increase over
1998. Product revenues as a percentage of total revenues were 98% in 1997, 94%
in 1998 and 84% in 1999. Service revenues, although small, are growing and are
expected to be a significant component of our revenues in the future as we
expand our LiveSecurity subscription-based broadcast service. Service revenues
as a percentage of total revenues were 2% in 1997, 6% in 1998 and 16% in 1999.
As a result of our investments in our worldwide sales and distribution
channels, development of new products and services, brand development and our
operational infrastructure, we have incurred net losses in each fiscal quarter.
As of December 31, 1999, we had an accumulated deficit of approximately $29.9
million. We anticipate significant growth in our operating expenses as we
continue to expand our business, particularly with respect to the expected
expansion of our corporate facilities in the next six to eight months. In the
future, however, we expect our operating expenses to begin to decline as a
percentage of total revenues.

Sources of Revenues and Revenue Recognition Policy

  We generate revenues through

  .  sales of products and service subscriptions through our indirect
     distribution partners at a discount from list price, which historically
     has averaged approximately 40%;

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

  .  from time to time, sales of service subscription renewals directly to
     our enterprise customers at list price.

  Product revenues include perpetual software license fees and sales of our
security appliance. Service revenues include fees for access to our
LiveSecurity broadcast service for product updates, security threat responses,
general security information and technical support. Service revenues also
include annual fees for our

                                       19
<PAGE>

LiveSecurity for MSS, which allows our ISP customers access to the LiveSecurity
broadcast service and the ability to manage and update a specific number of
their customers' security appliances. To date, service subscription renewals
directly from our enterprise customers have not been material.

  We recognize revenues only when a contract or agreement has been executed,
delivery has occurred, the fee is fixed and determinable and we believe
collection is probable. We recognize product revenues upon shipment and service
subscription revenues ratably on a monthly basis, generally over a one-year
period.





Recent Acquisition

  In October 1999, we acquired substantially all of the assets of BeadleNet,
LLC for $9.6 million. The acquisition cost was comprised of

  .  $3.4 million cash, paid at closing;

  .  335,931 unregistered shares of WatchGuard common stock with a fair
     market value of approximately $4.9 million, issued at closing;

  .  an additional $1.0 million in contingent consideration, comprised of
     $400,000 in cash and 20,189 unregistered shares of WatchGuard common
     stock with a fair market value of $600,000, which became due on
     completion of specified technology items in late December 1999 and was
     paid in January 2000; and

  .  estimated direct acquisition costs of $300,000.

  The aggregate purchase price was allocated, based on estimated fair values on
the acquisition date, as follows:

<TABLE>
     <S>                                                             <C>
     Inventory and equipment........................................ $   74,000
     Intangibles:
       Acquired workforce...........................................    204,000
       Trade names..................................................    409,000
       Developed technology.........................................    503,000
       Goodwill.....................................................  4,985,000
                                                                     ----------
         Total intangibles..........................................  6,101,000
     Acquired in-process research and development...................  3,381,000
                                                                     ----------
     Total purchase price........................................... $9,556,000
                                                                     ==========
</TABLE>

  We determined values assigned to acquired in-process research and
development, developed technology and trade names using a discounted cash flow
analysis. The value we assigned to the workforce in place was based on
replacement cost.

  To determine the value of in-process research and development, we considered,
among other factors, the state of development of each project, the time and
cost needed to complete each project, expected income and associated risks,
which included the inherent difficulties and uncertainties in completing the
project and achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. As a result of
this analysis, we assigned in-process research and development amounts to
projects that had not yet reached technological feasibility and do not have
alternative future uses. We expensed the entire $3,381,000 allocated to
acquired in-process research and development on the date of acquisition.

  The in-process projects, which were to be replacement products for those
products being sold at the acquisition date and which were included in the
acquired developed technology, were designed to provide a low-cost firewall and
networking solution for personal computers using existing telephone wiring and
external connections to the Internet using a cable or digital subscribing line,
or DSL, modem. At the time of the acquisition, most of the hardware development
for the products had been completed. However, the software

                                       20
<PAGE>


architecture for virtual private network integration and the scalability of
installing the virtual private network architecture into a DSL technology had
not yet been completed.

  We completed production-ready prototypes in late December 1999 and introduced
the new products in January 2000 for delivery during the first quarter of 2000.
The total costs to complete the in-process projects after the acquisition date
were approximately $635,000.

  To determine the value of the developed technology, we discounted the
expected future cash flows of the existing technology product, taking into
account risks related to the characteristics and applications of each product,
existing and future markets, and assessments of the life-cycle stage of each
project. Based on this analysis, we capitalized the existing technology that
had reached technological feasibility.

  We assigned to the identified intangible assets lives ranging from two to
four years and to goodwill a life of five years. Amortization expense for these
intangibles was $245,000 in the fourth quarter of 1999.

  In connection with the acquisition, we entered into an employment agreement
and a stock vesting agreement with Mr. Beadle. Pursuant to the employment
agreement, we granted Mr. Beadle an option, vesting over a period of four
years, to purchase 250,000 shares of WatchGuard common stock at an exercise
price of $14.44 per share, the fair value of the stock on the date the option
was granted. In consideration of some of Mr. Beadle's obligations in the
employment agreement, including his agreement not to compete with WatchGuard
for a period of three years after his employment terminates, we also issued to
Mr. Beadle 51,948 unregistered shares of WatchGuard common stock, valued at
$750,000 on the closing date of the acquisition. We have recorded the value of
this stock as deferred stock compensation expense and are amortizing the value
of the deferred stock compensation on a straight-line basis over the two-year
employment agreement period. Amortization of this deferred stock compensation
was $73,000 in the fourth quarter of 1999. Under the stock vesting agreement,
34,632 of these shares will be subject to forfeiture if Mr. Beadle's employment
is terminated for cause or if he resigns. One half of these shares will no
longer be subject to forfeiture on October 19, 2000 and the remainder will no
longer be subject to forfeiture on October 19, 2001.

Results of Operations

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

<TABLE>
<CAPTION>
                                                           Year Ended
                                                          December 31,
                                                        ---------------------
                                                        1997    1998    1999
                                                        -----   -----   -----
<S>                                                     <C>     <C>     <C>
Revenues:
 Product...............................................  97.6 %  93.8 %  84.0 %
 Service...............................................   2.4     6.2    16.0
                                                        -----   -----   -----
   Total revenues...................................... 100.0   100.0   100.0
Cost of revenues.......................................  31.6    34.5    38.6
                                                        -----   -----   -----
Gross margin...........................................  68.4    65.5    61.4
Operating expenses:
 Sales and marketing...................................  85.6    74.9    65.5
 Research and development..............................  43.0    39.0    34.5
 General and administrative............................  26.0    21.6    17.7
 Stock-based compensation..............................   --      9.1     4.5
 Acquired in-process technology and amortization of
  intangible assets acquired...........................   --      --     17.6
                                                        -----   -----   -----
   Total operating expenses............................ 154.6   144.6   139.8
                                                        -----   -----   -----
Operating loss......................................... (86.2)  (79.1)  (78.4)
Interest income (expense), net.........................   1.2    (1.0)    0.7
                                                        -----   -----   -----
Net loss............................................... (85.0)% (80.1)% (77.7)%
                                                        =====   =====   =====
</TABLE>

                                       21
<PAGE>


Years Ended December 31, 1998 and 1999

Total Revenues

  Total revenues, which consist of product revenues and service revenues,
increased from $11.4 million in 1998 to $20.6 million in 1999, an increase of
81%. During these periods, no one customer accounted for 10% or more of total
revenues. The increase in total revenues was primarily due to increases in
sales volume caused by increased distribution in the European, Asia/Pacific and
North American markets. Total international revenues represented approximately
35% of total revenues in 1998 and 50% in 1999.

  Product revenues include (1) the perpetual software license fees for our
security management system and the sale of our security appliance as part of
the LiveSecurity System and (2) the sale of our NOC, or network operations
center, security suite software license and our security appliance as part of
LiveSecurity for MSS. Product revenues increased from $10.7 million in 1998 to
$17.3 million in 1999, an increase of 62%. As a percentage of total revenues,
product revenues decreased from 94% in 1998 to 84% in 1999. We do not believe
that the historical percentage growth rates of product revenues will be
sustainable as our revenue base increases. Historically, we have generated the
majority of our revenues from our product sales, which, until the introduction
of LiveSecurity for MSS in the third quarter of 1998, consisted primarily of
the sale of our LiveSecurity System for the enterprise. Product revenues from
LiveSecurity for MSS are growing and are expected to be a more significant
component of our revenues in the future.

  Service revenues include the annual fee for our LiveSecurity broadcast
service, which is sold as a part of the LiveSecurity System and LiveSecurity
for MSS. Service revenues increased from $701,000 in 1998 to $3.3 million in
1999, an increase of 369%. As a percentage of total revenues, service revenues
increased from 6% in 1998 to 16% in 1999.

  Revenues from LiveSecurity for MSS have been increasing in amount during each
quarter since we introduced the product. Total revenues for the LiveSecurity
System increased from $10.4 million in 1998 to $17.7 million in 1999, while
total revenues from LiveSecurity for MSS increased from $1.0 million in 1998 to
$2.9 million in 1999. As a percentage of total revenues, LiveSecurity for MSS
revenues increased from 9% in 1998 to 14% in 1999. During the fourth quarter of
1999, LiveSecurity for MSS revenues reached 16% of total revenues. The increase
in LiveSecurity for MSS revenues, both in dollars and as a percentage of total
revenues, is attributable to the growing number of enterprises seeking security
protection through their ISPs and an increase in the number of ISPs with which
we contract to offer the LiveSecurity for MSS service.

  We established a returns and allowances reserve in 1998 to address the return
rights and pricing protection rights of some of our customers, primarily
related to anticipated returns originating from the introduction of a new
version of our security appliance, the Firebox II, during the last half of
1998. The provision for sales returns and allowances was $1.7 million, or 13%
of total revenues before returns and allowances, in 1998 and $1.1 million, or
5% of total revenues before returns and allowances, in 1999. Returns and
allowances before that time were immaterial. The provision in 1999 as compared
to 1998, as a percentage of total revenues, reflects a reduction in the
expected returns and pricing protection allowances based on actual results over
the last several quarters and no recent introduction of replacement products.

Cost of Revenues

  Cost of revenues consists of product and service costs, which include the
costs of manufacturing our security appliance, product packaging, third-party
product licensing fees and our technical support organization, including costs
associated with our LiveSecurity broadcast service. Historically, cost of
revenues has increased in total dollar amount and as a percentage of total
revenues in each year. Cost of revenues increased from $3.9 million in 1998 to
$8.0 million in 1999. As a percentage of total revenues, cost of revenues
increased from 35% in 1998 to 39% in 1999.

                                       22
<PAGE>


  The dollar increases in cost of revenues were primarily due to increases in
sales volume. The increase in cost of revenues as a percentage of total
revenues reflects an increase in the cost of manufacturing our Firebox II
security appliance and an increase in personnel-related costs of our service
organization, but is offset by the increased leverage of our service costs
relative to an increasing rate of service revenues. In the third quarter of
1998, we released an enhanced version of our security appliance, the Firebox
II, which incorporated additional features required to support our LiveSecurity
for MSS product. The Firebox II is more expensive to manufacture than the
previous version of our security appliance, which increased our cost of
revenues. Over time, as volume levels increase, we expect the unit cost to
manufacture the Firebox II to decrease. However, we cannot predict if or when
this reduction will occur.

  We expect service costs to increase in total dollar amount as our enterprise
customer base expands and our LiveSecurity for MSS product for ISPs is
deployed. Depending on our product and service mix, which may affect our
margins, we expect our gross margin to remain at or slightly below our fourth
quarter 1999 level for the short term. For the longer term, as revenues from
service subscriptions increase and become a greater percentage of total
revenues, we expect our gross margin to increase.

Operating Expenses

  Sales and Marketing. Sales and marketing expenses include salaries,
commissions and related expenses and some variable marketing expenses,
including public relations costs, marketing collateral and trade show expenses.
Overall sales and marketing expenses increased from $8.5 million in 1998 to
$13.5 million in 1999, an increase of 59%. As a percentage of total revenues,
sales and marketing expenses decreased from 75% in 1998 to 66% in 1999. The
dollar increase in sales and marketing expenses was primarily due to
recruiting, training and supporting our domestic and international resellers
and distributors and, to a lesser extent, to establishing brand recognition of
our products and services. Specifically, major components of the increase
included

  .  an increase in payroll and related expenses from $3.9 million to $6.6
     million;

  .  an increase in travel expenses from $1.4 million to $2.5 million; and

  .  an increase in marketing costs from $2.0 million to $3.4 million.

Sales and marketing expenses in 1998 included a one-time charge of $470,000 for
a common stock warrant issued to a customer.

  The decrease in sales and marketing expenses as a percentage of total
revenues reflects both increased productivity of and efficiencies in managing
our indirect channel network and realization of our previous investments to
expand distribution, capture market share and establish brand recognition of
our products. We expect to see a gradual reduction in sales and marketing
expenses as a percentage of total revenues.

  Research and Development. Research and development expenses consist of
salaries, computing equipment and software tools, nonrecurring costs associated
with our security appliance prototypes and payment of designers and
contractors. Research and development expenses increased from $4.4 million in
1998 to $7.1 million in 1999, an increase of 60%. As a percentage of total
revenues, research and development expenses decreased from 39% in 1998 to 35%
in 1999. The dollar increase in research and development expenses reflects the
growth of our research and development organization to expand and enhance our
enterprise product line, development and enhancement of our LiveSecurity for
MSS product and our efforts in researching and evaluating new and emerging
security threats through our LiveSecurity broadcast service. Specifically,
major components of the increase included

  .  an increase in payroll and related expenses from $2.5 million to $4.9
     million;

  .  an increase in contract labor and consulting services from $445,000 to
     $555,000; and

  .  an aggregate of $562,000 in costs incurred by our broadband Internet
     security division in connection with completion of our SOHO and
     telecommuter products originating from the acquisition of BeadleNet.

                                       23
<PAGE>

  We will continue to increase our research and development expenses in total
dollar amounts to enhance and expand our current product offerings, develop new
products and enhance our rapid response team and advisory council, which
analyze new security vulnerabilities and threats and provide continuing
education to our employees on Internet security. We expect that research and
development expenses will continue to increase in total dollar amounts but will
decrease as a percentage of total revenues.

  General and Administrative. General and administrative expenses include costs
of executive, human resource, finance and administrative support functions,
provision for uncollectable accounts and legal and accounting professional
services. General and administrative expenses increased from $2.5 million in
1998 to $3.6 million in 1999, an increase of 49%. As a percentage of total
revenues, general and administrative expenses decreased from 22% in 1998 to 18%
in 1999. The dollar increase in general and administrative expenses reflects
the expansion of our infrastructure to manage the growth of our operations.
Specifically, major components of the increase included

  .  an increase in payroll and related expenses from $786,000 to $1.4
     million; and

  .  an increase in professional fees from $218,000 to $672,000, related to
     legal and accounting costs incurred primarily in conjunction with the
     revision and implementation of our employee benefit plans and the
     expansion of our international operations.

  We expect that these expenses will continue to increase in total dollar
amounts but will decrease as a percentage of total revenues.

  Stock-Based Compensation. Deferred compensation is recorded for the
difference between the exercise price of options we granted and the deemed fair
value for financial reporting purposes of our common stock during the periods
in which the options were granted and for the value of common stock issued in
connection with an employment agreement associated with the acquisition of
BeadleNet. We recorded $912,000 of deferred compensation in 1999, which
included $750,000 related to the same employment agreement, and $2.5 million of
deferred compensation in 1998, which included $628,000 in stock-based
compensation related to options exchanged for services from a former employee.
Deferred compensation is amortized over the vesting periods of the options.
Amortization of deferred compensation, or stock-based compensation, expenses
were $1.0 million in 1998 and $926,000 in 1999. The allocation of the stock-
based compensation expense associated with the functional operating expense
categories of sales and marketing, research and development and general and
administrative was $148,000, $829,000 and $62,000, respectively, for 1998 and
$307,000, $491,000 and $128,000, respectively, for 1999.

Interest Income (Expense)

  Interest expense of $203,000 in 1998 resulted from borrowings on our bank
line of credit and our equipment term loan, and was offset by $84,000 of
interest income generated from our investment of proceeds from the sale of
preferred stock. Interest expense of $485,000 in 1999 resulted from borrowings
on our bank line of credit, our equipment term loan and our convertible note
agreements, and was offset by $640,000 of interest income generated from our
investment of proceeds from the sale of preferred stock in private transactions
and the sale of common stock in our initial public offering.

Income Taxes

  We have experienced losses since inception, resulting in a net operating loss
carryforward position of approximately $24.0 million as of December 31, 1999.
These carryforwards, if not utilized, will begin to expire in 2011, and may be
subject to limitations under Section 382 of the Internal Revenue Code.

Years Ended December 31, 1997 and 1998

Total Revenues

  Total revenues increased from $5.1 million in 1997 to $11.4 million in 1998,
an increase of 123%. During these periods, no one customer accounted for 10% or
more of total revenues. Product revenues increased from

                                       24
<PAGE>


$5.0 million in 1997 to $10.7 million in 1998, an increase of 115%. As a
percentage of total revenues, product revenues decreased from 98% in 1997 to
94% in 1998. Service revenues increased from $123,000 in 1997 to $701,000 in
1998. As a percentage of total revenues, service revenues increased from 2% in
1997 to 6% in 1998.

  The increase in total revenues was primarily due to increases in sales volume
caused by increased distribution in the European and Asia/Pacific markets and
increased market awareness of our products in North America. Total
international revenues represented 56% of total revenues in 1997 and 35% in
1998.

  The establishment of reserves for sales returns and allowances negatively
impacted our revenues for 1998. The provision for sales returns and allowances
in 1998 was $1.7 million, or approximately 13% of total revenues before giving
effect to the provision. The returns and allowances reserve was established in
1998 primarily to address return rights and price protection rights for some of
our customers, including anticipated returns originating from the introduction
of the Firebox II. Before 1998, we did not experience any material returns and
therefore provided no reserve.

Cost of Revenues

  Cost of revenues increased from $1.6 million in 1997 to $3.9 million in 1998.
As a percentage of total revenues, cost of revenues increased from 32% in 1997
to 35% in 1998. The dollar increases in cost of revenues were primarily due to
increases in sales volume. The increase in cost of revenues as a percentage of
total revenues was primarily due to an increase in the cost of manufacturing
our security appliance. As discussed above, the Firebox II, which we released
in the third quarter of 1998, is more expensive to manufacture than the
previous version of our security appliance.

Operating Expenses

  Sales and Marketing. Sales and marketing expenses increased from $4.4 million
in 1997 to $8.5 million in 1998. As a percentage of total revenues, sales and
marketing expenses decreased from 86% in 1997 to 75% in 1998.

  The dollar increase in sales and marketing expenses was primarily due to
recruiting, training and supporting our domestic and international resellers
and distributors and, to a lesser extent, to establishing brand recognition of
our products and services. Specifically, components of the increase from 1997
to 1998 included

  .  an increase in payroll and related expenses from $2.0 million to $3.9
     million;

  .  an increase in travel expenses from $771,000 to $1.4 million;

  .  an increase in marketing costs from $1.1 million to $2.0 million; and

  .  a $470,000 charge for a common stock warrant in 1998 issued to a
     customer.

  The decrease in 1998 sales and marketing expenses as a percentage of total
revenues reflects increased productivity of and efficiencies in managing our
indirect channel network and our utilization of our prior years' investment to
expand distribution, capture market share and establish brand recognition of
our products.

  Research and Development. Research and development expenses increased from
$2.2 million in 1997 to $4.4 million in 1998. As a percentage of total
revenues, research and development expenses decreased from 43% in 1997 to 39%
in 1998.

  The dollar increase in research and development expenses reflects the growth
of our research and development organization to expand our enterprise product
line, development of our LiveSecurity for MSS product and our efforts to
respond to new and emerging security threats through our LiveSecurity broadcast
service. Specifically, components of the increase from 1997 to 1998 included an
increase in payroll and related expenses from $1.5 million to $2.5 million.

                                       25
<PAGE>


  General and Administrative. General and administrative expenses increased
from $1.3 million in 1997 to $2.5 million in 1998. As a percentage of total
revenues, general and administrative expenses decreased from 26% in 1997 to 22%
in 1998.

  The dollar increases in general and administrative expenses primarily reflect
the increase in personnel and related expenses and other overhead items in
connection with the expansion of our business. Specifically, components of the
increase from 1997 to 1998 included

  .  an increase in payroll and related expenses from $516,000 to $786,000;

  .  an increase in the provision for uncollectable amounts from $122,000 to
     $418,000, reflecting additional exposure related to the overall growth
     of our operations; and

  .  an increase in professional fees from $150,000 to $218,000.

  The decrease in expenses as a percentage of total revenues from 1996 to 1998
reflects increased efficiencies of scale resulting from a larger revenue base.

  Stock-Based Compensation. Amortization of deferred compensation totaled $1.0
million for 1998. The allocation of the stock-based compensation expense
associated with the functional operating expense categories of sales and
marketing, research and development and general and administrative was
$148,000, $829,000 and $62,000, respectively.

Interest Income (Expense)

  Interest income of $88,000 in 1997 was generated from our investment of
proceeds from the sale of preferred stock, and was partially offset by $26,000
of interest expense that resulted from borrowings. Interest expense of $203,000
in 1998 resulted from borrowings on our bank line of credit and equipment term
loan, and was partially offset by $84,000 of interest income generated from our
investment of proceeds from the sale of preferred stock.

                                       26
<PAGE>

Quarterly Results of Operations

  The following tables provide our unaudited results of operations both in
dollar amounts and expressed as a percentage of total revenues for each quarter
in the six-quarter period ended December 31, 1999. In our opinion, this
unaudited information has been prepared on the same basis as our audited
financial statements. This information includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented, when read in conjunction with our
financial statements and the notes to the financial statements. The results of
operations for any quarter are not necessarily indicative of our future
results.

<TABLE>
<CAPTION>
                                           Three Months Ended
                         ------------------------------------------------------------
                         Sept. 30,  Dec. 31,  Mar. 31,  June 30,  Sept. 30,  Dec. 31,
                           1998       1998      1999      1999      1999       1999
                         ---------  --------  --------  --------  ---------  --------
                                             (In thousands)
<S>                      <C>        <C>       <C>       <C>       <C>        <C>
Statement of Operations
 Data:
Revenues, net:
  Product............... $  2,544   $  3,274  $  3,387  $  3,831  $  4,614   $ 5,497
  Service...............      205        339       551       806       907     1,026
                         --------   --------  --------  --------  --------   -------
    Total revenues......    2,749      3,613     3,938     4,637     5,521     6,523
Cost of revenues........    1,038      1,396     1,635     1,846     2,085     2,398
                         --------   --------  --------  --------  --------   -------
Gross margin............    1,711      2,217     2,303     2,791     3,436     4,125
Operating expenses:
  Sales and marketing...    2,258      2,447     2,841     3,242     3,612     3,817
  Research and
   development..........    1,233      1,430     1,426     1,614     1,700     2,378
  General and
   administrative.......      622        864       912       862       842     1,030
  Stock-based
   compensation.........      312        587       253       258       186       229
  Acquired in-process
   technology and
   amortization of
   intangible assets
   acquired.............      --         --        --        --        --      3,626
                         --------   --------  --------  --------  --------   -------
    Total operating
     expenses...........    4,425      5,328     5,432     5,976     6,340    11,080
                         --------   --------  --------  --------  --------   -------
Operating loss..........   (2,714)    (3,111)   (3,129)   (3,185)   (2,904)   (6,955)
Interest income
 (expense), net.........       24        (60)      (84)     (263)      118       384
                         --------   --------  --------  --------  --------   -------
Net loss................ $ (2,690)  $ (3,171) $ (3,213) $ (3,448) $ (2,786)  $(6,571)
                         ========   ========  ========  ========  ========   =======
</TABLE>

<TABLE>
<CAPTION>
                                           Three Months Ended
                         ----------------------------------------------------------
                         Sept. 30, Dec. 31,  Mar. 31,  June 30,  Sept. 30, Dec. 31,
                           1998      1998      1999      1999      1999      1999
                         --------- --------  --------  --------  --------- --------
<S>                      <C>       <C>       <C>       <C>       <C>       <C>
Statement of Operations
 Data:
Revenues, net:
  Product...............    92.5 %   90.6 %    86.0 %    82.6 %     83.6 %    84.3 %
  Service...............     7.5      9.4      14.0      17.4       16.4      15.7
                           -----    -----     -----     -----      -----    ------
    Total revenues......   100.0    100.0     100.0     100.0      100.0     100.0
Cost of revenues........    37.8     38.6      41.5      39.8       37.8      36.8
                           -----    -----     -----     -----      -----    ------
Gross margin............    62.2     61.4      58.5      60.2       62.2      63.2
Operating expenses:
  Sales and marketing...    82.1     67.7      72.1      69.9       65.4      58.5
  Research and
   development..........    44.9     39.6      36.2      34.8       30.8      36.4
  General and
   administrative.......    22.6     23.9      23.1      18.6       15.3      15.8
  Stock-based
   compensation.........    11.3     16.2       6.4       5.5        3.4       3.5
  Acquired in-process
   technology and
   amortization of
   intangible assets
   acquired.............     --       --        --        --         --       55.6
                           -----    -----     -----     -----      -----    ------
    Total operating
     expenses...........   161.0    147.5     137.9     128.9      114.8     169.8
                           -----    -----     -----     -----      -----    ------
Operating loss..........   (98.8)   (86.1)    (79.5)    (68.7)     (52.6)   (106.6)
Interest income
 (expense), net.........     0.9     (1.7)     (2.1)     (5.7)       2.1       5.9
                           -----    -----     -----     -----      -----    ------
Net loss................   (97.9)%  (87.8)%   (81.6)%   (74.3)%    (50.5)%  (100.7)%
                           =====    =====     =====     =====      =====    ======
</TABLE>

                                       27
<PAGE>

Liquidity and Capital Resources

  Since our inception, we have financed our operations primarily through
private placements of convertible preferred stock, and most recently through
the sale of common stock in our initial public offering. To date, net proceeds
from private placements of preferred stock and our initial public offering
totaled $54.0 million. We have also financed our operations through equipment
financing, traditional accounts receivable financing arrangements, bridge
financing arrangements and convertible notes.

  We have a working-capital revolving line of credit with a bank, secured by
our accounts receivable. The amount available under this facility is limited to
the greater of our borrowing base or $4.5 million. For purposes of this loan,
the borrowing base means the sum of 75% of the net amount of our eligible
domestic accounts receivable and 50% of the net amount of our eligible foreign
accounts receivable. As of December 31, 1999, we had no borrowings on this line
of credit, which expires in November 2000 and bears interest at prime plus 2%
per year. At December 31, 1999, our borrowing base was $2.1 million. We are
currently renegotiating this line of credit.

  We also have two term-loan facilities with the same bank to finance new
capital equipment purchases. The first facility closed to further advances on
March 5, 1998 and is being repaid in 36 equal monthly payments beginning April
5, 1998. The loan, which bears interest at prime plus 1.5% per year, matures on
March 5, 2001, at which time all unpaid principal and interest will be due and
payable. The second facility closed to further advances on December 31, 1998
and is being repaid in 36 equal monthly payments beginning January 1999. The
loan, which bears interest at prime plus 1% per year, matures on December 31,
2002, at which time all unpaid principal and interest will be due and payable.
As of December 31, 1999, we had a combined principal balance of $383,000 due
under these term loans.

  The agreements under which the line of credit and term loans were established
contain financial covenants, including a provision requiring us to maintain
specified financial ratios. At December 31, 1999, we were not in compliance
with one of the financial covenants, but we obtained a waiver for
noncompliance.

  As of December 31, 1999, we had $26.4 million in cash, cash equivalents and
short-term investments, invested primarily in high-quality money market
accounts and marketable securities. We believe that the market risk arising
from our holdings of these financial instruments is not material. Our working
capital as of December 31, 1999 was $24.4 million.

Operating Activities

  Our operating activities resulted in net cash outflows of $7.6 million in
1998 and $7.9 million in 1999. The operating cash outflows in 1998 and 1999
resulted primarily from significant investments in sales and marketing and
research and development, all of which led to operating losses. Cash used in
operating activities was net of noncash charges totaling $3.9 million in 1998
and $6.6 million in 1999. These noncash charges were primarily associated with
depreciation and amortization of capital assets, provisions for bad debts and
sales returns and allowances, compensation charges resulting from the issuance
of stock options and warrants and a one-time charge for acquired in-process
research and development associated with the acquisition of BeadleNet. Cash
used in operating activities from working capital components impacting
operating activities was $2.4 million in 1998, and cash provided from working
capital components for operating activities was $1.5 in 1999. In 1999 there
were large fluctuations within some major working capital components, as
described below.

  Receivables. Our receivables increased from $3.5 million at December 31, 1998
to $3.8 million at December 31, 1999, while revenues increased from $3.6
million in the three months ended December 31, 1998 to $6.5 million in the
three months ended December 31, 1999. We implemented enhanced credit and
collection processes during 1999 that contributed to improved collection
periods. Days sales outstanding, or DSO, were 86 days for the quarter ended
December 31, 1998 compared to 52 days for the quarter ended December 31, 1999.
Based upon sales mix, timing differences arising from varying payment cycles
and terms in our customer

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<PAGE>


agreements, we expect our DSO to generally range from 50 days to 70 days.
Reserves for uncollectable accounts were $449,000 at December 31, 1998 and
$177,000 at December 31, 1999. The decrease reflects reduced exposure
attributed to our improved credit and collection processes referred to above.
Our returns and allowance reserve was $615,000 at December 31, 1998 and
$550,000 at December 31, 1999, and reflects our estimate of returns and
allowances associated with the return rights and price protection rights of
some of our customers. The reserve may fluctuate from time to time depending
upon the timing of product introductions and pricing program changes.

  Deferred revenue. Deferred revenue increased from $1.8 million at December
31, 1998 to $4.2 million at December 31, 1999, an increase of 130%. The
increase reflects service subscriptions and annual client licenses associated
with the continued growth of product sales and, to a lesser extent, with
service subscription renewals. Deferred revenue from service subscriptions and
annual client licenses is generally amortized ratably over a one-year period.

Investing Activities

  Cash used in investing activities totaled $1.0 million in 1998 and $30.1
million in 1999, and reflects capital expenditures for computing equipment and
furniture, payments made in connection with the acquisition of BeadleNet and
investment in marketable securities of the net proceeds from our initial public
offering.

Financing Activities

  Cash provided by financing activities totaled $9.7 million in 1998 and $38.2
million in 1999. These activities primarily reflect proceeds from the sale of
preferred stock in 1998, borrowings on our line of credit during 1998 and 1999
and proceeds from our initial public offering in 1999, offset to some extent by
borrowing and repayments under our bank line of credit and various bridge
financing arrangements.

  We believe that existing cash and cash equivalents balances and our line of
credit, together with the net proceeds from this offering, will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
for at least the next 18 months. The underlying assumed levels of revenues and
expenses may prove to be inaccurate, however, and we may need to seek
additional funding through public or private financings or other arrangements
before that time.

Quantitative and Qualitative Market Risks

Interest Rate Risk

  We do not hold derivative financial instruments or derivative equity
securities in our investment portfolio. Our cash equivalents consist of high-
quality securities, as specified in our investment policy guidelines. Our
policy limits the amount of credit exposure to any one issue or issuer to a
maximum of 20% of the total portfolio or $5 million per issuer, with the
exception of treasury securities and money market funds, which are exempt from
this size limitation. Our policy limits all investments to those that mature in
two years or less, with the average maturity of our investments equal to one
year or less. The securities in our investment portfolio are subject to
interest-rate risk and will decrease in value if interest rates increase. Due
to the short-term nature of our investments and our investment policies and
procedures, however, we believe that the risk associated with interest-rate
fluctuations related to these securities does not pose a material risk to
WatchGuard.

Foreign Currency Risk

  All of our sales and the majority of our expenses are currently denominated
in U.S. dollars. As a result, we have not experienced significant foreign
exchange gains and losses. While we conducted some transactions in foreign
currencies during 1999 and expect to continue to do so in the future, we do not
anticipate that foreign exchange gains or losses will be material to
WatchGuard. Although we have not engaged in foreign currency hedging to date,
we may do so in the future.

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<PAGE>

Year 2000 Compliance

  We believe that we have successfully rendered our products, internal
management and other administrative systems and external information systems
year 2000 compliant. In addition, we have surveyed the vendors of the third-
party technologies we incorporate into our products and services and applied
updates or arrangements to correct potential year 2000 compliance problems.
Since January 1, 2000, we have experienced no disruptions in our business
operations as a result of year 2000 compliance problems or otherwise, and we
have received no reports of any year 2000 compliance problems with our products
and services. We are continuing to monitor third-party vendors of incorporated
technologies for additional recommended year 2000 upgrades, which we will apply
as soon as they become available. To date, the total cost of our efforts to
address year 2000 compliance has not been material.

  Nonetheless, some problems related to year 2000 risks may not appear until
several months after January 1, 2000. Year 2000 issues could include problems
with our own products and services or with third-party products or technology
that we use or with which our products exchange data. Any problems that are not
identified and corrected successfully and completely could adversely affect our
business. We expect that the cost to fix any year 2000 problems that may be
identified, however, will involve internal labor-hours and will not be
material.


                                       30
<PAGE>

                                    BUSINESS

Overview

  WatchGuard is a leading provider of Internet security solutions that protect
enterprises or telecommuters using the Internet for electronic commerce and
communications. Our core market is small- to medium-sized enterprises, or SMEs,
and we have recently expanded our marketing focus to include larger enterprises
as well as small offices and home offices, or SOHOs, and telecommuters,
particularly those using broadband Internet connections. According to
The Yankee Group, SMEs represent 98% of U.S. businesses, and account for
approximately 50% of the gross national product. SMEs are increasingly
utilizing the Internet to maintain a competitive advantage and to compete
effectively against enterprises with greater resources. International Data
Corporation, or IDC, estimated that, in the United States alone, approximately
3.5 million SMEs would be connected to the Internet by the end of 1999,
increasing to approximately 4.7 million by the end of 2000.

  Our innovative subscription-based LiveSecurity solution broadcasts threat
responses, software updates, information alerts, expert editorials, support
flashes and virus alerts over the Internet, enabling enterprises to keep their
security systems current with minimal effort. The dynamic nature of our
solution is made possible through an updatable security appliance that executes
software sent from the remote management system receiving our LiveSecurity
broadcasts. Our comprehensive, fully integrated LiveSecurity solution for SMEs
and larger enterprises features a firewall, encryption, user authentication,
virtual private networking, web surfing control and our LiveSecurity broadcast
service. In January 2000, we announced the introduction of our security
solutions for SOHOs and telecommuters, which we expect to begin shipping in the
first quarter of 2000. Our solutions for SOHOs and telecommuters will feature a
firewall, virtual private networking, Internet protocol, or IP, sharing and our
LiveSecurity broadcast service. We make installing, configuring and monitoring
our solutions easy with point-and-click security management.

  With our recent acquisition of BeadleNet, LLC and the formation of our new
broadband Internet security division, we have expanded our product line to
include security solutions for SOHOs and telecommuters, particularly those
individuals or SOHOs using broadband Internet connections. We will market this
expanded product line to both SOHOs that operate as a stand-alone business and
SOHOs and telecommuters that act as a branch office or extension of a larger
organization and share corporate resources through remote access to their
company's computing systems. According to IDC, in the United States alone,
approximately 10.9 million home offices will have broadband Internet access at
the end of 2000, up from an estimated 636,000 at the end of 1998.

  Our recently introduced higher-performance security appliance for larger
enterprises enables the WatchGuard LiveSecurity System to support up to 5,000
simultaneously authenticated users and over 50 simultaneously connected virtual
private networks, or VPNs, and delivers faster VPN throughput. The expanded
capacity represents a ten-fold increase in the number of possible connected
users and a five-fold increase in VPN throughput as compared to our security
appliance designed for SMEs. This higher-performance security appliance,
combined with our new security solution designed for SOHOs and telecommuters
and our existing SME security solution, will allow us to offer larger
enterprises integrated solutions to protect the main office, large and small
branch offices, and employees who telecommute.

  Our LiveSecurity solution gives enterprises a security management choice. An
enterprise can manage its own Internet security through our LiveSecurity System
or outsource its security management to an ISP implementing our LiveSecurity
for MSS. Enterprises using the LiveSecurity System may rapidly distribute
security protection from their desktop personal computer to all security
appliances on their corporate network, while retaining centralized control and
administration. Enterprises that do not want to be directly involved with their
security management may outsource the function to an ISP. For the ISP, our
technology improves the economics of managed security services through a
scalable delivery platform that enables the ISP to remotely configure and
manage thousands of sites quickly, easily and economically.

  We sell our Internet security solutions directly and indirectly to ISPs and
indirectly to end-users through more than 310 distributors and resellers
covering 54 countries. We have established relationships with a

                                       31
<PAGE>


number of ISPs to implement LiveSecurity for MSS, including AlphaNet Solutions,
Inc., AT&T Asia/Pacific Group Ltd., GTE Internetworking, Inc., Internet
Initiative Japan, Internet Security Systems, Inc., Interpath Communications,
Inc., MIS Corporate Defense Solutions, Nextcom K.K., PSINet Inc., sunrise
communications AG, Verio, Inc. and You Tools Corporation/FASTNET. As of
December 31, 1999, we had shipped over 12,000 of our security appliances.

Industry Background

The growth of the Internet

  The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
IDC estimates that there were over 38 million web users in the United States
and over 86 million worldwide at the end of 1997. IDC projects the number of
web users to increase to over 177 million users in the United States and 502
million worldwide by the end of 2003. IDC also estimates that the number of
customers buying goods and services on the Internet will grow from
approximately 15 million worldwide in 1997 to 182 million in 2003, with the
value of electronic commerce transactions growing from $15 billion to over $1.3
trillion in the same period.

  The growth in the Internet provides enterprises, regardless of size, with new
revenue opportunities through global distribution of products and services and
with significant reductions of sales and marketing costs through automation and
instantaneous access. Because of its affordability, global reach and
versatility, the Internet is a particularly powerful and necessary tool for
enterprises. Enterprises are increasingly required to establish secure Internet
access to facilitate and support strategic business objectives. In a
marketplace that is becoming more competitive, enterprises are increasingly
utilizing new business tools and initiatives such as remote access, e-commerce,
online customer service and supply chain management to gain competitive
advantage.

The need for Internet security

  The increased importance of electronic commerce and the proliferation and
growth of corporate intranets have dramatically increased the openness of
computer networks, with the Internet becoming a widely accepted platform for
many business-to-business and direct-to-consumer transactions. The
accessibility and the relative anonymity of users in open computing
environments, however, make systems and the integrity of information stored on
them increasingly vulnerable to security threats. Open systems present inviting
opportunities for computer hackers, curious or disgruntled employees,
contractors and competitors to compromise or destroy sensitive information
within the system or to disrupt operations and Internet access. In addition,
open computing environments are complex and typically involve a variety of
hardware, operating systems and applications supplied by a variety of vendors,
making these networks difficult to manage, monitor and protect from
unauthorized access. With the advent of "always on" broadband Internet
connections that leave a user's computer much more vulnerable to security
breaches than a traditional dial-up connection, even SOHOs and telecommuters
face security threats similar to those faced by larger enterprises connected to
the Internet.

  The annual Computer Security Institute survey conducted in early 1999
highlights the potential risks faced by organizations connected to the
Internet. The CSI poll of 521 computer security specialists at U.S.
corporations, government agencies, financial institutions and universities
revealed that 62% of respondents had experienced security breaches within the
past 12 months. The damage caused by a security breach is often difficult to
quantify and may include the loss of irreplaceable proprietary information or
data, damage to business reputation or undetected theft or alteration of
information. The 163 organizations in the CSI poll that were able to quantify
losses reported an average total loss of over $650,000 per organization.
Breached computer security has become such an extensive problem that the U.S.
Federal Bureau of Investigation has recently established the National
Infrastructure Protection Center to prevent and respond to cyber attacks on the
nation's infrastructure.


                                       32
<PAGE>

 The Internet security challenge

  Internet security begins with a firewall, a security component of varying
complexity designed to provide a barrier and control the flow of information
between a company's internal network and the Internet. Firewalls, however, are
often difficult to install, must be configured by skilled personnel and, to
maximize effectiveness, must be continually monitored and updated. A
comprehensive security solution also typically integrates several other
sophisticated security components, such as virtual private networking, which
secures encrypted communications between two points on the Internet, and access
control mechanisms. These components use a complex mixture of technologies,
including user authentication, passwords, packet filters, proxies and
encryption.

  Because enterprises increasingly depend on the Internet for external and
internal communications and for facilitating and conducting business, they need
comprehensive Internet security solutions. Traditional Internet security
solutions, however, are generally difficult to install and expensive to
maintain. Additionally, the technological complexity of traditional solutions
introduces a new set of risks--their many interacting components can easily be
misconfigured. The CSI poll revealed that more than 75% of the reported
successful break-ins took place despite the presence of a firewall. Enterprises
therefore face increasing pressure to hire trained security personnel to ensure
that traditional security solutions are installed and maintained properly. The
scarcity of skilled network and Internet security personnel, however, makes the
cost of hiring in-house personnel prohibitive for many enterprises,
particularly SMEs and SOHOs. Because of the financial and technical resources
necessary to implement, maintain and update these complex security solutions,
they tend to be better suited for larger enterprises than for SMEs, SOHOs and
individual telecommuters.

  Traditional security solutions are also expensive to maintain because they
must be updated continually to maximize effectiveness. These security solutions
tend to be static, while the dangers against which they must protect are
dynamic, with new types of intrusion schemes and other security threats and
vulnerabilities emerging constantly. The Computer Emergency Response Team, a
federally funded research and development center, handled 8,268 security
incidents in 1999, an average of nearly one per hour and more than double the
3,734 security incidents handled in 1998. Even if updates are available to
allow an enterprise's security systems to respond to the changing security
landscape, the enterprise needs dedicated security experts to proactively
identify, obtain and manually implement these updates quickly and correctly.

 The Internet security gap

  The expense and complexity of traditional security solutions incorporating a
firewall puts protection out of the reach of millions of enterprises that do
not have the resources to adopt these solutions, contributing to a security
gap. Comprising 98% of U.S. businesses, SMEs exemplify this gap. Despite the
obvious and compelling reasons for Internet security, most SMEs on the Internet
do not even have a firewall.

  IDC estimated that approximately 3.5 million SMEs in the United States would
be connected to the Internet by the end of 1999. IDC projected, however, that
from 1995, when IDC reports that firewalls first became widely available, until
the end of 1999, less than 450,000 firewalls would be shipped, leaving more
than 3 million SMEs without a firewall. This security gap is increasing, with
IDC projecting that in the United States more than 1.1 million new SMEs will
connect to the Internet in the year 2000, but less than 260,000 firewalls will
be shipped during the same period. We believe that the security gap for SMEs
results from the cost and complexity of traditional comprehensive solutions,
combined with the ineffectiveness of lower-end firewall solutions, which lead
many SMEs to choose not to adopt any Internet security solution. Moreover, many
enterprises that have installed security systems continue to experience
significant security breaches because their systems are either configured
improperly or are not timely or properly updated in response to the latest
security threats. SOHOs and telecommuters that adopt "always-on" broadband
Internet connections, particularly those accessing the corporate resources of a
larger enterprise, face a similar security threat but may have more limited
resources to dedicate to an Internet security solution.

  Enterprises require an easy-to-use, highly effective, fully integrated
Internet security solution with low installation and maintenance costs that can
be installed quickly and kept up to date easily. In addition, many

                                       33
<PAGE>

enterprises would rather outsource the management of any Internet security
system to vendors such as ISPs. ISPs, however, face challenges in economically
delivering affordable security services that can be rapidly deployed to
thousands of customer sites and easily managed from a central location.

The WatchGuard Solution

  WatchGuard's LiveSecurity products and services offer a fundamentally new
approach to Internet security. We provide enterprises with a comprehensive,
easy-to-use and cost-effective Internet security solution that we keep up to
date through our innovative Internet-based broadcast service. Our solution has
the following key benefits:

<TABLE>
 <C>                             <S>
 Comprehensive, fully            For SMEs and larger enterprises, we offer a
 integrated security tailored to comprehensive security solution integrated
 the needs of the user           into a single package that includes (1) a
                                 firewall, (2) virtual private networking for
                                 secure, encrypted communication between remote
                                 offices, mobile employees and trading
                                 partners, (3) authentication functions that
                                 identify network users and define user-group
                                 security policies, (4) web surfing control and
                                 (5) our LiveSecurity broadcast service. Our
                                 recently announced solution for SOHOs and
                                 telecommuters will offer a more affordable,
                                 comprehensive and integrated security solution
                                 that includes (1) a firewall, (2) virtual
                                 private networking, (3) IP sharing and (4) our
                                 LiveSecurity broadcast service.

 Dynamic protection              Our subscription-based Internet broadcast
                                 service is designed to keep our security
                                 solutions up to date with (1) security threat
                                 responses that specifically address newly
                                 discovered security vulnerabilities or hacker
                                 techniques, (2) software updates, (3)
                                 information alerts concerning current news in
                                 Internet security, (4) expert editorials
                                 containing Internet security-related feature
                                 articles, (5) support flashes with answers to
                                 commonly asked questions about our products
                                 and services and (6) virus alerts containing
                                 information about the latest virus threats and
                                 access to Trend Micro's virus protection
                                 products. Our SOHO and telecommuter solutions
                                 will initially include access only to security
                                 threat responses and software updates. We
                                 expect to offer the remaining LiveSecurity
                                 broadcast service channels as an option for
                                 SOHOs and telecommuters in the second quarter
                                 of 2000.

 Easy installation and use       We offer (1) a security appliance with plug-in
                                 installation, (2) management and security
                                 software with an automated installation guide
                                 and (3) point-and-click centralized
                                 management. These features make it easy for
                                 the non-security professional to install,
                                 configure and monitor our security system and
                                 to receive and implement our LiveSecurity
                                 broadcasts.

 Viable ISP outsourcing          Through its centralized configuration and
                                 management capabilities, LiveSecurity for MSS
                                 enables ISPs to provide outsourced Internet
                                 security services to thousands of customers
                                 quickly, easily and at a price enterprises can
                                 afford.

 Affordability                   We minimize the overall ownership cost of our
                                 security solution with easy deployment and
                                 management that reduces the requirements for
                                 information technology personnel. Our
                                 broadcast updating enables users of
                                 LiveSecurity to address their security needs
                                 by leveraging our team of security experts.
</TABLE>

                                       34
<PAGE>

Strategy

  Our objective is to be the leading provider of Internet security systems and
services to enterprises worldwide. Our strategy to achieve this goal is based
on the following key elements:

Extend our SME market leadership position in comprehensive security into the
large-enterprise and SOHO/telecommuter markets.

  We intend to maintain our leadership position in comprehensive security for
SMEs by expanding and enhancing our Internet security product and service
offerings. In September 1999, we introduced our security solution for larger
enterprises and, in January 2000, we announced the introduction of our new
security solutions for SOHOs and telecommuters, which we expect to begin
shipping in the first quarter of 2000. We expect to deliver new versions of our
major products, including products designed for the emerging broadband Internet
connectivity market, approximately two to three times per year. We were the
first, and remain the leader, in developing updatable security appliances that
execute software sent from a remote management system. Our architecture allows
enterprises to quickly and easily deploy new products and services from the
central management system, which utilizes a familiar Windows- or web-based
interface. Our distributed architecture also facilitates the scalability
necessary for ISPs to provide our products and services to their customers at a
price enterprises can afford. We intend to continue to enhance our technology
and architecture, hire additional network and Internet security experts and
continue to invest in product development and product and service enhancements.

Expand our strategic relationships with leading Internet service providers.

  To capitalize on the desire of many enterprises to outsource their Internet
security management, we have established relationships with industry-leading
ISPs, including AlphaNet, FASTNET, GTE, Interpath, ISS, PSINet and Verio in the
United States, MIS and sunrise in Europe and AT&T Asia/Pacific Group Ltd., IIJ
and Nextcom in the Asia/Pacific region. We intend to continue to establish
similar relationships with ISPs and expect that these relationships will
facilitate the widespread adoption of our LiveSecurity solution by enabling us
to capitalize on the brand recognition and customer bases of the ISPs. In
addition, these strategic relationships should enhance WatchGuard brand
awareness and provide a powerful endorsement of our security technology and
services. For example, GTE and PSINet use LiveSecurity for MSS to provide
managed security services to their customer bases, and their marketing of these
services prominently features the WatchGuard brand.

Expand and enhance our innovative LiveSecurity broadcast service.

  We have created an innovative LiveSecurity solution that broadcasts threat
responses, software updates, information alerts, expert editorials and support
flashes over the Internet directly to our subscribers and ISP partners. We plan
to expand and enhance our LiveSecurity broadcast content, and therefore the
value of our subscription service, through additional investment in three
areas:

  .  continued expansion of our rapid response team of internal security
     experts;

  .  expansion of our LiveSecurity advisory council of industry experts,
     including the addition of two outside experts by the end of 2000; and

  .  continued development of one to four third-party industry relationships
     that will allow us to broadcast third-party software and content to our
     subscribers.

As we expand and enhance our broadcast content, we plan to ensure that it
remains easy to implement and use by enterprises and ISPs.

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<PAGE>

Continue to expand WatchGuard brand awareness.

  We believe that we have an opportunity to make the WatchGuard brand
synonymous with Internet security worldwide. We intend to increase our
telemarketing and direct mail programs to companies that fit our target
subscriber profile. We also plan to develop our web site as a security portal
for enterprises with the goal of establishing www.watchguard.com as the first
location enterprises will visit with questions about Internet security. Our web
site currently features links to the web sites of PSINet and GTE. We plan to
add additional links in 2000 and to further integrate our web sites with the
web sites of our ISP partners. In addition, we intend to continue to invest in
marketing programs jointly executed with our distribution partners around the
world. These programs include WatchGuard web site content and links placed on
many of our reseller sites, regionally targeted public relations activities and
events worldwide, and use of the WatchGuard brand name when ISP partners market
their managed security services.

Continue to expand worldwide sales and distribution.

  We intend to continue to expand our international distribution capabilities
to allow any enterprise with an Internet connection to purchase the WatchGuard
LiveSecurity solution, no matter where the enterprise is located. Our goal is
to make our security solutions the easiest to purchase and deploy, whether by
the enterprise or by the ISP. We plan to expand our base of resellers,
distributors and ISP partners and make our solution available for purchase
through our resellers' web sites. We will continue to invest in web-based
training programs that educate our worldwide resellers and subscribers about
our product and service features and benefits and that assist our customers in
deploying our products and services.

  We have not determined a schedule for the continuing expansion of our
international distribution capabilities or for implementing other components of
our strategy. The timing for executing these strategies will depend on market
conditions, the availability of strategic opportunities and the availability of
management resources.

Products and Services

  Our comprehensive LiveSecurity solutions include an integrated suite of
security and management software, an Internet security appliance and a dynamic
broadcast service to keep security defenses current. Enterprises may use our
LiveSecurity System to internally manage their Internet security or elect to
outsource security management to an ISP implementing our LiveSecurity for MSS.

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<PAGE>

The LiveSecurity System for enterprise-managed security.

  We designed our LiveSecurity System for use by enterprises that want to
manage their own Internet security. With the LiveSecurity System, an enterprise
can quickly and affordably deploy comprehensive security protection to all
sites on its network, while retaining centralized control and administration.
Our LiveSecurity broadcast service enables enterprises to augment their
information technology staff with our security experts, which we believe
substantially reduces personnel costs. Every new LiveSecurity System includes a
one-year subscription to our broadcast service.

   [Diagram depicting the LiveSecurity System of enterprise-managed security:
  WatchGuard sends LiveSecurity broadcast over the Internet to the Firebox and
 the security manager at SME headquarters; the SME security manager manages the
  Fireboxes at the large and small branch offices and the telecommuter's home
from SME headquarters while a mobile user connects to company headquarters with
                                     a VPN]

  SMEs and larger enterprises

  For SMEs and larger enterprises, the LiveSecurity System has three key
components: our security management system software with security and
management features, our security appliance and a subscription to our Internet-
based broadcast service.

  Security features. The LiveSecurity System for SMEs and larger enterprises
contains the following security features:

  .  Firewall. Our firewall controls incoming and outgoing traffic between
     the Internet and an enterprise's systems and data. The firewall
     incorporates access control and detection and blocking features.

  .  Authentication. Our authentication features identify network users and
     define user and user-group security policies.

  .  Virtual private networking. Our software enables enterprises to create
     virtual private networks by using encryption technology to allow data to
     flow securely across the Internet between two

                                       37
<PAGE>

     predetermined points. Our remote user VPN secures communications with
     telecommuters and traveling employees, while our branch office VPN
     secures communications with branch offices and trading partners. Our
     virtual private networking solutions implement industry standard
     protocols.

  .  Web surfing control. Our web-blocking feature enables enterprises to
     restrict site access privileges by user, group, time of day, site type
     or particular site.

  Management features. Our Windows-based software manages and monitors an
enterprise's Internet security with an intuitive, point-and-click user
interface.

  .  Integrated suite of system management tools. Our security management
     system packages, configures and deploys security software, security
     policies and the operating system to an enterprise's security
     appliances. Featuring logging and notification functions and real-time
     monitoring and historical reporting of network, service and bandwidth
     usage, our management tools allow management of multiple security
     appliances from a single location.

  .  Automated installation guide. Our automated installation guide enables
     enterprises to install our system and define user and user-group
     security policies in as quickly as 30 minutes.

  Security appliance. Our security appliances for SMEs and larger enterprises,
the WatchGuard Firebox II, Firebox II Plus and Firebox II Plus with FastVPN,
are standalone Internet security appliances that run the security functions of
the LiveSecurity System. The security capabilities of these security appliances
come entirely from the operating system, security software and security
policies directed to them from the remote management software. They simply plug
in and reside between an enterprise's Internet router and its internal network
of servers and workstations. These Fireboxes have three independent, separately
monitored connections: one to the enterprise's network, one to the Internet and
one to the enterprise's public network for hosting web and email servers. The
LiveSecurity System encrypts communications between the security appliance and
the management software on the in-house manager's desktop.

  Broadcast service. We keep our security solution current and our customers
informed through a subscription-based broadcast service that securely transmits
new security content over the Internet directly to the in-house manager's
desktop computer. Our broadcasts include

  .  Threat responses. When our rapid response team discovers and neutralizes
     a security vulnerability or new hacker technique, we broadcast software
     that specifically addresses that security threat.

  .  Software updates. We broadcast software updates that enhance the
     function of the LiveSecurity System as a whole.

  .  Information alerts. We notify our customers of breaking Internet
     security news and upcoming enhancements.

  .  Expert editorials. Our team of industry-leading security advisors offer
     their views and provide continuing education on the rapidly changing
     field of Internet security.

  .  Support flashes. Interactive technical tutorials provide our customers
     with answers to frequently asked questions about managing the
     LiveSecurity System and information about new software updates.

  .  Virus alerts. Trend Micro provides information on the latest virus
     threats and offers access to its virus protection products.

  SOHOs and telecommuters

  Our recently announced LiveSecurity System for SOHOs and telecommuters has
three key components: security and management software, our security appliance
and a subscription to our Internet-based broadcast service.

                                       38
<PAGE>

  Security features. The LiveSecurity System for SOHOs and telecommuters
contains the following security features:

  .  Firewall. Our firewall controls incoming and outgoing traffic between
     the Internet and a SOHO's or telecommuter's systems and data. The
     firewall incorporates access control, detection and blocking features
     and IP sharing.

  .  Virtual private networking. Our software enables SOHOs and telecommuters
     to create virtual private networks by using encryption technology to
     allow data to flow securely across the Internet between two
     predetermined points.

  Management features. Our web-based security management software manages and
monitors the SOHO's or telecommuter's Internet security with an intuitive,
point-and-click user interface.

  .  Integrated suite of system management tools. Our web-based security
     management system packages, configures and deploys security software,
     security policies and the operating system to a SOHO's or telecommuter's
     security appliance.

  .  Automated installation guide. Our automated installation guide enables a
     SOHO or telecommuter to install our system and define a security policy
     in as quickly as 15 minutes.

  Security appliance. Our security appliances for SOHOs and telecommuters, the
WatchGuard Firebox SOHO and Firebox Telecommuter, are standalone Internet
security appliances that run the security functions of the LiveSecurity System.
The security capabilities of these security appliances come entirely from the
operating system, security software and security policies directed to them from
the remote management software. They simply plug in and reside between the
SOHO's or telecommuter's Internet router and cable or digital service line
modem and its internal network of servers and workstations. These Fireboxes
have two independent, separately monitored connections: one to the SOHO's or
telecommuter's network and one to the Internet.

  Broadcast service. We will keep our SOHO and telecommuter security solutions
current and our customers informed through a subscription-based broadcast
service that initially will transmit over the Internet to the SOHO manager's or
telecommuter's desktop computer the threat response and software update
channels of our LiveSecurity broadcast service for SMEs and larger enterprises.
We expect to offer the remaining channels of our LiveSecurity broadcast service
as an option for SOHOs and telecommuters in the second quarter of this year.

                                       39
<PAGE>

LiveSecurity for MSS for Internet service providers

  To serve the needs of SMEs and larger enterprises that want to outsource
their Internet security and the needs of ISPs that want to provide this
service, we have created LiveSecurity for MSS. We expect to introduce a
LiveSecurity for MSS solution for SOHOs and telecommuters in the second quarter
of 2000. LiveSecurity for MSS allows an ISP to centrally configure, monitor and
update the Internet security of thousands of managed customers. The ISP can
economically deliver a full range of security services while their subscribing
customers enjoy the benefit of our up-to-date protection at an affordable
price.

    [Diagram depicting LiveSecurity for MSS for Internet service providers:
 WatchGuard sends LiveSecurity broadcast to the ISP security manager at the ISP
 network operations center; ISP security manager manages and monitors Fireboxes
              at the premises of the ISP's subscribing customers.]

  LiveSecurity for MSS has three main components: our network operations center
security suite software with security and management features, our security
appliances and our LiveSecurity broadcast service. In addition, we offer
optional monitoring software for the ISP's customers.

  Security features. LiveSecurity for MSS includes the same comprehensive set
of security features offered with our LiveSecurity System for SMEs and larger
enterprises.

  Management features. Centrally located at the ISP's network operations
center, our global policy manager software provides security intelligence and
configuration for all customer sites under management. Our software allows the
ISP to create and store various security policy configurations for different
customer groups or service plans. Our scalable WatchGuard event processor
software provides monitoring and reporting for customer sites.

  Security appliances. One or more of our security appliances resides on the
ISP customer's premises. The appliances receive and implement the operating
system, security software and security policies that the ISP sends.

  Broadcast service. Through our LiveSecurity broadcast service, the ISP's
network operations center receives threat responses, system updates,
information alerts, expert editorials and support flashes. The ISP then updates
the security policy of its customers and transmits these policy updates over
its network to those customers.

                                       40
<PAGE>

  Monitoring software for the ISP's customers. The optional Firebox monitor
software allows the ISP's customer to view its network activity on-site while
otherwise leaving the management of its Internet security to the ISP.

  Receiving the benefits of our security solution through an ISP gives an
enterprise a number of added advantages. ISPs

  .  monitor and manage customers' security 24 hours a day, 7 days a week;

  .  define and implement professional, customized Internet security
     policies;

  .  automatically install software updates and threat responses;

  .  regularly review customers' security and provide detailed reporting and
     analysis; and

  .  mitigate the up-front cost of security system purchase and setup.

Implementation

  The WatchGuard LiveSecurity System. Once an enterprise registers on one of
our LiveSecurity web sites, its registration information is automatically
transferred to our LiveSecurity database. Upon verification, the enterprise can
download and install or access our security management system software and
begin receiving our LiveSecurity broadcasts. The security management system
software configures the LiveSecurity System, implements security protection and
manages the installed security features with a point-and-click user interface.
Our LiveSecurity broadcasts go directly to the desktop of the person
responsible for Internet security, who follows our easy installation
instructions to send the updated security software, security policy or
operating system to all of the enterprise's security appliances for automatic
implementation. We send our LiveSecurity broadcasts using technologies such as
digital certificates and public key encryption or emails containing links to
the secured broadcast server.

  LiveSecurity for MSS. Our scalable network operations center, or NOC,
security suite software enables an ISP to economically and efficiently
configure, monitor and update the Internet security of thousands of managed
customers from its network operations center. The ISP uses our global policy
manager's security policy templates to streamline initialization and
configuration of security policies to match the ISP's specific service
offerings and customer needs. The global policy manager then sends the desired
operating system, security software or policy configuration to subscribing
customers' security appliances. The security appliances implement the new
security policies and forward activity logs to WatchGuard event processor
software, which monitors network activity and reports back to the global policy
manager. Communications between the network operations center, the event
processors and the security appliances are encrypted, and we have implemented
automatic failover features to protect valuable log information against being
lost due to hardware or network failure. ISP personnel at the network
operations center use our suite of real-time monitoring tools to track each
security appliance on the ISP's network and transmit LiveSecurity broadcast
content to all ISP subscribers. In addition, the ISP can offer its customers
Firebox monitor software, a Windows-based monitoring tool that allows
subscribers to view their network activity and defenses in real time while
leaving management of the system to the ISP.

  Customer service. We make customer service a priority. Our staff of support
representatives serves our end-users and ISP partners by phone and email from
6:00 a.m. to 5:00 p.m. Pacific standard time, Monday through Friday, excluding
national holidays. As of December 31, 1999, we had 21 customer support
representatives. We also offer 24-hour-a-day, 7-day-a-week web support tools.
Our computerized customer center manages all support requests and allows
customers to check resolution status on-line. We provide on-line answers to
frequently asked questions about our products, descriptions of how to configure
WatchGuard products to work with other products and other technical
information.

                                       41
<PAGE>

The WatchGuard team of experts

  Rapid response team. Our rapid response team identifies, analyzes and
generates responses to new Internet security threats. To identify new threats,
the team continually monitors a wide variety of Internet sources related to
network security, including news groups, vendor web sites and hacker bulletin
boards. When the rapid response team identifies a new security threat, we send
an advisory to our LiveSecurity subscribers while software or configuration
changes to neutralize the threat are developed and tested. We then broadcast
the software updates or configuration recommendations to our subscribers. The
team sends other information of interest as information alerts, which include
cautionary notices, general usage guidelines and other important announcements.

  LiveSecurity advisory council. Our LiveSecurity advisory council provides
continuing education and editorials on the rapidly changing subject of Internet
security. The council also oversees and contributes to the efforts of our rapid
response team. We intend to expand the council as opportunities arise.
Currently, the council is composed of Messrs. Frederick Avolio and Rik Farrow.

    Frederick Avolio. Mr. Avolio has been involved in Internet computing and
communication since the early 1980s and has worked with Internet security
systems for over 10 years. He assisted in the creation of the first commercial
Internet firewall offering and helped create the commercial security products
division of Trusted Information Systems. His areas of expertise include
firewalls, intrusion detection, cryptography, security management and email
systems. Mr. Avolio is the co-author, with Paul Vixie, of Sendmail Theory and
Practice, published by Digital Press. He holds a B.S. in computer science from
the University of Dayton and an M.S. in computer science from Indiana
University.

    Rik Farrow. Mr. Farrow provides UNIX and Internet security consulting and
training. He has been working with UNIX system security since 1984 and with
TCP/IP networks since 1988. He has taught in a number of countries and for a
variety of organizations. He also consults with firms in designing and
implementing security applications. Mr. Farrow is the author of UNIX System
Security, published by Addison-Wesley, and is the co-author, with Rebecca
Thomas, of UNIX Administrator's Guide to System V, published by Prentice Hall.
He writes a column for ;login:, the magazine of the USENIX Association, and a
network security column for Network magazine.

Licensing and pricing

  For an SME, larger enterprise, SOHO or telecommuter purchasing our
LiveSecurity System, we include in the system price a perpetual license for the
security and management software. Each end-user also receives a renewable one-
year subscription to our LiveSecurity broadcast service, through which it
receives threat responses, software updates, information alerts, expert
editorials and support flashes.

  For LiveSecurity for MSS, an ISP buys a license to use our NOC security suite
management and security software and makes an annual license payment for each
customer security appliance it manages. The licenses, the cost of which varies
depending on the ISP's volume commitment, allow the ISP to manage its
subscribers' security appliances from its network operations center. Each
annual license includes a subscription to our LiveSecurity broadcast service.

                                       42
<PAGE>

  The following table lists our current end-user product prices. We offer
reseller discounts, educational discounts and occasional promotional pricing.


<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
        Product               Components                                        List Price
- -------------------------------------------------------------------------------------------------------
  <C>                  <S>                                               <C>

                       LiveSecurity System for SMEs                                           $  4,990
                        Security management system software
                        Firebox II security appliance
                        12-month LiveSecurity subscription

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

                       Live Security System for larger enterprises                            $  9,990
                        Security management system software                          (Firebox II Plus)
                        Firebox II Plus security appliance
                        Firebox II with VPN accelerator security                              $ 12,990
                        appliance                                            (Firebox II with FastVPN)
                        12-month LiveSecurity subscription

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

  LiveSecurity          Live Security System for SOHOs                                        $    449
  System                Web-based management and security software
                        Firebox SOHO security appliance (10 users)
                        Firebox Telecommuter security appliance
                        12-month LiveSecurity subscription

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

                       Firebox SOHO user-capability upgrades
                        25 users                                                              $    198
                        50 users                                                              $    449
                        Firebox SOHO VPN                                                      $    449

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

                       LiveSecurity System for telecommuters                                  $    649
                        Web-based management and security software
                        Firebox
                        Telecommuter security appliance
                        12-month LiveSecurity subscription

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

                       LiveSecurity subscription renewal
                        Firebox II                                                            $    995
                        Firebox II Plus                                                       $  1,495
                        SOHO                                                                  $     95
                        Telecommuter                                                          $     65

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

                       LiveSecurity for MSS platform pack                                     $ 64,475
                        NOC security suite
                        Firebox II for MSS: 5 appliances
                        MSS client licenses: 5 licenses
                        MSS technical certification class: 1 attendee
                        LiveSecurity broadcast service

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

                       NOC security suite software                                            $ 50,000

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

                       Firebox II for MSS security appliance                                  $  1,300

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

                       Firebox II Plus for MSS security appliance                             $  2,900

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

  LiveSecurity          Firebox II Plus for MSS with VPN accelerator                          $  4,400
  for MSS               security appliance

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

                       MSS technical certification class                                      $  2,500

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

                       Firebox monitor software                                               $    195

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

                       MSS annual client license
                        Block of 25: $1,695 per license                                       $ 42,375
                        Block of 50: $1,495 per license                                         74,750
                        Block of 100: $1,395 per license                                       139,500
                        Block of 250: $1,295 per license                                       323,750
                        Block of 500: $1,095 per license                                       547,500
                        Block of 1,000: $945 per license                                       945,000
- -------------------------------------------------------------------------------------------------------
</TABLE>


                                       43
<PAGE>

Sales, Marketing and Distribution

  We employ a global marketing strategy. Because the need for Internet security
crosses geographic and economic boundaries, our business opportunity extends
worldwide to all business segments. Since our inception, we have invested
heavily in worldwide sales and marketing. We currently sell our products and
services in 54 countries. International sales generated over 35% of our
revenues in 1998 and 50% of our revenues in 1999.

  We sell our LiveSecurity System through distributors and value-added
resellers. We may also sell some Firebox SOHO and Firebox Telecommuter products
through retail channels. We sell our LiveSecurity for MSS products and services
directly to ISPs, which resell our products and services to end-users. Over 310
companies resell our products and services, including

  .  distributors, such as Eltrax Systems, Inc., Fujitsu Business Systems,
     Ltd., Ingram Micro, Otsuka Shokai Co., Ltd., Tech Data and Wick Hill
     Group, Plc;

  .  value-added resellers, such as CDW Computer Centers, Inc., Integrated
     Network Technologies, Kent DataComm, Network Computing Architects, Inc.
     and Solunet; and

  .  ISPs, such as AlphaNet, AT&T Asia/Pacific Group Ltd., FASTNET, GTE, IIJ,
     Interpath, ISS, MIS, Nextcom, PSINet, sunrise and Verio.

  Our agreements with our resellers are nonexclusive and provide for discounts
based on the reseller's minimum purchase commitment or the volume that the
reseller purchases or resells.

  We divide our sales organization regionally among North America, Latin
America, Europe and Asia/Pacific, and also between the enterprise and managed
security market segments. In North America, we have sales personnel located in
California, Colorado, Connecticut, Georgia, Illinois, Massachusetts, New
Jersey, Texas and Washington. Internationally, we have sales personnel located
in Argentina, Australia, Germany, Japan, the Netherlands, Sweden and the United
Kingdom. Assisting our reseller network within a specific region is a central
responsibility of our regional sales representatives. Regional sales
representatives manage our relationships with our network of distributors,
resellers and ISPs, help our reseller network sell and support key customer
accounts, and act as liaison between our reseller network and our marketing and
product development organizations. We expect to continue to expand our field
sales organization in support of both the managed security and enterprise
market segments.

  We conduct a number of marketing programs to support the sale and
distribution of our products. These programs inform existing and potential
resellers, distributors, ISPs and end-user customers about the capabilities and
benefits of our products. Marketing activities include advertising, publishing
technical and educational articles in industry journals, participating in
industry tradeshows and product technology conferences, sales training and
marketing on our web site. As of December 31, 1999, we had 50 employees in our
sales and marketing organization.

  As an additional sales tool, we offer end-users, resellers and distributors
free interactive training on our LiveSecurity System solutions through our web
site. Our interactive training system guides customers through the
installation, setup and management of the LiveSecurity System and provides new
product information.

WatchGuard LiveSecurity alliance

  In September 1998, we launched a LiveSecurity alliance, a technology and
marketing program designed to support the LiveSecurity concept and WatchGuard
products and services. The purpose of the alliance program is to enhance the
interoperability of our LiveSecurity products and services with alliance
partner products and services and to engage in cooperative marketing. Vendors
in the alliance include BackWeb Technologies, Clarent Corporation, CRYPTOCard,
FASTNET, Funk Software, IIJ, Interpath, ISS Group, Inc., Netrex, PSINet,
Rainbow Technologies, RSA Data Security, Inc., The Learning Company, Trend
Micro, WebTrends Corporation, Verio and Virtual Media.


                                       44
<PAGE>

Customers

  As of December 31, 1999, we had shipped over 12,000 of our security
appliances to our reseller network, which resold our products and services to
end-users spanning a wide variety of countries and industries. The following is
a representative list of our ISP and end-user customers:

                           Media                      Retail
Internet Service           KSTW-UPN 11 Television     Norm Thompson
Providers                  Reader's Digest            Outfitters, Inc.
AlphaNet Solutions, Inc.   Australia                  Rebel Sport Limited
AT&T Asia/Pacific Group
Ltd.

                           The Everett Herald
                           University of Toronto      Manufacturing
GTE Internetworking,       Press                      Bolle Inc.
Inc.

                                                      Durkan Patterned Carpet,
Internet Initiative        Technology                 Inc.
Japan, IIJ                 AlphaBlox Corporation      Ferguson
Internet Security          Inc.                       Metals/Aerospace
Systems, Inc.              Bentley Systems,             Alloys Inc.
Interpath                  Incorporated               Graham Steel Corporation
Communications, Inc.       e-DOCS.net                 J.E. Dunn Construction
MIS Corporate Defense      JDA Software Group, Inc.   Company
Solutions                  Pentax Technologies        The Mitchell Gold
Nextcom KK                 Corporation                Company
PSINet Inc.

                           Sheridan Software
sunrise communications     Systems, Inc.              Government
AG

                                                      City of Bellingham, WA
Verio, Inc.                Education                  City of Dandenong,
You Tools Corporation/     Boston Architectural       Australia
 FASTNET                   Center                     City of Garden Grove, CA

                           Canon City Schools         Lenoir County, NC
Services                   Huntsville Intermediate    Mornington Peninsula
Boullioun Aviation          School District           Shire
Services                   Summit Board of              Council, Australia
Bull Housser & Tupper      Education                  North Carolina State
Camp, Inc.                 Woodridge School           Ports
Catholic Charities         District #68               Pierce County, WA
Digital Magic

                                                       Library Service
hawthorne direct inc.      Financial Services

Javelin Technology         Atlantic Mortgage &        Entertainment
                            Investment Corp.

                                                      Argosy Gaming Company
Medical                    Hudson Valley Federal      Black Hawk Gaming &
Bendigo Health Care         Credit Union                Development Company
Group                      KDP Investment Advisors    Crave Entertainment,
CoreCare Systems, Inc.     McMahan Securities Co.,    Inc.
Health Technologies Pty    LP                         Everton Football Club
Ltd                        Seritis Services Group,
                           LLC

NeoTherapeutics, Inc.                                 Utilities and
PATH                       Sunflower Bank             Telecommunications
Southeast Alabama                                     Globecomm Systems, Inc.
 Medical Center                                       MACtel
Unimed Pharmaceuticals,
Inc.

Case Studies

  The following are profiles of two WatchGuard customers that have successfully
implemented our products and services:

GTE Internetworking, Inc. -- An ISP providing managed Internet security
services

  GTE Internetworking, Inc., part of one of the largest publicly held
telecommunications companies in the world, has been providing managed Internet
access and related services worldwide for more than 20 years. In April 1999,
GTE introduced a new LiveSecurity for MSS-based security service, GTE Security
Advantage(TM), which enables GTE to offer a cost-effective managed Internet
security service to SMEs and branch offices of large corporations.

  GTE has integrated LiveSecurity for MSS into its sophisticated $6 million,
5,000-square-foot network operations center in Burlington, Massachusetts, and
offers GTE Security Advantage to both current and new

                                       45
<PAGE>

customers. In the past, GTE focused its managed security services on Fortune
500 corporations. By partnering with WatchGuard, however, GTE can expand its
range of services by offering SMEs the same level of security it could only
offer in the past to large enterprises, due to the cost and complexity of its
previous service offerings.

  GTE is a member of our preferred service provider program, which enables GTE
and WatchGuard to combine our marketing expertise and resources in joint
marketing activities that promote GTE Security Advantage through various media.
GTE will also promote the GTE Security Advantage service through its network of
independent local exchange carriers, which deliver telephone service and
Internet connectivity to SMEs.

Bentley Systems, Incorporated -- An enterprise using the WatchGuard
LiveSecurity System

  Bentley Systems, Incorporated is a worldwide leader in quality engineering
software products and user services, serving over 300,000 professionals in
building engineering, geoengineering and mechanical engineering. Its
MicroStation(TM) and ModelServer products, used by over 70% of the largest
engineering firms in the United States, are used to design buildings, airports,
hospitals, facilities, highways, bridges and industrial plants throughout the
world.

  Bentley uses the WatchGuard LiveSecurity System, deploying 11 WatchGuard
Fireboxes. The company has implemented WatchGuard's branch office VPN software
to secure communications between its headquarters in Exton, Pennsylvania and
its branch offices in Huntsville, Alabama and Littleton, Massachusetts, and
uses WatchGuard's remote user VPN software to encrypt communications between
its offices and approximately 55 traveling salespeople. Now that Bentley has
established interconnectivity between offices with its network of WatchGuard
security appliances, it is in the process of moving from a private-frame wide
area network to a virtual private network of Internet sites, which will reduce
its remote access costs by over 60%.

Technology and Architecture

  Our LiveSecurity solution utilizes an innovative distributed architecture
through which a basic processor in a security appliance receives and executes
software directed to it from a remote management system. Because the security
intelligence resides in the software and not in the hardware, we can keep our
customers' Internet security up to date with periodic broadcasts of new
security software and operating system configurations. Our LiveSecurity
solutions come in two forms: solutions for SMEs and larger enterprises and
solutions for SOHOs and telecommuters.

LiveSecurity for SMEs and larger enterprises

  Our LiveSecurity solution for SMEs and larger enterprises encrypts and
authenticates communications between WatchGuard, the management system software
and the security appliance. This allows the management system and the appliance
to be separated within an enterprise's local or wide area network or between an
ISP and its subscriber. Typically, to install software on a computer using a
general-purpose operating system such as Windows, a person must be physically
present at the computer. Our distributed architecture, however, allows our
customers to remotely install our software on the security appliances and
receive updated software broadcasts over the Internet.

                                       46
<PAGE>

  The diagram below depicts the core technologies we use to deliver our
products and services. Our approach gives us flexibility, reliability and
scalability.

  [Diagram depicting the components of WatchGuard's SME and larger enterprise
  security appliance, operating system software, security software, management
                      software and Internet distribution.]

  Security appliance. Our security appliance uses a standard Intel Pentium
processor, which is dedicated solely to running security functions. The
security appliance has no other function and no hard drive memory storage.

  Operating system software. Our security appliance's operating system is a
custom-configured Linux kernel. Using Linux under an open source license, we
have been able to review the source code and generate a flexible, robust and
secure operating system. We use specially designed application programming
interfaces to facilitate secure loading of new operating system and security
software that our management software sends to the appliance.

  Security features. The LiveSecurity solution implements our security features
in a number of software modules. Each module provides the specific function
that the management system defines in security rules and transmits to the
appliance. For example, the firewall features that control network traffic are
based around an extensible set of network service protocols, such as HTTP and
SMTP. The appliance applies the security policies defined by the management
system to all incoming or outgoing traffic. Those network services that require
special security, such as mail and file transfers, are directed to specific
modules. Additional modules implement other security features, such as
authentication and web surfing control, which also are defined in the security
policies that the management system transmits to the appliance. If web surfing
control is activated, for example, the web surfing control software module will
automatically check the details of all outgoing web traffic to make sure it
complies with the defined policies.

  We use an open architectural structure to allow integration with common
standards for network security. For example, our virtual private networking
component currently supports IPSec and PPTP standards, and our authentication
module supports a variety of standard authentication methods. We intend to
adopt additional standards as they mature in the market.

  Management features. Because enterprise and ISP environments are very
different, we designed a separate management system for each. Our LiveSecurity
System management software allows for quick installation and management by a
typical in-house manager using a standard Windows-based system. We

                                       47
<PAGE>

designed the LiveSecurity for MSS management software, on the other hand, for a
trained operator using a dedicated management console to configure and manage
the security of a large subscriber base. Both management systems have the
ability to remotely deploy new security software to the appliances or update
their security engines from the management console. Our ISP customers can
choose to separately and remotely deploy certain security features, such as
virtual private networking and web blocking. This gives ISPs the ability to
incrementally add for-fee services to their basic service offering, without the
expense of sending personnel to their customers' sites.

  To enable ISPs to configure, monitor and manage the Internet security of
thousands of customers, LiveSecurity for MSS includes scalable logging and
monitoring software called WatchGuard event processors. The event processors
run on UNIX-based workstations and can be located in the network operations
center or distributed at the ISP's point of presence. Each event processor
manages the logging and notification features of up to 500 security appliances
through commands issued from the global policy manager at the network
operations center.

  LiveSecurity broadcast. Our scalable LiveSecurity broadcast system is a
collection of secured servers that registers subscribers, facilitates
downloading our software to the desktop computers of registered subscribers and
broadcasts threat responses, software updates, information alerts, expert
editorials, support flashes and virus alerts to subscribers. To facilitate a
high level of security and authenticity, we protect our servers with our own
security system and strongly encrypt data communication between servers. We
also encrypt and digitally sign broadcasts to ensure that subscribers receive
only authentic LiveSecurity broadcast content. We can replicate and distribute
our LiveSecurity servers throughout the world, which should enable us to meet
growth in demand for our LiveSecurity service. We have initially deployed one
primary server and two replicated servers to reach North America, Asia and
Europe.

LiveSecurity for SOHOs and telecommuters

  Our LiveSecurity solutions for SOHOs and telecommuters are based on a common
hardware and software architecture.

    [Diagram depicting the components of WatchGuard's SOHO and telecommuter
  security appliance, operating system software, security software, management
                      software and Internet distribution]

                                       48
<PAGE>


  Security Appliance. Our SOHO and telecommuter security appliances use an MIPS
processor, which is dedicated solely to running the security functions. The
security appliances have no other function and no hard drive memory storage.
These solutions provide network address translation and port address
translation, which allows a network to use a single IP address and allows an
Internet service provider to conserve IP addresses while still accommodating
local networks.

  Operating System Software. Our SOHO and telecommuter solutions utilize
WindRiver's VxWorks Real Time operating system. These appliances' architecture
includes data encryption hardware that allows high-speed IPSec performance.

  Security Features. Our SOHO and telecommuter solutions use the same IPSec
protocols found in our solutions for SMEs and larger enterprises. The firewall
is based on stateful packet inspection technology, which allows the user to
access the Internet without exposing the network to external attacks. Our
telecommuter solution includes virtual private networking to allow the home-
based employee to connect to the office via an encrypted, secure channel. While
our SOHO base product does not include virtual private networking, it may be
ordered as an option or obtained as an upgrade.

  Management Features. We have designed our SOHO and telecommuter solutions for
very simple installation and configuration, using a web-based interface. We
anticipate that all telecommuter sites and many SOHO sites will require end-
user installation without the availability of information technology
professional support, and we have designed these products accordingly. In
addition, our SOHO and telecommuter solutions management interfaces allow
customers to immediately download updates into the product with minimal user
intervention. This process is protected with advanced cryptography and is tied
to the serial number of the appliance for additional security. Customers may
also order new features, such as additional user capability or virtual private
networking, from our web site.

  Our SOHO and telecommuter products allow local configuration. The security
appliances may be managed with an Internet browser, such as Netscape Navigator
or Internet Explorer. The systems may also be configured to allow management by
one of our security solutions for SMEs or larger enterprises or, in the near
future, by an ISP using our LiveSecurity for MSS.

  Subscription Services. In addition to accessing our LiveSecurity broadcasts,
SOHOs and telecommuters will be able to subscribe to our URL tracking service.
This service allows those persons supervising the use of Internet access, such
as parents or system administrators, to track sites visited by user, time of
visit, location, frequency of visits or other parameters.

Research and Development

  To maintain our product and service leadership position, we focus our
research and development efforts on enhancing our existing products, developing
new products based on our innovative distributed appliance architecture and
developing services that capitalize on our LiveSecurity broadcast
infrastructure. We utilize a modular design, which allows us to develop new
applications that plug into our existing product line. As a result, our
products can be deployed in stages, whether directly by an enterprise or by an
ISP if the enterprise has outsourced its security management. As we develop new
products, our LiveSecurity end-users and ISP partners can incorporate the new
products into their systems with minimal system interruption.

  As of December 31, 1999, we employed 75 people on our research and
development staff. Research and development expenses were $2.2 million in 1997,
$4.4 million in 1998 and $7.1 million in 1999. We conduct our product
development activities related to our security solutions for SMEs and larger
enterprises at our principal facility in Seattle, Washington. We conduct our
product development activities related to our security solutions for SOHOs and
telecommuters at our broadband Internet security division in Laguna Hills,
California and at our facility in Seattle.


                                       49
<PAGE>

Competition

  We compete in a market that is new, intensely competitive, highly fragmented
and rapidly changing. We face competition in sales both of products and
services designed for enterprises and of those designed for ISPs. We have
experienced and will continue to experience increased competition from current
and emerging competitors, many of which have significantly greater financial,
technical, marketing and other resources.

  In the market for Internet security solutions, we compete on the basis of
technological expertise and functionality, breadth of service and product
features, ease of installation and management, updatability, scalability, brand
recognition, price and customer support. Currently, the dominant competitors in
our industry are Cisco Systems, Inc., Check Point Software Technologies Ltd.
and Nokia Corporation. We expect the introduction of our SOHO and telecommuter
products to increase competition with SonicWALL Inc., a developer of security
appliances for SOHOs and home users. Other competitors offering security
products include hardware and software vendors such as Axent Technologies,
Inc., Lucent Technologies, Inc. and Network Associates, Inc., operating system
vendors such as Microsoft Corporation, Novell, Inc. and Sun Microsystems, Inc.
and a number of smaller companies.

  Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. In addition, our
current and future competitors may bundle their products with other software or
hardware, including operating systems and browsers, in a manner that may
discourage users from purchasing the products and services we offer. Many of
our current and potential competitors have greater name recognition, larger
customer bases to leverage and access to proprietary technology, and could
therefore gain market share to our detriment. In addition, our current and
potential competitors may establish cooperative relationships among themselves
or with third parties that may further enhance their resources, such as the
partnership between Check Point and Nokia. We expect additional competition as
other established and emerging companies enter the Internet security market and
new products and technologies are introduced.

  While most of our competitors have generally targeted large-enterprise
security needs, using complex products that run on general purpose hosts such
as UNIX or Windows NT and require full training and support programs, these
vendors could adapt their existing products to make them more attractive to
SMEs. If our competitors were to focus their greater financial, technical and
marketing resources on the SME market, our business could be adversely
affected. While none of our competitors currently offer a technology similar to
our LiveSecurity solution architecture to address changing security threats,
they could develop such technology as part of any appliance offering. Increased
competition in any of our markets could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share.

Proprietary Rights

  To protect our proprietary rights, we rely primarily on

  .  copyright, trademark, service mark and trade secret laws;

  .  license agreements with third parties, including a standard software
     license included with our products;

  .  confidentiality agreements with our employees and third parties;

  .  invention assignment agreements with our employees and contractors;

  .  protective contractual provisions in our agreements with some of our
     consultants, resellers and customers; and

  .  limited access to our software, documentation and other proprietary
     information.

  WatchGuard(R) is a registered trademark in the United States, Norway, New
Zealand and Japan. Applications to register the WatchGuard trademark are
pending in other foreign jurisdictions. Firebox(TM) and LiveSecurity(TM) are
trademarks in use in the United States, and applications are pending in the
United States for registration of these trademarks. We have no patents, but we
have eight patents pending.

                                       50
<PAGE>

  We currently license and use the following technologies in our products and
services:

  .  BSAFE encryption toolkit from RSA Data Security, Inc. This industry-
     standard product provides us with encryption functions that we use in
     our remote office VPN product. We pay a fee for this perpetual license,
     which we may terminate for any reason with 90 days' notice.

  .  Cyber Patrol database from The Learning Company. This database provides
     blocking of particular web addresses as part of our web-blocking module.

  .  Linux kernel. We use a customized version of the Linux operating system
     for our security appliance platform. This license is a no-cost, open-
     source license.

  .  BackWeb Technologies client software and server. We use this technology
     to facilitate the distribution of our LiveSecurity content.

  .  Internet Security Systems Inc. Internet scanner. We sell an OEM version
     of this software as an optional scanning module for our LiveSecurity for
     MSS ISP customers.

  .  WebTrends Corporation Inc. WebTrends for Firewalls and VPNs. We sell an
     OEM version of this software as an optional reporting module for our
     LiveSecurity for MSS ISP customers.

  .  US Software TCP/IP stack. We use a customized version of this basic
     TCP/IP stack in source code form in our SOHO and telecommuter products.

  .  WindRiver VxWorks Real Time operating system. We use this operating
     system in our SOHO and telecommuter products.

U.S. Government Export Regulation Compliance

  Our products are subject to federal regulations governing the export of
encryption commodities and software. To comply with these regulations, we have
developed two versions of our products: one for the U.S. and Canadian markets
and one for international markets. Recent federal legislation, however, has
relaxed export controls on encryption. U.S. law now allows the export of
encryption commodities and software of any strength to nongovernmental end-
users located in any country except those designated as embargoed or otherwise
restricted by the U.S. government, subject to streamlined reporting
requirements. To satisfy these encryption export reporting requirements, we use
data gathered from end-users during product registration. Encryption
commodities and software previously approved for export by the federal Bureau
of Export Administration, or BXA, under an export license or encryption
licensing arrangement are immediately eligible for export under the revised
regulations without further technical review by the BXA. These commodities and
software include our branch office and remote user VPN software and the VPN
accelerator in our Firebox II Plus with FastVPN security appliance. Our Firebox
Telecommuter and Firebox SOHO products, which also utilize this encryption in
branch office VPN software, are currently under review by the BXA for retail
export status. If we obtain retail export status, we would be eligible to
export these products to all nonembargoed and nonrestricted foreign end-users,
including government entities. We anticipate a favorable ruling by the BXA for
export of the telecommuter and SOHO products as retail encryption commodities.

Manufacturing

  We currently outsource all hardware manufacturing and assembly for our
Firebox II product lines to two companies in California: Smart Modular
Technologies, Inc., our motherboard manufacturer, and Streamlined Electronics
Manufacturing, our final assembly house. The motherboard manufacturer designed
and manufactures the motherboard to our specifications. The manufacturer may
terminate the agreement for breach or insolvency of WatchGuard. For our Firebox
SOHO and Firebox Telecommuter product lines, we currently outsource all
hardware manufacturing and assembly to Productivity Enhancement Products, Inc.
in California.

                                       51
<PAGE>

We then distribute the finished products worldwide from our Seattle
distribution center. All three manufacturers test our hardware to confirm that
all components function properly. All three manufacturers are certified as
meeting the International Organization for Standardization's quality assurance
standards: Smart Modular Technologies against ISO 9001 and 9002, Streamlined
Electronics Manufacturing against ISO 9002 and Productivity Enhancement
Products against ISO 9001 and 9002.

Employees

  As of December 31, 1999, we had 165 employees. Of these, 50 were employed in
sales and marketing, 19 in finance and administration, 21 in customer support
and 75 in development and operations. We are not parties to any collective
bargaining agreements with our employees and we have not experienced any work
stoppages. We believe we have good relations with our employees.

Facilities

  Our principal administrative, marketing, sales, development and operations
facility is located in Seattle, Washington. We occupy approximately 30,000
square feet in this facility, under two leases that expire in April 2001. We
also maintain a small office in Laguna Hills, California for our broadband
Internet security division and a 3,000-square-foot warehouse in Seattle for
product fulfillment and distribution. We have the right to lease the Laguna
Hills office on a month-to-month basis until October 2000, but we may terminate
this option before that date. We expect to move our broadband Internet security
division to new offices before that time. The warehouse lease expires in August
2000, but has two one-year renewal options. We will be relocating or expanding
our general office space in both Seattle and Laguna Hills within the next six
to eight months, and we expect adequate space to be available on commercially
reasonable terms.

Legal Proceedings

  We currently are not a party to any material legal proceeding.


                                       52
<PAGE>

                                   MANAGEMENT

Executive Officers, Directors and Key Employees

  The following table lists the executive officers, directors and key employees
of WatchGuard as of December 31, 1999.

<TABLE>
<CAPTION>
                 Name               Age                Position
                 ----               ---                --------
   <C>                              <C> <S>
   Executive Officers and Directors
   Christopher G. Slatt............  41 President, Chief Executive Officer and
                                        Chairman of the Board
   Steven N. Moore.................  41 Executive Vice President of Finance,
                                        Chief Financial Officer, Secretary,
                                        Treasurer and Director
                                        Vice President and Chief Operating
   R. Michael Peronto..............  43 Officer
   Stuart J. Ellman................  33 Director
   Andrew W. Verhalen..............  43 Director
   Charles P. Waite, Jr. ..........  44 Director
   Key Employees
   Danny M. Beadle.................  50 Vice President, General Manager of
                                        Broadband Internet Security Division
   David W. Bonn...................  36 Chief Technology Officer
   Dennis R. Cloutier..............  49 Executive Vice President of Sales
   Todd A. Hooper..................  34 Vice President of Business Development
   Michael V. Martucci.............  41 Vice President of Marketing
</TABLE>

  Christopher G. Slatt cofounded WatchGuard in February 1996. Mr. Slatt has
served WatchGuard as president, chief executive officer and director since its
inception, and as chairman of the board since April 1999. From September 1993
to October 1995, he served as a vice president and a general manager of Legent
Corporation, a computer software company. Legent Corporation was acquired by
Computer Associates International, Inc., a computer software company, in August
1995. He is also a director of a privately held company. Mr. Slatt holds a
B.S.E.E. from the University of Notre Dame.

  Steven N. Moore cofounded WatchGuard in February 1996. Mr. Moore has served
WatchGuard as executive vice president of finance since March 1999, chief
financial officer, secretary, treasurer and director since inception, and as
vice president of finance and operations from inception until March 1999. From
September 1993 to September 1995, he served as a director of finance of Legent
Corporation. Mr. Moore holds a B.S. in finance from Central Washington
University.

  R. Michael Peronto joined WatchGuard as vice president and chief operating
officer in March 1999. From February 1997 to November 1998, Mr. Peronto served
as president and chief executive officer of Endura Software Corporation, a
management software supply company. From September 1994 to February 1997, he
served as vice president of publishing products and site manager of Adobe
Systems Incorporated, a desktop publishing and graphics software company. From
July 1992 to September 1994, he served as general manager of graphic products
of Aldus Corporation, a desktop publishing and graphics software company that
was acquired by Adobe Systems Incorporated. Mr. Peronto holds a B.A. in
economics from UCLA and an M.B.A. from the University of Washington.

  Stuart J. Ellman has served as a director of WatchGuard since April 1998. Mr.
Ellman cofounded RRE Ventures LLC, a venture capital firm, and since August
1994 has served as general partner of RRE Ventures LLC and its affiliates and
predecessors. He serves as managing director of RRE Investors, LLC and as a
member of RRE Investors II, LLC. He is also a director of several privately
held companies. Mr. Ellman holds a B.A. in economics from Wesleyan University
and an M.B.A. from Harvard University.

                                       53
<PAGE>

  Andrew W. Verhalen has served as a director of WatchGuard since May 1997.
Since April 1992, Mr. Verhalen has been a partner of Matrix Partners, a venture
capital firm. He currently is a director of Copper Mountain Networks, Unwired
Planet, Alteon WebSystems Inc., Turnstone Systems and several privately held
technology companies. Before Matrix, Mr. Verhalen held senior management
positions at 3Com Corporation and Intel Corporation. He holds a B.S.E.E., an
M.E. and an M.B.A. from Cornell University.

  Charles P. Waite, Jr. has served as a director of WatchGuard since May 1997.
Since December 1987, Mr. Waite has served as a general partner of Olympic
Venture Partners. He is also a director of Cardima, Inc., CellPro Incorporated,
Verity, Inc. and several privately held companies. Mr. Waite holds an A.B. in
history from Kenyon College and an M.B.A. from Harvard University.

  Danny M. Beadle joined WatchGuard in October 1999 as vice president, general
manager of our broadband Internet security division. From May 1999 to October
1999, Mr. Beadle served as chief executive officer of BeadleNet, LLC, which was
acquired by WatchGuard in October 1999. From November 1988 to May 1999, he
served as chief executive officer of Productivity Enhancement Products, Inc.,
an OEM product development company. Mr. Beadle holds a B.A. in physics and a
B.A. in social science with an emphasis in economics from the University of
California, Irvine and an M.B.A. from Pepperdine University.

  David W. Bonn joined WatchGuard in March 1996 and has served WatchGuard as
chief technology officer since March 1999. From May 1997 to March 1999, Mr.
Bonn served as WatchGuard's vice president of engineering, and from February
1997 to May 1997, he served as WatchGuard's chief technology officer. From
March 1996 to February 1997, he served as WatchGuard's vice president of
security products. He cofounded Mazama Software Labs, Inc., a computer software
company, in 1995, and served as its president until the acquisition of Mazama's
technology by WatchGuard in March 1996. From November 1993 to January 1995, he
served as senior software engineer of Legent Corporation. Mr. Bonn holds a B.S.
in computer science from the University of Washington.

  Dennis R. Cloutier joined WatchGuard in March 1997 as executive vice
president of sales. From March 1994 to September 1996, Mr. Cloutier served as
vice president of sales of Sierra On-Line, an education and entertainment
computer software publisher. Mr. Cloutier holds a B.S. in marketing from
Central Connecticut University.

  Todd A. Hooper joined WatchGuard in June 1998 and has served WatchGuard as
vice president of business development since February 1999. From June 1998 to
February 1999, Mr. Hooper served as WatchGuard's director of market
development. From March 1996 to May 1998, he served as manager of Internet and
open systems of AlphaWest Pty. Ltd., a provider of information technology-based
services. From January 1994 to March 1996, he served as chief executive officer
and managing director of Momentum Pty. Ltd., a management consulting company.
Mr. Hooper holds a Bachelor of Business in information processing from Curtin
University.

  Michael V. Martucci joined WatchGuard in May 1997 as vice president of
marketing. From February 1996 to May 1997, Mr. Martucci served as director of
sales and marketing worldwide of Corbis Corporation, an Internet delivery and
sales company. From August 1994 to February 1996, he served as director of
sales and marketing worldwide of Knight-Ridder's Presslink, Inc., an Internet
delivery and sales company. From August 1993 to August 1994, he served as vice
president of marketing of Telepad Corporation, a wireless and hand-held
computer company. Mr. Martucci holds a B.C.E. in civil engineering and an
M.S.I.M. in marketing and financial management from Georgia Institute of
Technology.

                                       54
<PAGE>

Committees of the Board of Directors

  The compensation committee of our board of directors consists of Messrs.
Ellman, Verhalen and Waite. The compensation committee

  .  reviews and approves the compensation and benefits for our executive
     officers and grants stock options under our stock option plan; and

  .  makes recommendations to the board of directors regarding these matters.

  The audit committee consists of Messrs. Ellman, Verhalen and Waite. The audit
committee

  .  makes recommendations to the board of directors regarding the selection
     of independent auditors;

  .  reviews the results and scope of the audit and other services provided
     by our independent auditors; and

  .  reviews and evaluates our audit and control functions.

  We established these committees in February 1999.

Director Compensation

  We do not pay cash compensation to our directors for their services as
directors or members of committees of the board of directors, but we do
reimburse them for reasonable expenses they incur in attending meetings of the
board of directors. Directors of WatchGuard are eligible to participate in our
stock option plan.

Director and Officer Indemnification and Liability

  Our certificate of incorporation limits the liability of directors to the
full extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may eliminate or limit the personal
liability of directors for monetary damages for breach of their fiduciary
duties as directors, except for liability for

  .  any breach of their duty of loyalty to the corporation or its
     stockholders;

  .  acts or omissions not in good faith or that involve intentional
     misconduct or a knowing violation of law;

  .  unlawful payments of dividends or unlawful stock repurchases or
     redemptions; or

  .  any transaction from which the director derived an improper benefit.

  Our bylaws provide that we shall indemnify our directors and officers and may
indemnify our employees and agents to the fullest extent permitted by law. In
addition, we maintain directors' and officers' liability insurance, under which
our directors and officers may be indemnified against liability they incur for
serving in their capacities as directors and officers of WatchGuard.

  The Securities and Exchange Commission has advised us that, in its opinion,
any indemnification of our directors and officers for liabilities arising under
the Securities Act of 1933 is against public policy as expressed in the
Securities Act and is therefore unenforceable.

  We believe that the limitation of liability provision in our certificate of
incorporation, the indemnification provisions in our bylaws and the liability
insurance will facilitate our ability to continue to attract and retain
qualified individuals to serve as directors and officers of WatchGuard.

                                       55
<PAGE>

Compensation Committee Interlocks and Insider Participation

  Our board of directors' compensation committee currently consists of Messrs.
Ellman, Verhalen and Waite. None of these individuals has at any time been an
employee or officer of WatchGuard. Until the compensation committee was formed
in February 1999, the full board of directors made all decisions regarding
executive compensation. No member of our board of directors or of its
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as members of its board of directors or its compensation committee.

  Mr. Ellman is a general partner of RRE Ventures LLC and a member of RRE
Investors II, LLC, the managing member of RRE Investors, L.P., which purchased
500,241 shares of our Series C preferred stock. RRE Investors II, LLC is also
the indirect manager of RRE Investors Fund L.P., which purchased 275,403 shares
of our Series C preferred stock. Mr. Verhalen is the general partner of Matrix
IV Management Co., L.P., the general partner of Matrix Partners IV, L.P., which
purchased 1,100,416 shares of our Series B preferred stock and 276,324 shares
of our Series C preferred stock. Matrix IV Management Co., L.P. is also the
general partner of Matrix IV Entrepreneurs Fund, L.P., which purchased 57,917
shares of our Series B preferred stock and 14,543 shares of our Series C
preferred stock. Mr. Waite is the general partner of OVMC III, L.P., the
general partner of Olympic Venture Partners III, L.P., which purchased 489,685
shares of our Series B preferred stock and 122,964 shares of our Series C
preferred stock. OVMC III, L.P. is also the general partner of OVP III
Entrepreneurs Fund, L.P., which purchased 25,773 shares of our Series B
preferred stock and 6,472 shares of our Series C preferred stock. Mr. Waite is
also the managing member of OVMC IV, LLC, the general partner of Olympic
Venture Partners IV, L.P., which purchased 610,731 shares of our Series B
preferred stock and 153,360 shares of our Series C preferred stock. OVMC IV,
LLC is also the general partner of OVP IV Entrepreneurs Fund, L.P., which
purchased 32,144 shares of our Series B preferred stock and 8,071 shares of our
Series C preferred stock.

  We sold the Series B preferred stock on May 9, 1997 at $2.59 per share. We
sold the Series C preferred stock on April 24, 1998 at $5.16 per share.

Executive Compensation

  The following table provides information concerning the compensation received
for services rendered to WatchGuard in all capacities during the year ended
December 31, 1999, by our chief executive officer and the other executive
officers of WatchGuard whose compensation exceeded $100,000 in 1999.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                    Long-Term
                                                                   Compensation
                                                                      Awards
                                                      Annual       ------------
                                                   Compensation     Securities
                                                ------------------  Underlying
Name and Principal Position                     Salary($) Bonus($) Options)(#)
- ---------------------------                     --------- -------- ------------
<S>                                             <C>       <C>      <C>
Christopher G. Slatt, Chief Executive Officer
 and President................................. $ 190,000 $ 67,203    40,000
Steven N. Moore, Executive Vice President of
 Finance, Chief Financial Officer, Secretary
 and Treasurer.................................   171,250   67,203    40,000
R. Michael Peronto, Vice President and Chief
 Operating Officer (1).........................   142,019   49,538   440,564
</TABLE>
- --------

(1) Mr. Peronto joined WatchGuard in March 1999. His annual salary is $175,000.

                                       56
<PAGE>

  The following table provides information regarding stock options we granted
in 1999 to our chief executive officer and the other executive officers whose
compensation exceeded $100,000 in 1999. The table includes the potential
realizable value over the term of the options, based on assumed rates of stock
appreciation of 5% and 10%, compounded annually. The assumed rates of
appreciation are prescribed by the Securities and Exchange Commission for
illustrative purposes only and are not intended to forecast or predict future
stock prices. Any actual gains on option exercises will depend on the future
performance of our stock.

                       Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
                            Individual Grants
                         ------------------------
                                                                           Potential Realizable
                                                                             Value at Assumed
                         Number of   Percent of                           Annual Rates of Stock
                         Securities Total Options                           Price Appreciation
                         Underlying  Granted to                              for Option Term
                          Options   Employees in    Exercise   Expiration ----------------------
          Name           Granted(#)  Fiscal Year  Price ($/Sh)    Date      5%($)      10%($)
          ----           ---------- ------------- ------------ ---------- ---------- -----------
<S>                      <C>        <C>           <C>          <C>        <C>        <C>
Christopher G. Slatt....   40,000        1.78%       $14.30     6/17/04   $  158,000 $   349,000
Steven N. Moore.........   40,000        1.78         14.30     6/17/04      158,000     349,000
R. Michael Peronto......  439,564       19.55         13.00     4/12/09    3,594,000   9,107,000
                            1,000           *         13.00     7/30/09        8,000      21,000
</TABLE>
- --------
*  Less than 1%

  Approximately 2% of Mr. Slatt's and Mr. Moore's options vest and become
exercisable each month, commencing July 17, 1999. Of the options we granted to
Mr. Peronto on April 12, 1999, 25% vest and become exercisable on April 12,
2000, and approximately 2% of the remaining options vest and become exercisable
each month after that date. Of the options we granted to Mr. Peronto on July
30, 1999, approximately 2% vest and become exercisable each month, commencing
on August 30, 1999. In 1999, we granted options to purchase up to an aggregate
of 2,248,314 shares to employees. We granted all options under our stock option
plan at exercise prices at the fair market value of our common stock on the
date of grant, as determined in good faith by our board of directors.

  The following table provides information regarding unexercised options held
as of December 31, 1999 by our chief executive officer and the other executive
officers whose compensation exceeded $100,000 in 1999. The value of unexercised
options is calculated on the basis of the closing sales price of our common
stock on The Nasdaq National Market on December 31, 1999, which was $30.25 per
share. These individuals did not exercise any options in 1999.

                              FY-End Option Values

<TABLE>
<CAPTION>
                                     Number of
                               Securities Underlying     Value of Unexercised
                              Unexercised Options at    In-the-Money Options at
                                Fiscal Year End(#)        Fiscal Year-End($)
                             ------------------------- -------------------------
            Name             Exercisable Unexercisable Exercisable Unexercisable
            ----             ----------- ------------- ----------- -------------
<S>                          <C>         <C>           <C>         <C>
Christopher G. Slatt........   38,541        71,459    $1,089,569   $1,655,921
Steven N. Moore.............   38,541        71,459     1,089,569    1,655,921
R. Michael Peronto..........      104       440,460         1,794    7,597,935
</TABLE>

Change-of-Control Arrangements

  Under Mr. Peronto's stock option letter agreement, if a change of control of
WatchGuard occurs, half of the unvested shares subject to the option for
439,564 shares granted on April 12, 1999 will vest and become exercisable.

                                       57
<PAGE>

Employee Benefit Plans

1996 Stock Incentive Compensation Plan

  In March 1996, our board of directors and stockholders adopted our 1996 stock
incentive compensation plan, which was amended and restated on May 26, 1999.
The purpose of the stock option plan is to enhance long-term stockholder value
by offering opportunities to selected persons to participate in our growth and
success, and to encourage them to remain in our service or in the service of
our subsidiaries and to acquire and maintain ownership in WatchGuard. The stock
option plan provides for awards, which may include incentive stock options,
nonqualified stock options and stock awards. The board has reserved a total of
8,634,986 shares of common stock under the plan, of which 524,999 remain
available for grant as of December 31, 1999. In addition, the plan provides for
an automatic annual increase to be added on the first day of each fiscal year,
the first of which occurred on January 1, 2000, equal to the least of

  .  750,000 shares;

  .  3% of the average number of outstanding common shares used to calculate
     fully diluted earnings per share as reported in our annual financial
     statements for the preceding year; and

  .  a lesser amount determined by our board of directors.

  As of December 31, 1999, 1,607,307 shares had been issued upon the exercise
of stock options granted under the stock option plan and 6,502,680 shares were
subject to outstanding options.

  The compensation committee of our board of directors serves as the plan
administrator of the stock option plan. Unless the plan administrator permits
otherwise, no awards granted under the stock option plan may be assigned or
transferred by the holder other than by will or the applicable laws of descent
and distribution. During the holder's lifetime, awards generally may be
exercised only by the holder. The board may suspend or terminate the stock
option plan at any time. Unless sooner terminated by the board, the plan will
terminate on May 26, 2009.

  Stock Option Grants. The plan administrator has the authority to select
individuals to receive options under the stock option plan and to specify the
terms and conditions of each option granted, the exercise price, the vesting
provisions and the option term. For incentive stock options, the exercise price
must be equal to at least the fair market value of the common stock on the
grant date and, for nonqualified stock options, must be not less than 85% of
the fair market value of the common stock on the grant date. Unless otherwise
provided by the plan administrator, options granted under the stock option plan
will expire 10 years from the grant date.

  Stock Awards. The stock option plan authorizes the plan administrator to
award shares of common stock subject to terms, conditions and restrictions
established by the plan administrator in its sole discretion. The terms,
conditions and restrictions that the plan administrator has the power to
determine include the manner in which shares subject to stock awards are held
during the periods they are subject to restrictions and the circumstances under
which forfeiture of restricted stock will occur because of termination of the
holder's services. Holders of restricted stock are stockholders of WatchGuard
and generally have all the rights of stockholders with respect to those shares.

  Corporate Transactions. Unless individual letter agreements provide
otherwise, if certain corporate transactions, such as a merger or sale of
WatchGuard, occur, each outstanding option will automatically accelerate and
become 100% vested and exercisable immediately before the corporate
transaction, unless the option is assumed, continued or replaced with a
comparable award by the successor corporation or the parent of the successor
corporation. If option vesting is accelerated, any forfeiture provisions
applicable to the stock awards will lapse. Any option or stock award that is
assumed, continued or replaced with a comparable award in the corporate
transaction will accelerate if the holder's employment or services are
terminated by the successor corporation without cause or by the holder
voluntarily and with good reason within two years.


                                       58
<PAGE>

1999 Employee Stock Purchase Plan

  In May 1999, our board of directors and stockholders approved our 1999
employee stock purchase plan. We implemented our stock purchase plan on July
30, 1999 in connection with our initial public offering, to encourage employees
to remain in our employ or the employ of our subsidiaries. We intend for the
plan to qualify under Section 423 of the Internal Revenue Code.

  Our stock purchase plan permits our eligible employees and eligible employees
of our subsidiaries to purchase common stock through payroll deductions of up
to 15% of their salary or wage compensation. Under our stock purchase plan, no
employee may purchase common stock with a fair market value of more than
$25,000 in any calendar year, or purchase more than 1,000 shares of common
stock in any single purchase period.

  The stock purchase plan has two-year offering periods and each two-year
offering period has four consecutive six-month purchase periods. The first
offering period commenced on July 30, 1999 and will end on August 31, 2001. The
first purchase period under the first offering period commenced on July 30,
1999 and will end on February 29, 2000. Subsequent purchase periods will begin
on each March 1 and September 1 and end on the next August 31 and February 28,
or February 29 in the case of leap years. The plan administrator generally may
establish a different term and different commencing and ending dates for future
offerings.

  The price of the common stock purchased under the stock purchase plan will be
the lesser of 85% of the fair market value on the first day of the applicable
offering period and 85% of the fair market value on the last day of the
applicable purchase period. The purchase price for the first offering period,
however, will be equal to the lesser of $13.00, the initial public offering
price of our common stock, and 85% of the fair market value on the last day of
the first purchase period. The stock purchase plan terminates 10 years after
the date of adoption by our board of directors, but the board may terminate it
at any earlier time. We have not yet issued any shares of common stock under
the stock purchase plan.

  Employees generally will be eligible to participate in the stock purchase
plan if they are customarily employed by WatchGuard for 20 hours or more per
week and are not, as of the beginning of a purchase period, holders of 5% or
more of our common stock or the common stock of our subsidiaries. Options
granted under the stock purchase plan generally are not transferable and are
exercisable only during the optionee's lifetime.

  We initially authorized the issuance under the stock purchase plan of a total
of 600,000 shares of common stock. In addition, the plan provides for automatic
annual increases to be added on the first day of each fiscal year, the first of
which occurred on January 1, 2000, equal to the least of

  .  400,000 shares;

  .  1.5% of the average outstanding common shares used to calculate fully
     diluted earnings per share as reported in our annual financial
     statements for the preceding year; and

  .  a lesser amount determined by our board of directors.

  If a merger or consolidation resulting in a change of control or acquisition
by another corporation of all or substantially all of our assets occurs, each
outstanding option to purchase shares under the stock purchase plan will be
assumed or an equivalent option substituted by the successor corporation. If
the successor corporation refuses to assume or substitute for the option, the
offering period during which a participant may purchase stock will be shortened
to a specified date before the proposed transaction. Similarly, if a
liquidation or dissolution of WatchGuard is proposed, the offering period
during which a participant may purchase stock will be shortened to a specified
date before the date of the proposed liquidation or dissolution.


                                       59
<PAGE>

401(k) Plan

  We maintain a 401(k) plan that covers all our employees who satisfy the
plan's eligibility requirements relating to minimum age, length of service and
hours worked. We may make an annual contribution for the benefit of eligible
employees in an amount determined by our board of directors. We have not made
any contribution to date and have no current plans to do so. Eligible employees
may make pretax elective contributions of up to 15% of their compensation,
subject to maximum limits on contributions prescribed by law.

                                       60
<PAGE>

                           RELATED-PARTY TRANSACTIONS

 Since our inception in February 1996, we issued shares of preferred stock in
private placement transactions, as the following table summarizes:

<TABLE>
<CAPTION>
                                                         Number of Shares of
                                                           Preferred Stock
                                               Price ---------------------------
                                     Issuance   per                      Series
            Purchaser                  Date    Share Series A  Series B     C
            ---------               ---------- ----- --------- --------- -------
<S>                                 <C>        <C>   <C>       <C>       <C>
Christopher G. Slatt..............   March and $0.05 1,500,002
                                     July 1996

Steven N. Moore...................   March and  0.05 1,500,002
                                     July 1996

Entities affiliated with Matrix IV
 Management Co., L.P. ............    May 1997  2.59           1,158,333
                                    April 1998  5.16                     290,867

Olympic Venture Partners III, L.P.
 and OVP III Entrepreneurs Fund...    May 1997  2.59             515,458
                                    April 1998  5.16                     129,436

Olympic Venture Partners IV, L.P.
 and
 OVP IV Entrepreneurs Fund, L.P. ..   May 1997  2.59             642,875
                                    April 1998  5.16                     161,431

MLS-I, L.C. ......................  March 1998  2.59              38,610

Entities affiliated with RRE
 Investors II, LLC................  April 1998  5.16                     775,644
</TABLE>

  Christopher G. Slatt and Steven N. Moore are executive officers and directors
of WatchGuard. Stuart J. Ellman, a director of WatchGuard, is a member of RRE
Investors II, LLC, which is the managing member of RRE Investors, L.P. and the
indirect managing member of RRE Investors Fund, L.P. Andrew W. Verhalen, a
director of WatchGuard, is the general partner of Matrix IV Management Co.,
L.P., which is the general partner of Matrix Partners IV, L.P. and of Matrix IV
Entrepreneurs Fund, L.P. Charles P. Waite, Jr., a director of WatchGuard, is a
general partner of OVMC III, L.P., which is the general partner of Olympic
Venture Partners III, L.P. and of OVP III Entrepreneurs Fund, L.P. Mr. Waite is
also a managing member of OVMC IV, LLC, which is the general partner of Olympic
Venture Partners IV, L.P. and of OVP IV Entrepreneurs Fund, L.P. All
outstanding shares of preferred stock converted into an aggregate of
13,425,316 shares of common stock on the closing of our initial public
offering. These investors are entitled to registration rights with respect to
these shares of common stock.

  Mr. Slatt and Mr. Moore are guarantors of the lease agreement between COM
Realty, Inc. and WatchGuard Technologies Inc., dated as of March 16, 1996. Mr.
Slatt and Mr. Moore were guarantors of our loan with Commerce Bank of
Washington, which we have repaid. Mr. Slatt was, but is no longer, a guarantor
of a cell phone service contract between WatchGuard and AT&T Wireless.

                                       61
<PAGE>

  On March 9, 1999, we borrowed an aggregate of $1,500,000 from entities
affiliated with Olympic Venture Partners and an aggregate of $1,500,000 from
entities affiliated with Matrix IV Management Co., L.P. We issued each entity a
promissory note, which bore interest at 6% per year and would have matured on
March 9, 2000, and a warrant to purchase our common stock at an exercise price
of $7.00 per share. The table below states the amount of each loan and the
number of shares for which each warrant was exercisable. At the closing of our
initial public offering, all of these warrants were exercised and the loans
were repaid. The entities affiliated with Olympic Venture Partners exercised
their warrants on a cash exercise basis, while the entities affiliated with
Matrix Management Co., L.P. exercised their warrants on a net issuance basis.

<TABLE>
<CAPTION>
                                                               Number of Shares
                                                    Amount of  for Which Warrant
                   Name of Investor                    Loan     Was Exercisable
                   ----------------                 ---------- -----------------
   <S>                                              <C>        <C>
   Olympic Venture Partners III, L.P. ............. $  647,500       9,244

   OVP III Entrepreneurs Fund, L.P. ...............     20,000         296

   Olympic Venture Partners IV, L.P. ..............    774,225      11,060

   OVP IV Entrepreneurs Fund, L.P. ................     58,275         828

   Matrix Partners IV, L.P. .......................  1,425,000      20,356

   Matrix IV Entrepreneurs Fund, L.P. .............     75,000       1,072
</TABLE>

  On June 29, 1999, we amended our loan and security agreement with our bank to
make available to us additional funds under our secured bridge loan facility.
Each of Matrix Partners IV, L.P., Matrix IV Entrepreneurs Fund, L.P., Olympic
Venture Partners III, L.P., Olympic Venture Partners IV, L.P. and
RRE Investors, L.P. jointly and severally guaranteed a portion of the loan, in
the amounts shown below.

<TABLE>
<CAPTION>
                                                                  Maximum Amount
                         Name of Guarantor                         of Guaranty
                         -----------------                        --------------
   <S>                                                            <C>
   Matrix Partners IV, L.P. .....................................    $633,334

   Matrix IV Entrepreneurs Fund, L.P. ...........................      33,334

   Olympic Venture Partners III, L.P. ...........................     333,334

   Olympic Venture Partners IV, L.P. ............................     333,334

   RRE Investors, L.P. ..........................................     666,667
</TABLE>

  We believe that we made all of the transactions described above on terms no
less favorable to us than we could have obtained from unaffiliated third
parties. Any future transactions between us and our officers, directors and
principal stockholders will be approved by a majority of our board of
directors, including a majority of the independent and disinterested directors,
and will be on terms no less favorable to us that we could obtain from
unaffiliated third parties.

  Dain Rauscher Incorporated, the parent company of one of our underwriters,
Dain Rauscher Wessels, is a limited partner in Olympic Venture Partners IV,
L.P., a stockholder of WatchGuard.

                                       62
<PAGE>

                       PRINCIPAL AND SELLING STOCKHOLDERS

Principal Stockholders

  The following table provides information regarding the actual beneficial
ownership of our outstanding common stock as of December 31, 1999, and as
adjusted to reflect the sale of common stock offered by this prospectus, for

  .  each person or group that we know beneficially owns more than 5% of our
     common stock;

  .  each of our directors;

  .  our chief executive officer;

  .  the other executive officers whose compensation exceeded $100,000 in
     1999;

  .  all of our directors and executive officers as a group; and

  .  the selling stockholders.

  The table includes percentage ownership data reflecting ownership both before
and after this offering. The pre-offering percentage ownership is based on
19,511,752 shares of WatchGuard common stock outstanding as of December 31,
1999. The post-offering percentage ownership is based on 21,136,752 shares
outstanding after this offering. Under the rules of the Securities and Exchange
Commission, beneficial ownership includes shares over which the indicated
beneficial owner exercises voting and/or investment power. Shares of common
stock subject to options that are currently exercisable or will become
exercisable within 60 days are deemed outstanding for computing the percentage
ownership of the person holding the option, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, we believe that the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to applicable community property
laws. Unless otherwise indicated, the following beneficial owners can be
reached at our principal offices.

                                       63
<PAGE>

<TABLE>
<CAPTION>
                                                                Percentage of
                           Number of              Number of   Shares of Common
                             Shares    Number of    Shares    Stock Outstanding
                          Beneficially  Shares   Beneficially -----------------
                          Owned Before   Being   Owned After   Before   After
    Name and Address        Offering    Offered    Offering   Offering Offering
    ----------------      ------------ --------- ------------ -------- --------
<S>                       <C>          <C>       <C>          <C>      <C>
5% Holders, Directors
 and Executive Officers
Entities affiliated with
 Matrix IV Management
 Co., L.P.(1)...........    2,908,291          0   2,908,291   14.91%   13.76%
 2500 Sand Hill Road
 Menlo Park, CA 94025
Entities affiliated with
 Olympic Venture
 Partners(2)............    2,919,828    100,000   2,819,828   14.96    13.34
 2420 Carillon Point
 Kirkland, WA 98033
Entities affiliated with
 RRE Investors II,
 LLC(3).................    1,551,288    350,000   1,201,288    7.95     5.68
 126 East 56th St., 22nd
  Floor
 New York, NY 10022
Stuart J. Ellman(4).....    1,551,288    350,000   1,201,288    7.95     5.68
Andrew W. Verhalen(5)...    2,908,291          0   2,908,291   14.91    13.76
Charles P. Waite,
 Jr.(6).................    2,919,828    100,000   2,819,828   14.96    13.34
Christopher G.
 Slatt(7)...............    2,952,753    330,000   2,622,753   15.10    12.38
Steven N. Moore(8)......    2,952,753    330,000   2,622,753   15.10    12.38
Michael C. Peronto(9)...          145          0           0      *        *
Directors and executive
 officers as a group
 (6 persons)(10)........   13,285,058  1,110,000  12,175,058   67.79    57.37
Other Selling
 Stockholders
Dennis R. Cloutier(11)..      620,587    175,000     445,587    3.14     2.09
Michael V.
 Martucci(12)...........      385,506    125,000     260,506    1.94     1.21
David W. Bonn(13).......      649,655     90,000     559,655    3.25     2.59
</TABLE>
- --------
  *   Less than 1%

 (1)  Matrix IV Management Co., L.P. is the general partner of Matrix Partners
      IV, L.P. and of Matrix IV Entrepreneurs Fund, L.P., and thus is deemed to
      beneficially own the shares held by these entities. Andrew W. Verhalen, a
      director of WatchGuard, is a general partner of Matrix IV Management Co.,
      L.P.

 (2)  Includes 1,299,328 shares held by Olympic Venture Partners III, L.P. and
      OVP III Entrepreneurs Fund, L.P. OVMC III, L.P. is the general partner of
      Olympic Venture Partners III, L.P. and of OVP III Entrepreneurs Fund,
      L.P., and thus is deemed to beneficially own the shares held by these
      entities. Also includes 1,620,500 shares held by Olympic Venture Partners
      IV, L.P. and OVP IV Entrepreneurs Fund, L.P. OVMC IV, LLC is the general
      partner of Olympic Venture Partners IV, L.P. and of OVP IV Entrepreneurs
      Fund, L.P., and thus is deemed to beneficially own the shares held by
      these entities. OVMC III, L.P. and OVMC IV, LLC disclaim beneficial
      ownership of these shares except to the extent of their pecuniary
      interests in these shares. Charles P. Waite, Jr., a director of
      WatchGuard, is a general partner of OVMC III, L.P. and a managing member
      of OVMC IV, LLC.

 (3)  RRE Investors II, LLC is the managing member of RRE Investors, L.P. and
      the indirect managing member of RRE Investors Fund, L.P., and thus is
      deemed to beneficially own the shares held by these entities. Stuart J.
      Ellman, a director of WatchGuard, is a member of RRE Investors II, LLC.

 (4)  Mr. Ellman is a member of RRE Investors II, LLC, which is the direct or
      indirect managing member of each of the entities affiliated with it. Mr.
      Ellman disclaims beneficial ownership of the shares held by the entities
      affiliated with RRE Investors II, LLC, except to the extent of his
      pecuniary interest arising from his interest in RRE Investors II, LLC.

                                       64
<PAGE>

 (5)  Represents 2,908,291 shares held by entities affiliated with Matrix IV
      Management Co., L.P. Mr. Verhalen is a general partner of Matrix IV
      Management Co., L.P., which is the general partner of each of the
      entities affiliated with it. Mr. Verhalen disclaims beneficial ownership
      of the shares held by the entities affiliated with Matrix IV Management
      Co., L.P., except to the extent of his pecuniary interest arising from
      his interest in Matrix IV Management Co., L.P.

 (6)  Represents 2,919,828 shares held by affiliates of OVMC III, L.P. and OVMC
      IV, LLC. Mr. Waite is a general partner of OVMC III, L.P., which is the
      general partner of Olympic Venture Partners III, L.P. and of OVP III
      Entrepreneurs Fund. Mr. Waite is also a managing member of OVMC IV, LLC,
      which is the general partner of Olympic Venture Partners IV, L.P. and of
      OVP IV Entrepreneurs Fund, L.P. Mr. Waite disclaims beneficial ownership
      of the shares held by Olympic Venture Partners III, L.P., OVP III
      Entrepreneurs Fund, L.P., Olympic Venture Partners IV, L.P. and OVP IV
      Entrepreneurs Fund, L.P., except to the extent of his pecuniary interest
      arising from his interest in these entities.

 (7)  Includes 300,000 shares held by Venus Capital LLC and 43,123 shares
      subject to options exercisable within 60 days of December 31, 1999.

 (8)  Includes 300,000 shares held by Baja Investment Co. LLC and 43,123 shares
      subject to options exercisable within 60 days of December 31, 1999.

 (9)  Represents 145 shares subject to an option exercisable within 60 days of
      December 31, 1999.

(10)  Includes 86,391 shares subject to options exercisable within 60 days of
      December 31, 1999.

(11)  Includes 232,371 shares subject to options exercisable within 60 days of
      December 31, 1999.

(12)  Includes 385,506 shares subject to options exercisable within 60 days of
      December 31, 1999.

(13)  Includes 474,655 shares subject to options exercisable within 60 days of
      December 31, 1999.

Selling Stockholders

  If the underwriters exercise their over-allotment option in full, the
following directors, officers and stockholders will sell the number of shares
indicated below:

<TABLE>
<CAPTION>
                                                                Percentage of
                                                                  Shares of
                            Beneficial   Number    Beneficial    Common Stock
                            Ownership      of      Ownership     Outstanding
                              Before     Shares      After          After
                          Over-Allotment  Being  Over-Allotment Over-Allotment
          Name               Exercise    Offered    Exercise       Exercise
          ----            -------------- ------- -------------- --------------
<S>                       <C>            <C>     <C>            <C>
Entities affiliated with
 Olympic Venture
 Partners................   2,819,828    110,000   2,709,828        12.79%
Entities affiliated with
 RRE Investors II, LLC...   1,201,288    100,000   1,101,288         5.20
Christopher G. Slatt.....   2,622,753     30,000   2,592,753        12.21
Steven N. Moore..........   2,622,753     30,000   2,592,753        12.21
Dennis R. Cloutier.......     445,587    100,000     345,587         1.61
Michael V. Martucci......     260,506     50,000     210,506           *
David W. Bonn............     559,655     30,000     529,655         2.45
</TABLE>
- --------

* Less than 1%

                                       65
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

  We are authorized to issue up to 80,000,000 shares of common stock and
10,000,000 shares of preferred stock. You should carefully read our restated
certificate of incorporation, which is included as an exhibit to the
registration statement of which this prospectus is a part.

Common Stock

  As of December 31, 1999, there were 19,511,752 shares of common stock
outstanding, held of record by approximately 75 stockholders. Following this
offering, there will be 21,136,752 shares of common stock outstanding, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options or warrants. The holders of common stock are entitled to
one vote for each share held of record on all matters submitted to a vote of
stockholders. Subject to preferences of any outstanding shares of preferred
stock, the holders of common stock are entitled to receive ratably any
dividends the board of directors declares out of funds legally available for
paying dividends. If WatchGuard is liquidated, dissolved or wound up, the
holders of common stock are entitled to share ratably in all assets remaining
after paying liabilities and liquidation preferences of any outstanding shares
of preferred stock. Holders of common stock have no preemptive rights or rights
to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon completion of this offering will be
fully paid and nonassessable.

Preferred Stock

  There are no shares of preferred stock outstanding. Under our certificate of
incorporation, the board of directors has the authority, without further action
by the stockholders, to issue up to 10,000,000 shares of preferred stock in one
or more series and to fix the price, rights, privileges, preferences and
restrictions of that preferred stock, any or all of which may be greater than
the rights of the common stock. The board of directors, without stockholder
approval, can issue preferred stock with voting, conversion or other rights
that could adversely affect the voting power and other rights of the holders of
common stock. Preferred stock could thus be issued quickly with terms that
could delay or prevent a change of control of WatchGuard or make removal of
management more difficult. Additionally, the issuance of preferred stock may
decrease the market price of the common stock and may adversely affect the
voting and other rights of the holders of common stock. We have no current
plans to issue any preferred stock.

Warrants

   As of December 31, 1999, there were outstanding warrants to purchase 225,000
shares of common stock. The warrants expire and are exercisable as follows:

  .  15,000 shares at an exercise price of $0.03 per share, expiring on July
     24, 2001;

  .  200,000 shares at an exercise price of $0.39 per share, expiring on June
     17, 2003; and

  .  10,000 shares at an exercise price of $13.00 per share, expiring on May
     26, 2004.

Antitakeover Effects of Provisions of Our Certificate of Incorporation, Our
Bylaws, Delaware Law and Washington Law

  Preferred Stock. Our board of directors, without stockholder approval, has
the authority under our certificate of incorporation to issue preferred stock
with rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change of control of WatchGuard or make removal of
management more difficult.


                                       66
<PAGE>

  Election and Removal of Directors. Our bylaws provide, effective with our
next annual meeting of stockholders, for the division of our board of directors
into three classes, as nearly equal in number as possible. The directors in the
first class will serve an initial term of one year, the directors in the second
class an initial term of two years, and the directors in the third class an
initial term of three years. After the initial term, all classes of directors
will serve for a three-year term, and one class will be elected each year by
our stockholders. Directors may be removed only for cause. Because this system
of electing and removing directors generally makes it more difficult for
stockholders to replace a majority of directors, it may tend to discourage a
third party from making a takeover bid or attempting to gain control of
WatchGuard and may maintain the incumbency of our board of directors.

  Approval for Certain Business Combinations. Our certificate of incorporation
requires that certain business combinations, including a merger, share exchange
and the disposition or encumbrance of a substantial part of our assets other
than in the usual course of business, be approved by the holders of at least
two-thirds of the outstanding shares. If the business combination has been
approved by a majority of the board of directors, however, the affirmative vote
required is a majority of the outstanding shares.

  Stockholder Meetings. Under our certificate of incorporation and bylaws, our
stockholders may call a special meeting only upon the request of holders of at
least 25% of the outstanding shares. Additionally, the board of directors, the
chairman of the board and the president may call special meetings of
stockholders.

  Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures for stockholder
proposals and the nomination of candidates for election as directors, other
than nominations made by or at the direction of the board of directors or a
committee of the board of directors.

  Washington Law. The laws of Washington, where our principal executive offices
are located, impose restrictions on transactions between foreign corporations
and significant stockholders. Chapter 23B.19 of the Washington Business
Corporation Act generally prohibits a target corporation from engaging in
significant business transactions with an acquiring person. An acquiring person
is defined as a person or group of persons that beneficially owns 10% or more
of the voting securities of the target corporation, for a period of five years
after the acquisition, unless a majority of the members of the target
corporation's board of directors approves the transaction before the
acquisition. Prohibited transactions include

  .  a merger or consolidation with, disposition of assets to, or issuance or
     redemption of stock to or from, the acquiring person;

  .  termination of 5% or more of the employees of the target corporation as
     a result of the acquiring person's acquisition of 10% or more of the
     shares; and

  .  allowing the acquiring person to receive any disproportionate benefit as
     a stockholder.

  After the five-year period, a significant business transaction may take place
so long as it complies with the fair price provisions of the statute or is
approved at an annual or special meeting of stockholders. A target corporation
includes a foreign corporation if

  .  the corporation's principal executive office is located in Washington;

  .  any of (a) more than 10% of the corporation's stockholders of record are
     Washington residents, (b) more than 10% of its shares of record are
     owned by Washington residents or (c) 1,000 or more of its stockholders
     of record are Washington residents;

  .  a majority of the corporation's employees are Washington residents or
     more than 1,000 Washington residents are employees of the corporation;
     and

  .  a majority of the corporation's tangible assets are located in
     Washington or the corporation has more than $50 million of tangible
     assets located in Washington.

                                       67
<PAGE>

  A corporation may not opt out of this statute. If WatchGuard continues to
meet the definition of a target corporation, Chapter 23B.19 of the Washington
Business Corporation Act may have the effect of delaying, deferring or
preventing a change of control of WatchGuard.

  Delaware Law. WatchGuard is subject to Section 203 of the Delaware General
Corporation Law, which prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder, unless

  .  before that date, the board of directors of the corporation approves
     either the business combination or the transaction that resulted in the
     stockholder's becoming an interested stockholder;

  .  upon consummation of the transaction that resulted in the stockholder's
     becoming an interested stockholder, the interested stockholder owns at
     least 85% of the outstanding voting stock, excluding shares held by
     directors, officers and employee stock plans; or

  .  on or after the consummation date, the business combination is approved
     by the board of directors and by the affirmative vote at an annual or
     special meeting of stockholders of at least 66 2/3% of the outstanding
     voting stock that is not owned by the interested stockholder.

  For purposes of Section 203, a business combination includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is generally a person who, together with
affiliates and associates of that person, (a) owns 15% or more of the
corporation's voting stock or (b) is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the prior three years.

  These charter provisions and provisions of Washington and Delaware law may
have the effect of delaying, deterring or preventing a change of control of
WatchGuard.

Registration Rights

  After this offering, the holders of 13,198,667 shares of common stock will
have rights with respect to the registration of those shares under the
Securities Act, under a registration rights agreement among the holders and
WatchGuard, dated as of April 24, 1998. Under the terms of the registration
rights agreement, if we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other security
holders exercising registration rights, the holders are entitled to notice of
the registration and to include shares of common stock in the registration at
our expense. Additionally, the holders are entitled to demand registration
rights under which they may require us to file a registration statement under
the Securities Act at our expense for their shares of common stock. Further,
the holders may require us to file additional registration statements on Form
S-3 at our expense. All of these registration rights are subject to conditions
and limitations, including the right of the underwriters of an offering to
limit the number of shares included in the registration.

Transfer Agent and Registrar

  The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.

Nasdaq National Market Listing

  Our common stock is quoted on The Nasdaq National Market under the symbol
WGRD. The last reported price of our common stock on February 10, 2000 was
$50.00 per share.

                                       68
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

  Future sales of substantial amounts of our common stock in the public market,
or the possibility of these sales occurring, could adversely affect prevailing
market prices for our common stock or our future ability to raise capital
through an offering of equity securities.

  After this offering, we will have outstanding 21,136,752 shares of common
stock, or 21,186,752 shares if the underwriters exercise their over-allotment
option in full. Of these shares, the 3,000,000 shares that we and the selling
stockholders expect to sell in this offering, or 3,450,000 shares if the
underwriters exercise their over-allotment option in full, will be freely
tradable in the public market without restriction under the Securities Act,
unless the shares are acquired by affiliates of WatchGuard, as that term is
defined in Rule 144 under the Securities Act. In general, affiliates include
directors, officers and 10% stockholders.

  Of the remaining 18,136,752 shares of common stock that will be outstanding
after this offering, 13,799,815 shares are restricted shares. We issued and
sold the restricted shares in private transactions in reliance on exemptions
from registration under the Securities Act. Restricted shares may be sold in
the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or 701 under the Securities Act,
which are summarized below.

  Our executive officers and directors and the selling stockholders, who
collectively hold an aggregate of 12,491,185 restricted shares, have agreed not
to offer, sell, contract to sell, grant any option to purchase or dispose of
their shares by any other means for a period of 90 days from the date of this
prospectus. This 90-day period is known as the lock-up period. We also have
entered into an agreement with Credit Suisse First Boston Corporation that we
will not offer, sell or dispose of common stock by any other means during the
lock-up period.

  On the date of this prospectus, 1,110,053 shares that are not subject to
lock-up agreements will be eligible for sale in the public market under Rules
144 and 701. On the date the lock-up agreements expire, an additional
12,491,185 restricted shares will be eligible for immediate sale, of which
12,067,239 shares will be subject to the volume, manner of sale and other
limitations of Rule 144. The remaining 409,307 restricted shares will be
eligible for sale under Rule 144 when one-year holding periods expire.

  Some of the shares issued upon exercise of options we granted before the date
of this prospectus will also be available for sale in the public market under
Rule 701 under the Securities Act. Rule 701 permits resales of those shares in
reliance on Rule 144 but without compliance with some of the restrictions
imposed by Rule 144, including the holding period requirement. Under Rule 144,
a person who has beneficially owned restricted shares for at least one year
would be entitled to sell within any three-month period up to the greater of

  .  1% of the then-outstanding shares of common stock, which will be
     approximately 211,368 shares immediately after this offering; and

  .  the average weekly trading volume of the common stock during the four
     calendar weeks preceding the filing of a Form 144 with respect to the
     sale.

  Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
WatchGuard. Under Rule 144(k), a person who is not deemed to have been an
affiliate of WatchGuard during the 90 days preceding a sale and who has
beneficially owned the restricted shares for at least two years may sell them
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

  The 10,610,796 shares of common stock reserved for issuance under our stock
option plan and our employee stock purchase plan have been registered on a
registration statement on Form S-8, which became effective at the time of our
initial public offering in July 1999. Shares issued under our stock option plan
and

                                       69
<PAGE>

our employee stock purchase plan therefore may be sold in the open market. Some
holders, however, will be subject to the Rule 144 limitations applicable to
affiliates, the lock-up agreements and vesting restrictions imposed by us.

  In addition, following this offering, the holders of an aggregate of
13,198,667 shares of outstanding common stock will have rights to require us to
register their shares for future sale.

                                       70
<PAGE>

                                  UNDERWRITING

  Under the terms and subject to the conditions contained in an underwriting
agreement dated February   , 2000, we and the selling stockholders have agreed
to sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated,
and SoundView Technology Group, Inc. are acting as representatives, the
following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
                                                                        Number
          Underwriter                                                  of Shares
          -----------                                                  ---------
   <S>                                                                 <C>
   Credit Suisse First Boston Corporation.............................
   Dain Raucher Wessels...............................................
   SoundView Technology Group, Inc....................................
                                                                       ---------
     Total............................................................ 3,000,000
                                                                       =========
</TABLE>

  The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of nondefaulting underwriters may be increased or the
offering of common stock may be terminated.

  The selling stockholders have granted the underwriters a 30-day option to
purchase up to an aggregate of 450,000 additional outstanding shares from the
selling stockholders at the public offering price less the underwriting
discounts and commissions. The option may be exercised only to cover any over-
allotments of common stock.

  The underwriters propose to offer the shares of common stock initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $     per share. The underwriters
and selling group members may allow a discount of $     per share on sales to
other broker/dealers. After the public offering, the public offering price and
concession and discount to broker/dealers may be changed by the
representatives.

  The following table summarizes the compensation and estimated expenses we and
the selling stockholders will pay.

<TABLE>
<CAPTION>
                                    Per Share                       Total
                          ----------------------------- -----------------------------
                             Without          With         Without          With
                          Over-Allotment Over-Allotment Over-Allotment Over-Allotment
                          -------------- -------------- -------------- --------------
<S>                       <C>            <C>            <C>            <C>
Underwriting discounts
 and commissions paid by
 us.....................      $              $            $              $
Expenses payable by us..      $              $            $              $
Underwriting discounts
 and commissions paid by
 selling stockholders...      $              $            $              $
Expenses payable by the
 selling stockholders...      $              $            $              $
</TABLE>

  We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 90 days after the date of this prospectus, except
grants of employee stock options under our stock option plan, issuances of
shares under our employee stock purchase plan, issuances of shares upon the
exercise of stock options or warrants outstanding on the date of this
prospectus and issuances of securities in connection with strategic
acquisitions or other business alliances, provided that the fair market value
of those securities does not exceed $50 million on the date of issuance.

  All but one of our officers, our directors and some of our stockholders,
including the selling stockholders, have agreed that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,

                                       71
<PAGE>

any shares of our common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock, enter into a transaction
which would have the same effect, or enter into any swap, hedge or other
arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such transaction is
to be settled by delivery of our common stock or other securities, in cash or
otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, without the prior written consent of Credit Suisse First
Boston Corporation, for a period of 90 days after the date of this prospectus.

  We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments that
the underwriters may be required to make in that respect.

  Our common stock is quoted on The Nasdaq National Market.

  The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Exchange Act.

  .  Over-allotment involves syndicate sales in excess of the offering size,
     which creates a syndicate short position.

  .  Stabilizing transactions permit bids to purchase the underlying security
     so long as the stabilizing bids do not exceed a specified maximum.

  .  Syndicate covering transactions involve purchases of the common stock in
     the open market after the distribution has been completed in order to
     cover syndicate short positions.

  .  Penalty bids permit the representatives to reclaim a selling concession
     from a syndicate member when the common stock originally sold by the
     syndicate member is purchased in a stabilizing or syndicate covering
     transaction to cover syndicate short positions.

  .  In passive market making, market makers in the common stock who are
     underwriters or prospective underwriters may, subject to limitations,
     make bids for or purchases of the common stock until the time, if any,
     at which a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be absent these transactions. These transactions may be effected on
The Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.

  A prospectus in electronic format is being made available on an Internet web
site maintained by Wit SoundView's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on web sites
maintained by each of these dealers. Other than the prospectus in electronic
format, the information on the web site of Wit SoundView's affiliate and any
information contained on any other web site maintained by Wit Capital is not
part of this prospectus or of the registration statement of which this
prospectus is a part. Neither we nor any underwriter in its capacity as
underwriter has approved or endorsed information not contained in this
prospectus, and you should not rely on any such information.

  Dain Rauscher Incorporated, the parent of Dain Rauscher Wessels, is a limited
partner in Olympic Venture Partners IV, L.P., which is one of the entities that
invested in our preferred stock and now holds shares of our common stock. On
March 9, 1999, Olympic Venture Partners IV, L.P. loaned $774,225 to us under a
promissory note bearing interest at the rate of 6% each year, which was repaid
on August 2, 1999. As part of the loan, Olympic Venture Partners IV, L.P.
received a warrant to purchase 11,060 shares of our common stock, which it
exercised for common stock at the closing of our initial public offering. All
shares owned by Olympic Venture Partners IV, L.P., other than the shares being
sold in this offering, are subject to an agreement preventing them from being
sold until the expiration of 90 days following the date of this prospectus. The
shares that Dain Rauscher Incorporated beneficially owns through its interest
in Olympic Venture Partners IV, L.P. are also restricted from sale or transfer
under Rule 2710(c)(7) of the National Association of Securities Dealers'
conduct rules. The shares underlying the warrants exercised at the time of our
initial public offering are restricted under the securities laws until August
2, 2001.

                                       72
<PAGE>

                          NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

  The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that the issuer and selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws, which will vary depending on the
relevant jurisdiction and which may require resales to be made in accordance
with available statutory exemptions or under a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers should
seek legal advice before any resale of the common stock.

Representations of Purchasers

  Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to us, the selling stockholders and the dealer from
whom the purchase confirmation is received that (i) the purchaser is entitled
under applicable provincial securities laws to purchase common stock without
the benefit of a prospectus qualified under the securities laws, (ii) where
required by law, the purchaser is purchasing as principal and not as agent and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."

Rights of Action (Ontario Purchasers)

  The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

  All of the issuer's directors and officers as well as the experts named
herein and the selling stockholders may be located outside of Canada and, as a
result, Canadian purchasers may be unable to effect service of process within
Canada upon the issuer or such persons. All or a substantial portion of the
assets of the issuer and such persons may be located outside of Canada and, as
a result, it may not be possible to satisfy a judgment against the issuer or
such persons in Canada or to enforce a judgment obtained in Canadian courts
against such issuer or persons outside of Canada.

Notice to British Columbia Residents

  A purchaser of common stock to whom the Securities Act (British Columbia)
applies is required to file a report with the British Columbia Securities
Commission within ten days of the sale of any common stock acquired by such
purchaser pursuant to this offering. The report must be in the form attached to
British Columbia Securities Commission Blanket Order BOR #95/17, a copy of
which may be obtained from us. Only one report must be filed for common stock
acquired on the same date and under the same prospectus exemption.

Taxation and Eligibility for Investment

  Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

                                       73
<PAGE>

                                 LEGAL MATTERS

  WatchGuard's legal counsel is Perkins Coie LLP of Seattle, Washington. The
underwriters' legal counsel is Gray Cary Ware & Freidenrich LLP of Palo Alto,
California.

                                    EXPERTS

  Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at December 31, 1998 and 1999, and for each of the
three years in the period ended December 31, 1999, as set forth in their
reports. We have included our financial statements and schedule in this
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's reports, given on their authority as experts in accounting and
auditing.

  The financial statements of BeadleNet, LLC and its predecessor included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing in this prospectus, and are
included in reliance upon the report of that firm, given on their authority as
experts in accounting and auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

  We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which is part of the registration
statement, does not contain all the information included in the registration
statement. Because some information is omitted, you should refer to the
registration statement and its exhibits. For copies of actual contracts or
documents referred to in this prospectus, you should refer to the exhibits
attached to the registration statement. You may review a copy of the
registration statement, including the attached exhibits and schedule, at the
SEC's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC at
7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
also obtain copies of these materials from the Public Reference Room of the
SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a
web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants, such as WatchGuard,
that file electronically with the SEC.

                                       74
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Audited Financial Statements: WatchGuard Technologies, Inc.
Report of Ernst & Young LLP, Independent Auditors.........................  F-2
Balance Sheets............................................................  F-3
Statements of Operations..................................................  F-4
Statements of Stockholders' Equity........................................  F-5
Statements of Cash Flows..................................................  F-6
Notes to Financial Statements.............................................  F-7

Audited Financial Statements of Business Acquired: BeadleNet, LLC
Report of Deloitte & Touche LLP, Independent Auditors..................... F-22
Balance Sheets............................................................ F-23
Statements of Operations.................................................. F-24
Statements of Capital Deficiency.......................................... F-25
Statements of Cash Flows.................................................. F-26
Notes to Financial Statements............................................. F-27

Unaudited Pro Forma Financial Information
Unaudited Pro Forma Combined Condensed Statement of Operations............ F-33
Notes to Unaudited Pro Forma Combined Condensed Financial Statements...... F-34
</TABLE>

                                      F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
WatchGuard Technologies, Inc.

  We have audited the accompanying balance sheets of WatchGuard Technologies,
Inc. as of December 31, 1998 and 1999 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
WatchGuard's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WatchGuard Technologies, Inc.
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

                                          ERNST & YOUNG LLP

Seattle, Washington

February 4, 2000

                                      F-2
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                                 BALANCE SHEETS
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               1998     1999
                                                             --------  -------
ASSETS
<S>                                                          <C>       <C>
Current assets:
  Cash and cash equivalents................................. $  1,712  $ 1,903
  Securities available for sale.............................      --    24,498
  Trade accounts receivable, net............................    3,458    3,772
  Inventories...............................................    2,156    2,013
  Prepaid expenses and other receivables....................      483    1,275
                                                             --------  -------
Total current assets........................................    7,809   33,461
Equipment and furniture, net................................    1,140    1,927
Goodwill....................................................      --     4,830
Other intangibles and other assets..........................       83    1,093
                                                             --------  -------
Total assets................................................ $  9,032  $41,311
                                                             ========  =======

<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                          <C>       <C>
Current liabilities:
  Line of credit............................................ $  2,500  $   --
  Accounts payable..........................................    2,185    2,088
  Accrued expenses..........................................    1,016    2,362
  Deferred revenue..........................................    1,841    4,233
  Equipment term loan.......................................      609      383
                                                             --------  -------
Total current liabilities...................................    8,151    9,066
Commitments
Stockholders' equity:
  Preferred stock, $0.001 par value:
    Authorized shares: 10,000,000
    Shares issued and outstanding: 6,712,658 at December 31,
     1998 and 0 at December 31, 1999........................        6      --
  Common stock, $0.001 par value:
    Authorized shares: 80,000,000
    Shares issued and outstanding: 1,362,744 at December 31,
     1998 and 19,511,752 at December 31, 1999...............        1       19
  Additional paid-in capital................................   16,261   63,694
  Stock-based compensation..................................   (1,466)  (1,452)
  Accumulated other comprehensive loss......................      --       (77)
  Accumulated deficit.......................................  (13,921) (29,939)
                                                             --------  -------
    Total stockholders' equity..............................      881   32,245
                                                             --------  -------
    Total liabilities and stockholders' equity.............. $  9,032  $41,311
                                                             ========  =======
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Revenues:
  Product........................................ $  4,975  $ 10,678  $ 17,329
  Service........................................      123       701     3,290
                                                  --------  --------  --------
    Total revenues...............................    5,098    11,379    20,619
Cost of revenues.................................    1,610     3,925     7,964
                                                  --------  --------  --------
Gross margin.....................................    3,488     7,454    12,655
Operating expenses:
  Sales and marketing............................    4,369     8,519    13,512
  Research and development.......................    2,192     4,442     7,118
  General and administrative.....................    1,323     2,454     3,646
  Stock-based compensation.......................      --      1,039       926
  Acquired in-process technology and amortization
   of intangible assets acquired.................      --        --      3,626
                                                  --------  --------  --------
    Total operating expenses.....................    7,884    16,454    28,828
                                                  --------  --------  --------
Operating loss...................................   (4,396)   (9,000)  (16,173)
Interest income..................................       88        84       640
Interest expense.................................      (26)     (203)     (485)
                                                  --------  --------  --------
Net loss......................................... $ (4,334) $ (9,119) $(16,018)
                                                  ========  ========  ========
Basic and diluted net loss per share............. $ (17.17) $ (11.34) $  (1.80)
                                                  ========  ========  ========
Shares used in calculation of basic and diluted
 net loss per share..............................      252       804     8,903
                                                  ========  ========  ========
</TABLE>


                            See accompanying notes.

                                      F-4
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                      STATEMENTS OF STOCKHOLDERS' EQUITY
                       (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                                    Accumulated
                      Preferred Stock      Common Stock    Additional                  Other                     Total
                     ------------------  -----------------  Paid-in   Stock-Based  Comprehensive Accumulated Stockholders'
                       Shares    Amount    Shares   Amount  Capital   Compensation     Loss        Deficit      Equity
                     ----------  ------  ---------- ------ ---------- ------------ ------------- ----------- -------------
<S>                  <C>         <C>     <C>        <C>    <C>        <C>          <C>           <C>         <C>
Balance, January 1,
 1997..............   3,000,004  $   3          --  $ --    $    147    $    --        $ --       $    (468)   $   (318)
 Sale of Series B
  preferred stock,
  net of issuance
  costs of $21.....   2,316,666      2          --    --       5,977         --          --             --        5,979
 Issuance of
  common stock in
  settlement of
  royalty
  payments.........         --     --       400,000   --          52         --          --             --           52
 Exercise of
  common stock
  options and
  warrants.........         --     --       132,916   --           3         --          --             --            3
 Net loss..........         --     --           --    --         --          --          --          (4,334)     (4,334)
                     ----------  -----   ---------- -----   --------    --------       -----      ---------    --------
Balance, December
 31, 1997..........   5,316,670      5      532,916   --       6,179         --          --          (4,802)      1,382
 Sales of Series B
  preferred
  stock............      38,610    --           --    --         100         --          --             --          100
 Sales of Series C
  preferred stock,
  net of issuance
  costs of $25.....   1,357,378      1          --    --       6,974         --          --             --        6,975
 Issuance of stock
  warrant to a
  customer.........         --     --           --    --         470         --          --             --          470
 Stock-based
  compensation.....         --     --           --    --       2,505      (2,505)        --             --          --
 Amortization of
  stock-based
  compensation.....         --     --           --    --         --        1,039         --             --        1,039
 Exercise of
  common stock
  options and
  warrants.........         --     --       829,828     1         33         --          --             --           34
 Net loss..........         --     --           --    --         --          --          --          (9,119)     (9,119)
                     ----------  -----   ---------- -----   --------    --------       -----      ---------    --------
Balance, December
 31, 1998..........   6,712,658      6    1,362,744     1     16,261      (1,466)        --         (13,921)        881
 Proceeds from
  issuance of
  common stock
  from initial
  public offering,
  net of offering
  costs............         --     --     3,500,000     3     40,666         --          --             --       40,669
 Conversion of
  preferred stock
  into common
  stock............  (6,712,658)    (6)  13,425,316    13         (7)        --          --             --          --
 Stock-based
  compensation.....         --     --           --    --         162        (162)        --             --          --
 Issuance of
  common stock to
  an employee......         --     --        51,948   --         750        (750)        --             --          --
 Amortization of
  stock-based
  compensation.....         --     --           --    --         --          926         --             --          926
 Issuance of
  common stock in
  connection with
  acquisition......         --     --       335,931   --       5,450         --          --             --        5,450
 Issuance of stock
  warrants.........         --     --           --    --         195         --          --             --          195
 Exercise of
  common stock
  options and
  warrants.........         --     --       835,813     2        217         --          --             --          219
 Comprehensive
  loss:
   Net unrealized
    loss on
    securities
    available for
    sale...........         --     --           --    --         --          --          (77)           --          (77)
   Net loss........         --     --           --    --         --          --          --         (16,018)    (16,018)
                                                                                                               --------
   Comprehensive
    loss...........                                                                                             (16,095)
                     ----------  -----   ---------- -----   --------    --------       -----      ---------    --------
Balance, December
 31, 1999 .........         --   $ --    19,511,752 $  19   $ 63,694    $ (1,452)      $ (77)     $ (29,939)   $ 32,245
                     ==========  =====   ========== =====   ========    ========       =====      =========    ========
</TABLE>

                            See accompanying notes.

                                      F-5
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Operating activities:
Net loss........................................  $ (4,334) $ (9,119) $(16,018)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation..................................       207       235       602
  Amortization of intangible assets.............        52        86       259
  Amortization of stock-based compensation......       --      1,039       926
  Loss on disposal of equipment.................       --        --         57
  Warrant issued in exchange for services.......       --        470       --
  Acquired in-process research and development..       --        --      3,381
  Provision for sales returns and allowances....       --      1,655     1,083
  Provision for bad debt expense................       122       418       129
  Noncash interest expense......................       --        --        195
  Changes in operating assets and liabilities:
    (Increase) in accounts receivable...........    (1,551)   (3,968)   (1,526)
    (Increase) decrease in inventories..........      (214)   (1,938)      148
    (Increase) in prepaid expenses and other....      (113)     (288)     (792)
    (Increase) decrease in other assets.........      (325)      183        12
    Increase in accounts payable and accrued
     expenses...................................       868     2,093     1,249
    Increase (decrease) in deferred revenue.....       (22)    1,528     2,392
                                                  --------  --------  --------
Net cash used in operating activities...........    (5,310)   (7,606)   (7,903)

Investing activities:
Purchases of equipment and furniture............      (391)   (1,003)   (1,387)
Purchase of intangible assets...................       (70)      --        --
Proceeds from sale of marketable securities.....       --        --      1,000
Purchases of marketable securities..............       --        --    (25,575)
Net cash paid in connection with BeadleNet
 acquisition....................................       --        --     (4,106)
                                                  --------  --------  --------
Net cash used in investing activities...........      (461)   (1,003)  (30,068)

Financing activities:
Borrowings on line of credit, long-term debt and
 notes payable..................................       700     2,663     7,280
Issuance of warrants............................       --        --        195
Principal repayments on line of credit, long-
 term debt and notes payable....................      (540)      (54)  (10,201)
Proceeds from sale of preferred stock...........     5,979     7,075       --
Proceeds from sale of common stock, net of
 expenses.......................................       --        --     40,669
Proceeds from exercise of common stock options
 and warrants...................................         3        34       219
                                                  --------  --------  --------
Net cash provided by financing activities.......     6,142     9,718    38,162
                                                  --------  --------  --------
Net increase in cash and cash equivalents.......       371     1,109       191
Cash and cash equivalents at beginning of period
 ...............................................       232       603     1,712
                                                  --------  --------  --------
Cash and cash equivalents at end of period......  $    603  $  1,712     1,903
                                                  ========  ========  ========
Supplemental disclosure of cash flow informa-
 tion:
Cash paid for interest..........................  $     21  $    179  $    508
                                                  ========  ========  ========
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                         NOTES TO FINANCIAL STATEMENTS


1. Accounting Policies

Description of Business

  WatchGuard Technologies, Inc. is a provider of Internet security solutions
designed to protect enterprises or telecommuters using the Internet for
electronic commerce and communications.

Revenue Recognition

  Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued
in October 1997 by the American Institute of Certified Public Accountants
(AICPA) and was amended by SOP 98-4. In December 1998, the AICPA issued SOP 98-
9, which amends SOP 97-2 and 98-4 and is effective for transactions entered
into after March 15, 1999. WatchGuard adopted SOP 97-2, as amended by SOP 98-9,
effective January 1, 1998. Based upon its interpretation of SOP 97-2 and SOP
98-9, WatchGuard believes its current revenue recognition policies and
practices are consistent with the SOPs.

  WatchGuard generates revenues through sales of its Firebox products,
including related software licenses, and subscriptions for its LiveSecurity
broadcast service, which includes threat responses, information alerts,
software updates and maintenance. Software license revenues are generated from
licensing the rights to use WatchGuard's products directly to end-users, from
sublicense fees from resellers, distributors and, beginning in late 1998, from
sales of its products to Internet service providers (ISPs), which utilize the
product to provide managed security services to the ISPs' customers. Revenues
from LiveSecurity subscriptions are recognized ratably over the term of the
contract, typically one year.

  Revenues from software license agreements are generally recognized upon
delivery of software if persuasive evidence of an arrangement exists,
collection is probable and the fee is fixed or determinable, and vender-
specific objective evidence exists to allocate the total fee to elements of the
arrangement. Payment terms do not extend beyond a year. A limited number of
WatchGuard's distributors have the right to delay payment until the product is
sold to the end-user. Revenues from these arrangements are not recognized until
sale to the end-user occurs. WatchGuard provides unspecified upgrades on a when
and if available basis. These upgrades are considered post-contract customer
support (PCS) and are recognized as revenues ratably over the terms of the PCS
arrangement. Vendor-specific objective evidence is typically based on the price
charged when an element is sold separately or, in the case of an element not
sold separately, on the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. WatchGuard uses the residual method, as defined in SOP 98-9, to
allocate revenue to delivered elements once it has established vendor-specific
objective evidence for all undelivered elements. Under the residual method, any
discount in the arrangement is allocated to the delivered element. WatchGuard
provides for return rights and pricing protection rights for some of its
customers. The return rights included in these customer agreements are
generally limited to a percentage of purchases by these customers for the
previous quarter. The pricing protection rights in these agreements are
generally limited to 60 to 90 days after notification of a price change.
Revenues are reduced by the provision for estimated returns and allowance at
the time the sale is made. The reserves are reviewed and revised as needed.

Fair Values of Financial Instruments

  At December 31, 1999, WatchGuard had the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities and equipment loans. The carrying value of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximates their fair value based on the liquidity of these financial
instruments or based on their short-term nature. The carrying value of debt
approximates fair value based on the market interest rates available to
WatchGuard for debt of similar risk and maturities.

                                      F-7
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


Cash Equivalents

  WatchGuard considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents. Cash equivalents are
carried at fair market value.

Securities Available for Sale

  WatchGuard's investments are classified as available for sale and are stated
at fair value on the balance sheet with the unrealized gains and losses
included as a component of stockholders' equity. Interest earned on securities
is included in interest income. The amortized cost of investments is adjusted
for amortization of premiums and accretion of discounts to maturity. These
amortization and accretions are included in interest income. The cost of
securities sold is calculated using the specific identification method.
WatchGuard's investment guidelines state that the maximum life of any one
security shall be two years, with the maximum weighted average life of the
investment portfolio being one year.

Inventories

  Inventories are stated at the lower of cost (first-in, first-out basis) or
market. WatchGuard outsources all of its hardware manufacturing and assembly to
one manufacturer and one assembler. The inability of the manufacturer and
assembler to supply product in a timely manner and on terms acceptable to
WatchGuard could severely affect WatchGuard's ability to meet customers'
demands.

Equipment and Furniture

  Equipment and furniture is stated at cost, less accumulated depreciation.
Equipment and furniture is depreciated using the straight-line method over
estimated useful lives ranging from three to five years.

Goodwill and Other Intangibles

  Goodwill and other intangibles represent the excess of the purchase price
over the fair value of net tangible assets acquired. Goodwill and other
intangibles are being amortized on a straight-line basis over lives ranging
from two to five years.

Long-Lived Assets

  In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internal and external,
that may suggest impairment. To date, no such impairment has been indicated.
Should there be an impairment in the future, WatchGuard will measure the amount
of the impairment based on undiscounted expected future cash flows from the
impaired assets. The cash flow estimates that will be used will contain
management's best estimates, using assumptions and projections appropriate and
customary at the time.

Research and Development

  Research and development costs are expensed as incurred and consist primarily
of software development costs. Financial accounting standards require the
capitalization of certain software development costs after technological
feasibility of the software is established. In the development of WatchGuard's
new products and enhancements to existing products, the technological
feasibility of the software is not established until

                                      F-8
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


substantially all product development is complete, including the development of
a working model. Internal software development costs that were eligible for
capitalization were insignificant and were charged to research and development
expense in the accompanying statements of operations.

Net Loss per Share

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

Advertising Costs

  WatchGuard expenses advertising costs as incurred. Total expenses were
$199,500, $60,000 and $234,000 in 1997, 1998 and 1999, respectively.

Concentration of Credit Risk

  WatchGuard is subject to concentrations of credit risk primarily from cash
investments and accounts receivable. WatchGuard's credit risk is managed by
investing its excess cash in high-quality money market instruments and
securities available for sale. In addition, substantially all of WatchGuard's
accounts receivable are due from WatchGuard's resellers, distributors and ISPs
located throughout the world. International sales were $2.8 million, $4.0
million and $10.3 million, or 56%, 35% and 50% of total revenues for 1997, 1998
and 1999, respectively. No single customer or foreign country accounted for
more than 10% of revenues in the periods presented, except that in 1997
revenues from one customer in Japan accounted for 17% of total revenues.
Foreign geographic regions accounting for 10% or more of revenues were Europe,
with 22%, 18% and 26% of total revenues, and Asia, with 24%, 10% and 16% of
total revenues, for 1997, 1998 and 1999, respectively.

Stock Compensation

  WatchGuard has elected to apply the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, WatchGuard
accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Compensation cost for stock
options is measured as the excess, if any, of the fair value of WatchGuard's
common stock at the date of grant over the stock option exercise price.

Income Taxes

  WatchGuard recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. WatchGuard provides a
valuation allowance for deferred tax assets that cannot be currently recognized
due to WatchGuard's losses and the uncertainty of future profitability.

Comprehensive Loss

  As of January 1, 1998, WatchGuard adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. WatchGuard's
comprehensive loss includes all items that comprise net loss and the effect of
unrealized gains or losses on available-for-sale securities. Comprehensive loss
is shown on the statement of stockholders' equity.

                                      F-9
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Reclassifications

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


New Accounting Pronouncements

  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Because WatchGuard has never used nor currently intends to use
derivatives, management does not anticipate that the adoption of this new
standard will have a significant effect on earnings or the financial position
of WatchGuard.

2. Balance Sheet Account Detail

Trade Accounts Receivable, Net

  Trade accounts receivable, net consisted of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                1998     1999
                                                               -------  -------
                                                               (In thousands)
     <S>                                                       <C>      <C>
     Trade accounts receivable................................ $ 4,522   $4,499
     Reserve for returns......................................    (615)    (550)
     Allowance for uncollectable accounts.....................    (449)    (177)
                                                               -------  -------
                                                                $3,458   $3,772
                                                               =======  =======

Inventories

  Inventories consisted of the following:

<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                1998     1999
                                                               -------  -------
                                                               (In thousands)
     <S>                                                       <C>      <C>
     Finished goods........................................... $ 1,203  $ 1,093
     Components...............................................     953      920
                                                               -------  -------
                                                               $ 2,156  $ 2,013
                                                               =======  =======
</TABLE>

                                      F-10
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


Equipment and Furniture

  Equipment and furniture consisted of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1998    1999
                                                                ------- -------
                                                                (In thousands)
     <S>                                                        <C>     <C>
     Computer equipment........................................ $   831 $ 1,615
     Furniture and fixtures....................................     337     576
     Software..................................................     302     638
                                                                ------- -------
                                                                  1,470   2,829
     Less accumulated depreciation.............................     330     902
                                                                ------- -------
                                                                $ 1,140 $ 1,927
                                                                ======= =======
</TABLE>

Accrued Expenses

  Accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1998    1999
                                                                 ------- -------
                                                                 (In thousands)
     <S>                                                         <C>     <C>
     Accrued payroll-related expenses........................... $   526 $ 1,323
     Acquisition-related liabilities............................     --      531
     Other......................................................     490     508
                                                                 ------- -------
                                                                 $ 1,016 $ 2,362
                                                                 ======= =======
</TABLE>

  Of the liabilities related to WatchGuard's acquisition of BeadleNet, LLC,
$400,000 relates to contingent consideration earned before December 31, 1999.
The remaining acquisition-related liabilities relate to estimated acquisition
costs. See Note 12.

3. Securities Available for Sale

  Securities available for sale consist of the following:

<TABLE>
<CAPTION>
                                                  Gross      Gross
                                        Market  Unrealized Unrealized Amortized
                                        Value     Gains      Losses     Cost
                                       -------- ---------- ---------- ---------
                                                    (In thousands)
<S>                                    <C>      <C>        <C>        <C>
December 31, 1999:
  Corporate debt securities........... $ 23,485   $ --       $ (75)   $ 23,560
  U.S. government and agency
   obligations........................    1,013     --          (2)      1,015
                                       --------   -----      -----    --------
                                       $ 24,498   $ --       $ (77)   $ 24,575
                                       ========   =====      =====    ========
</TABLE>


                                      F-11
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

  WatchGuard's gross realized gains or losses in 1999 on sales of available-
for-sale securities were immaterial. The contractual maturities of WatchGuard's
available-for-sale securities are shown below:

<TABLE>
<CAPTION>
                                                        Estimated Fair Amortized
                                                         Market Value    Cost
                                                        -------------- ---------
                                                             (In thousands)
<S>                                                     <C>            <C>
December 31, 1999:
  Due in one year or less..............................    $14,449      $14,472
  Due in one year through two years....................     10,049       10,103
                                                           -------      -------
                                                           $24,498      $24,575
                                                           =======      =======
</TABLE>

4. Acquisition of Intangibles

  In March 1996, WatchGuard acquired certain technology (source code for its
software products) from Mazama Software Labs, Inc. for $50,000. Additionally,
WatchGuard was required to make royalty payments for a three-year period on the
sale of products that utilized the Mazama technology, with the total royalty
payments not to exceed $4 million. In June 1997, WatchGuard and Mazama agreed
to a buy-out of the royalty payments due Mazama, with WatchGuard paying $70,000
in cash and issuing 400,000 shares of its common stock valued at $52,000, the
deemed fair value at that date, which was based on the board of directors' best
estimate of fair value. As of December 31, 1999, this amount was fully
amortized.

5. Borrowing Agreements

Line of Credit and Term Loans

  At December 31, 1999, WatchGuard had borrowings outstanding under (a) a $4.5
million working capital revolving line of credit; (b) a $95,000 equipment term
loan; and (c) a $288,000 equipment term loan. All three facilities are from a
commercial bank.

  The revolving line of credit is for operating needs and expires in November
2000. Principal and interest are due at maturity. Borrowings under the line of
credit bear interest at the bank's prime interest rate plus 1.0% (9.5% at
December 31, 1999). The borrowing base for the line is to be monitored on a
monthly basis and is to consist of the sum of up to 75% of eligible domestic
and 50% of eligible foreign accounts receivable. The line of credit is
collateralized by substantially all of WatchGuard's assets. There was no
balance outstanding on this line at December 31, 1999 and $2.1 million was
available for borrowing. The weighted average interest rate on WatchGuard's
short-term borrowings for 1999 was 8.7%.

  The $95,000 term loan bears interest at the bank's prime interest rate plus
1.5% (10.0% at December 31, 1999) and matures in March 2001. The $288,000 term
loan bears interest at the bank's prime interest rate plus 1% (9.5% at December
31, 1999) and matures in December 2001. The term loans require monthly
principal and interest payments, with the principal payments fixed at $6,327
and $11,995, respectively, and are collateralized by equipment.

  At December 31, 1999, WatchGuard was not in compliance with one of its
covenants related to the line of credit and term loans, but obtained a waiver
for noncompliance.

Convertible Note Financing and Warrants

  In March 1999, WatchGuard entered into convertible note agreements with its
existing investors for an aggregate of $3,000,000. In connection with these
note agreements, WatchGuard issued warrants to purchase

                                      F-12
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

42,856 shares of common stock at an exercise price of $7.00 per share, all of
which were exercisable immediately. WatchGuard assigned the warrants a fair
value of $155,139 based upon the Black Scholes pricing model, based upon a fair
value of the underlying stock of $8.00 per share, a risk-free interest rate of
6%, a dividend yield rate of 0%, volatility of 0.6 and an expected life of one
year. WatchGuard amortized the resulting discount on the notes over the
expected term of the notes. Upon completion of WatchGuard's initial public
offering, the notes were repaid and the warrants were exercised.

Bridge Loan

  In May and June 1999, WatchGuard amended its loan and security agreement with
its bank. The amendments primarily provided for a secured bridge loan facility
that immediately made available to WatchGuard an additional $4.25 million, of
which $2.0 million was guaranteed by existing investors. WatchGuard granted the
bank warrants to purchase up to 14,500 shares of common stock, at an exercise
price of $13.00 per share. The loan was repaid with proceeds from the initial
public offering.


6. Stockholders' Equity

Reincorporation

  WatchGuard was incorporated as Seattle Software Labs, Inc. in the state of
Washington in February 1996. In March 1996, WatchGuard sold 1,000,000 shares of
Series A preferred stock to its two cofounders for $0.05 per share, resulting
in aggregate proceeds of $50,000. In July 1996, WatchGuard sold 350,878 shares
of what was originally characterized as Series B preferred stock to the
cofounders for $0.29 per share, resulting in aggregate proceeds of $100,000. In
connection with the restatement of its Articles of Incorporation in March 1997,
WatchGuard reclassified the preferred shares originally characterized as Series
B preferred stock into 2,000,004 Series A preferred shares. The financial
statements have been restated to reflect this recapitalization.

Stock Split

  On May 26, 1999, the board of directors authorized a two-for-one split of
WatchGuard's common stock and approved an amendment to the certificate of
incorporation to increase the number of authorized common and preferred shares
to 80,000,000 and 10,000,000 shares, respectively. The stock split was effected
on July 8, 1999. The related common share, preferred share and per share data
in the accompanying financial statements have been restated to reflect the
stock split.

Preferred Stock

  In May 1997, WatchGuard completed a Series B preferred stock offering by
selling 2,316,666 shares at $2.59 per share, aggregating gross proceeds of $6.0
million. In March 1998, WatchGuard issued an additional 38,610 shares of Series
B preferred stock at $2.59 per share, aggregating gross proceeds of $100,000.
In April 1998, WatchGuard completed a Series C preferred stock offering by
selling 1,357,378 shares at $5.16 per share, aggregating gross proceeds of
approximately $7.0 million.

  Holders of Series A, B, and C preferred stock had preferential rights to
dividends when and if declared by the board of directors. Series A, B and C
preferred stockholders had the right to one vote for each share of common stock
into which these Series A, B, and C preferred stock could then be converted
and, with respect to that vote, had full voting rights and powers equal to
those of the holders of common stock.

  In the event of liquidation, the holders of Series A, B, and C preferred
stock had preferential rights to liquidation payments of $0.05, $2.59, and
$5.16 per share, respectively, plus any declared, but unpaid,

                                      F-13
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


dividends. Series A, B, and C preferred stock was convertible into common stock
at a price per share of $0.05, $2.59, and $5.16, respectively, at the option of
the holder, or automatically upon the vote or written consent of a majority of
the preferred stockholders in the case of Series A or Series B, or 75% in the
case of Series C, or upon the closing of an initial public offering of
WatchGuard's common stock from which the aggregate proceeds were not less than
$15 million and a price per share is paid by the public of at least $10.31.
Each share of Series A, B, and C preferred stock converted into two shares of
common stock at the closing of WatchGuard's initial public offering.

  The following is a summary of the terms and conditions for each series of
preferred stock before their conversion:

<TABLE>
<CAPTION>
                                                     Approximate     Annual
                                                      Aggregate     Dividend
                         Shares     Shares    Stated Liquidation     Rate--
                       Designated Outstanding Value     Value    Non-Cumulative
                       ---------- ----------- ------ ----------- --------------
   <S>                 <C>        <C>         <C>    <C>         <C>
   Series A........... 3,000,004   3,000,004  $ 0.05 $  150,000      $ 0.01
   Series B........... 2,374,581   2,355,276    2.59  6,100,000        0.16
   Series C........... 1,357,378   1,357,378    5.16  7,000,000        0.31
</TABLE>

Initial Public Offering

  On July 30, 1999, WatchGuard issued 3,500,000 shares of its common stock at
an initial public offering price of $13.00 per share. The proceeds to
WatchGuard from the offering were approximately $40.7 million, net of $4.8
million in offering expenses, underwriting discounts and commissions. At the
closing of the offering, all 6,712,658 shares of preferred stock automatically
converted into 13,425,316 shares of common stock.

Stock Options

  In 1996, WatchGuard adopted the 1996 Stock Incentive Compensation Plan (the
Plan), which provides for the granting of incentive and nonqualified stock
options to employees, officers, directors, agents, consultants and independent
contractors. In May 1999, the board of directors and stockholders approved
amendments to the Plan that provide for a 900,000-share increase in the
authorized number of shares to be granted under the Plan, plus an automatic
increase to be added on the first day of each fiscal year, the first of which
occurred on January 1, 2000, equal to the least of (a) 750,000 shares, (b) 3.0%
of the average common shares outstanding as used to calculate fully diluted
earnings per share as reported in WatchGuard's annual financial statements for
the preceding year, and (c) a lesser amount determined by the board of
directors.

  As of December 31, 1999, WatchGuard had authorized 8,634,986 shares of common
stock for possible grant under the Plan. Options under the Plan generally are
granted at fair market value on the date of grant. The shares of common stock
covered by the options generally vest at the rate of 25% on the first
anniversary, with the remaining shares covered by the option vesting at 2.08%
every month thereafter, and with all shares becoming fully vested on the fourth
anniversary date of the date of grant. Stock options under the Plan have a term
of ten years unless modified by the plan administrator.

                                      F-14
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


  The following table summarizes WatchGuard's stock option activity during
1997, 1998 and 1999:

<TABLE>
<CAPTION>
                         December 31, 1997   December 31, 1998   December 31, 1999
                         ------------------- ------------------- -------------------
                                    Weighted            Weighted            Weighted
                                    Average             Average             Average
                                    Exercise            Exercise            Exercise
                          Options    Price    Options    Price    Options    Price
                         ---------  -------- ---------  -------- ---------  --------
<S>                      <C>        <C>      <C>        <C>      <C>        <C>
Balance at beginning of
 period................. 1,156,994   $ 0.03  5,227,580   $ 0.08  5,145,268   $ 0.16
Granted................. 4,970,526     0.08  1,212,500     0.44  2,248,314    13.26
Exercised...............   (12,916)    0.03   (819,828)    0.04   (774,563)    0.09
Canceled................  (887,024)    0.04   (474,984)    0.09   (116,339)    5.67
                         ---------           ---------           ---------
Balance at end of
 period................. 5,227,580     0.08  5,145,268     0.16  6,502,680     4.60
                         =========           =========           =========
Exercisable at end of
 period.................   428,300           1,618,038           2,359,707
Shares of common stock
 available for grant
 under the plan.........                                           524,999
Weighted average fair
 value of options
 granted during period
  Granted at fair
   value................ 4,970,526     0.02    308,000     0.01  2,086,314    13.75
  Granted at below fair
   value................       --       --     904,500     2.08    162,000     7.00
</TABLE>

  The weighted average remaining contractual life and weighted average exercise
price of options outstanding and options exercisable at December 31, 1999 for
selected exercise price ranges is as follows:

<TABLE>
<CAPTION>
                                                                  Options
                                 Options Outstanding            Exercisable
                         ----------------------------------- ------------------
                                   Weighted Average Weighted           Weighted
                                      Remaining     Average            Average
                                     Contractual    Exercise           Exercise
       Exercise Prices    Shares   Life (in years)   Price    Shares    Price
       ---------------   --------- ---------------- -------- --------- --------
     <S>                 <C>       <C>              <C>      <C>       <C>
     $  0.03-1.13....... 4,269,491       7.38        $ 0.16  2,265,924  $ 0.13
     $  2.25-13.00...... 1,609,767       9.37         12.26     83,471   10.74
     $ 14.30-15.94......   597,922       9.21         14.50     10,312   14.30
     $ 32.13-32.13......    25,500       9.95         32.13        --      --
                         ---------                           ---------
                         6,502,680       8.05        $ 4.60  2,359,707  $ 0.57
                         =========                           =========
</TABLE>

  WatchGuard uses the intrinsic value-based method to account for all of its
employee stock-based compensation arrangements. Accordingly, no compensation
cost has been recognized for its stock options in the accompanying financial
statements because the fair value of the underlying common stock equals or
exceeds the exercise price of the stock options at the date of grant, except
with respect to certain options granted during 1998 and 1999. WatchGuard
recorded deferred stock compensation expense of $2.5 million relating to
options granted during the year ended December 31, 1998, which includes
$628,000 related to the 48,000 option shares described below. An additional
expense of $162,000 was recorded in 1999. These amounts represent the
difference between the exercise price and the deemed fair value for financial
reporting purposes of WatchGuard's common stock on the date the options were
granted. Amounts recorded as deferred stock compensation expense are generally
being amortized over a four-year vesting period, using a graded vesting
approach. Under this approach, 52% of the deferred stock compensation is
amortized in the first year after grant, 27% in the second year, 15% in the
third year and the remaining 6% in the fourth year. Amortization of deferred
stock compensation originating from stock option grants of $1.0 million and
$853,000 were recognized for the years ended December 31, 1998 and 1999,
respectively. Amortization of deferred stock compensation originating from
stock option grants will be $461,000 in 2000, $237,000 in 2001 and $78,000 in
2002. See Note 12.

                                      F-15
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

  The following pro forma information regarding stock-based compensation has
been determined as if WatchGuard had accounted for its employee stock options
under the fair market value method of SFAS 123. The fair value of these options
was estimated at the date of grant using a minimum value option pricing model
through the date of WatchGuard's initial public offering in July 1999 and using
the Black-Scholes pricing model thereafter. The following weighted average
assumptions were used in the pricing model: risk-free interest rates ranging
from 6.0% to 4.9% from 1997 through 1999; a dividend yield rate of 0% for all
periods; volatility of 0.85 since the initial public offering date; and an
expected life ranging from two to five years.

  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. WatchGuard's
pro forma information is as follows:

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                      ----------------------------------------
                                          1997          1998          1999
                                      ------------  ------------  ------------
                                      (In thousands, except per share data)
     <S>                              <C>           <C>           <C>
     Net loss--as reported..........  $     (4,334) $     (9,119) $    (16,018)
     Net loss--pro forma............        (4,363)       (9,166)      (19,837)
     Net loss per share--as
      reported......................        (17.17)       (11.34)        (1.80)
     Net loss per share--pro forma..        (17.30)       (11.42)        (2.23)
</TABLE>

  Under SFAS 123, compensation expense representing the fair value of the
option grant is recognized over the vesting period. The initial impact on pro
forma net loss may not be representative of compensation expense in future
years, when the effect of amortization of multiple awards would be reflected in
pro forma earnings.

  In December 1997, WatchGuard granted approximately 48,000 options with
exercise prices ranging from $0.05 to $0.26 to a consultant in connection with
a one-year consulting agreement. The options vested at the December 1998
termination date of the consulting agreement. WatchGuard has recorded
compensation expense of approximately $628,000 based on the fair value of the
options at the termination of the consulting agreement.

Common Stock Warrants

  During 1996, WatchGuard issued warrants for 145,000 shares of common stock at
an exercise price of $0.03 per share to various consultants and vendors for
technical and marketing services, including public relations and technical
writing. The warrants expire five years from date of issuance, beginning in
July 2001. During 1997, 1998 and 1999, 100,000, 10,000 and 20,000 shares,
respectively, of these warrants were exercised.

  In January 1997, WatchGuard granted warrants for 20,000 shares at an exercise
price at $0.03 per share to an individual for recruiting services. In July
1997, the warrant was exercised for all 20,000 shares.

  In March 1998, WatchGuard granted a warrant to purchase 10,000 shares of
common stock at an exercise price of $0.13 per share to a bank in connection
with a debt financing. These warrants were exercised in 1999.

  WatchGuard performed an analysis to value all warrants using the Black
Scholes pricing model based upon the exercise prices described above, a risk-
free interest rate of 6%, a dividend yield rate of 0%, volatility of 0.6 and an
expected life of one year. The fair value associated with these warrants was
immaterial.

  In June 1998, WatchGuard entered into a two-year license and sales agreement
with a customer, under which the customer has committed to minimum purchase
quantities. This agreement may be terminated by either party for
nonperformance. The only recourse for nonperformance is the return of all
product and

                                      F-16
<PAGE>


                       WATCHGUARD TECHNOLOGIES, INC.

                NOTES TO FINANCIAL STATEMENTS--(Continued)


promotional material. Because of the promotional value of this customer,
WatchGuard granted it a warrant to purchase 200,000 shares of common stock at
an exercise price of $0.39 per share. The warrant is fully vested,
nonforfeitable and fully exercisable at the date of grant. The fair value of
the warrant, approximately $470,000, was recorded as sales and marketing
expense during the last six months of 1998, the period in which WatchGuard
derived its promotional value from its customer. The warrant is not tied to any
performance commitments under the license and sales agreement.

  Warrants were also granted in connection with the bridge loan and convertible
notes discussed in Note 5. At December 31, 1999, WatchGuard had 225,000
warrants outstanding.

1999 Employee Stock Purchase Plan

  In May 1999, the board of directors and stockholders approved the 1999
Employee Stock Purchase Plan (ESPP). WatchGuard implemented the ESPP upon the
effectiveness of its initial public offering. Subject to certain limitations,
the ESPP permits eligible employees of WatchGuard to purchase common stock
through payroll deductions of up to 15% of their compensation. WatchGuard
authorized the issuance under the ESPP of a total of 600,000 shares of common
stock, plus an automatic annual increase to be added on the first day of each
fiscal year, the first of which occurred on January 1, 2000, equal to the least
of (a) 400,000 shares, (b) 1.5% of the average common shares outstanding as
used to calculate fully diluted earnings per share as reported in WatchGuard's
annual financial statements for the preceding year, and (c) a lesser amount
determined by the board of directors.

Common Stock Grant

  In connection with the employment and stock vesting agreement granted to an
employee in connection with the BeadleNet acquisition, WatchGuard issued 51,948
unregistered shares of its common stock, valued at $750,000, on the closing
date of the acquisition. See Note 12.

Common Shares Reserved

  At December 31, 1999, common stock reserved for future issuance was as
follows:

<TABLE>
     <S>                                                               <C>
     Exercise of common stock options................................. 7,027,679
     Exercise of common stock warrants................................   225,000
                                                                       ---------
                                                                       7,252,679
                                                                       =========
</TABLE>


                                      F-17
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


7. Net Loss per Share

  Basic and diluted net loss per common share is calculated by dividing net
loss by the weighted average number of common shares outstanding. Pro forma net
loss per share is computed using the weighted average number of shares used for
basic and diluted per share amounts and the weighted average convertible
preferred stock outstanding as if such shares were converted to common stock at
the time of issuance.

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                  ----------------------------
                                                    1997      1998      1999
                                                  --------  --------  --------
                                                  (In thousands, except per
                                                         share data)
<S>                                               <C>       <C>       <C>
Net loss........................................  $ (4,334) $ (9,119) $(16,018)
                                                  ========  ========  ========
Basic and diluted net loss per common share.....  $ (17.17) $ (11.34) $  (1.80)
                                                  ========  ========  ========
Weighted average number of common shares used
 for basic and diluted per share amounts........       252       804     8,903
                                                  ========  ========
Weighted average common shares issuable upon
 pro forma conversion of preferred stock........                         7,761
                                                                      --------
Weighted average number of shares used for pro
 forma per share amounts........................                        16,664
                                                                      ========
Pro forma basic and diluted net loss per share..                      $  (0.96)
                                                                      ========
</TABLE>

  For the years ended December 31, 1997, 1998 and 1999, options to purchase
5,227,580, 5,145,268 and 6,502,680 shares of common stock, respectively, and
warrants to purchase 245,000, 45,000 and 225,000 shares of common stock,
respectively, were excluded from the computation of actual and pro forma
diluted net loss per common share, as their effect is antidilutive.

8. Income Taxes

  At December 31, 1999, WatchGuard had a net operating loss carryforward for
federal tax purposes of approximately $24 million. The carryforwards begin to
expire in 2011. Utilization of net operating loss carryforwards may be subject
to certain limitations under Section 382 of the Internal Revenue Code. A
valuation allowance has been established to reflect the uncertainty of
generating future taxable income necessary to utilize available tax loss
carryforwards.

  Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of WatchGuard's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                           December 31,
                                                     --------------------------
                                                      1997     1998      1999
                                                     -------  -------  --------
                                                          (In thousands)
     <S>                                             <C>      <C>      <C>
     Deferred tax assets:
       Net operating loss carryforwards............. $ 1,423  $ 3,358  $  8,216
       Acquisition intangibles......................     --       --      1,179
       Research and development tax credit..........      92      218       313
       Returns reserve..............................     --       215       253
       Allowance for bad debts......................      42      153        60
       Accrued expenses.............................      43      102       214
                                                     -------  -------  --------
     Total deferred tax assets......................   1,600    4,046    10,235
     Valuation allowance............................  (1,600)  (4,046)  (10,235)
                                                     -------  -------  --------
     Net deferred taxes............................. $   --   $   --   $    --
                                                     =======  =======  ========
</TABLE>


                                      F-18
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

  WatchGuard's valuation allowance increased by $1,441,000, $2,446,000 and
$6,189,000 in 1997, 1998 and 1999, respectively.

9. 401(k) Retirement Plan

  WatchGuard sponsors a 401(k) plan that is available to all employees who
satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Eligible employees may elect to contribute up to 15%
of their pre-tax gross earnings, subject to statutory limitations regarding
maximum contributions. WatchGuard may also make a discretionary contribution to
the plan. No such contributions have been made by WatchGuard.

10. Commitments

  WatchGuard leases office space and equipment under noncancelable operating
leases. Future minimum payments at December 31, 1999 under these leases are as
follows (in thousands):

<TABLE>
     <S>                                                                    <C>
     2000.................................................................. $468
     2001..................................................................  182
     2002..................................................................   24
     2003..................................................................   14
                                                                            ----
                                                                            $688
                                                                            ====
</TABLE>

  Two of the officers of WatchGuard are guarantors of part of the office lease.

  Rent expense for 1997, 1998 and 1999 was $134,000, $273,000 and $512,000,
respectively.

11. International Revenues

  WatchGuard licenses and markets its Internet security products and services
throughout the world, and operates in a single industry segment. While certain
expenses for sales and marketing activities are incurred in various
geographical regions, substantially all of WatchGuard's assets are located, and
the majority of its operating expenses are incurred, at its corporate
headquarters. Revenue information by geographic region is the only segment
information presented as follows:

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        ------------------------
                                                         1997     1998    1999
                                                        ------- -------- -------
                                                             (In thousands)
     <S>                                                <C>     <C>      <C>
     United States....................................  $ 2,262 $  7,401 $10,303
     Rest of World
       Europe.........................................    1,140    2,049   5,340
       Asia...........................................    1,209    1,106   3,275
       Other..........................................      487      823   1,701
                                                        ------- -------- -------
                                                          2,836    3,978  10,316
                                                        ------- -------- -------
         Total........................................  $ 5,098 $ 11,379 $20,619
                                                        ======= ======== =======
</TABLE>


                                      F-19
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


12. Acquisition of BeadleNet, LLC

  On October 19, 1999, WatchGuard acquired the assets of BeadleNet, LLC, a
California limited liability company, pursuant to an Asset Purchase Agreement
dated as of October 19, 1999, among BeadleNet, Productivity Enhancement
Products, Inc. (PEP), a member of BeadleNet, Danny M. Beadle, the founder and a
member of BeadleNet and the principal shareholder of PEP, and WatchGuard.
WatchGuard accounted for the acquisition using the purchase method of
accounting. The results of operations of BeadleNet and the fair value of the
assets acquired have been included in the financials statements beginning on
the acquisition date.

  The total BeadleNet acquisition cost of $9,556,000 is comprised of: (1)
$3,406,000 in cash paid at closing, including $1,000,000 paid to PEP in
satisfaction of BeadleNet's outstanding liabilities to PEP; (2) 335,931
unregistered shares of WatchGuard common stock issued at closing with a fair
value of $4,850,000; (3) an additional $1 million in contingent consideration,
comprised of $400,000 in cash and 20,189 unregistered shares of WatchGuard
common stock with a fair value of $600,000, which became due upon completion of
certain technology items in late December 1999 and was paid in January 2000;
and (4) estimated direct acquisition costs of $300,000.

  The aggregate purchase price was allocated, based on estimated fair values on
the acquisition date, as follows:

<TABLE>
   <S>                                                               <C>
   Inventories...................................................... $    5,000
   Equipment........................................................     69,000
   Intangibles:
     Acquired workforce.............................................    204,000
     Tradenames.....................................................    409,000
     Developed technology...........................................    503,000
     Goodwill.......................................................  4,985,000
                                                                     ----------
       Total intangibles............................................  6,101,000
   Acquired in-process research and development.....................  3,381,000
                                                                     ----------
   Total purchase price............................................. $9,556,000
                                                                     ==========
</TABLE>

  Values assigned to the acquired in-process research and development,
developed technology and tradenames were determined using a discounted cash
flow analysis. The value assigned to the workforce in place was based on
replacement cost.

  To determine the value of the in-process research and development, WatchGuard
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, and associated
risks, which included the inherent difficulties and uncertainties in completing
the project and achieving technological feasibility and risks related to the
viability of and potential changes in future target markets. This analysis
resulted in amounts assigned to in-process research and development projects
that had not yet reached technological feasibility and do not have alternative
future uses. The entire $3,381,000 allocated to acquired in-process research
and development was expensed on the date of acquisition.

  To determine the value of the developed technology, WatchGuard discounted the
expected future cash flows of the existing technology product, taking into
account risks related to the characteristics and applications of each product,
existing and future markets and assessments of the life cycle stage of each
project. Based on this analysis, WatchGuard capitalized the existing technology
that had reached technological feasibility.

                                      F-20
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


  The lives assigned to the identified intangible assets ranged from two to
four years and the life assigned to goodwill was five years. Amortization
expense for these intangibles was $245,000 in the fourth quarter of 1999 and
was recorded based on the straight-line method.

  The unaudited pro forma combined historical results, presented as if
BeadleNet had been acquired at the beginning of each period presented and
excluding the nonrecurring one-time charge for in-process research and
development, are as follows:

<TABLE>
<CAPTION>
                                                               Year Ended
                                                              December 31,
                                                            ------------------
                                                              1998      1999
                                                            --------  --------
                                                               (unaudited)
<S>                                                         <C>       <C>
Total revenues, net........................................ $ 11,379  $ 20,619
Net loss................................................... $(10,396) $(15,707)
Pro forma net loss per share............................... $ (10.21) $  (1.69)
</TABLE>

  In connection with the acquisition, WatchGuard entered into an employment
agreement and a stock vesting agreement with Mr. Beadle. Pursuant to the
employment agreement, WatchGuard granted Mr. Beadle an option, vesting over a
period of four years, to purchase 250,000 shares of WatchGuard common stock at
an exercise price of $14.44 per share, the fair value of the stock on the date
the option was granted. In consideration of certain of Mr. Beadle's obligations
in the employment agreement, including his agreement not to compete with
WatchGuard for a period of three years after his employment terminates,
WatchGuard also issued to Mr. Beadle 51,948 unregistered shares of WatchGuard
common stock, valued at $750,000 on the closing date of the acquisition. The
value of this stock has been recorded as deferred stock compensation expense
and is being amortized on a straight-line basis over the two-year employment
agreement period. Amortization of this deferred stock compensation was $73,000
in the fourth quarter of 1999. Under the stock vesting agreement, 34,632 of
these shares will be subject to forfeiture if Mr. Beadle's employment is
terminated for cause or if he resigns. One half of these shares will no longer
be subject to forfeiture on October 19, 2000 and the remainder will no longer
be subject to forfeiture on October 19, 2001.

13. Related-Party Transactions

  The vice president and general manager of WatchGuard's broadband Internet
security division is also the founder and principal shareholder of PEP, the
former parent of BeadleNet. Since the acquisition date, PEP has provided, and
continues to provide, various products and services to WatchGuard. Primarily,
PEP supplies products for sale (including purchasing, producing and assembling
products), provides office space and facilities services and provides
engineering and consulting services during the development of some of
WatchGuard's new broadband product offerings. Total expenditures for PEP
products and services during 1999 were $448,000 and total amounts due PEP at
December 31, 1999 were $361,000. WatchGuard expects that PEP will continue to
provide products and services during the first half of 2000 until WatchGuard
relocates to a new facility, contracts with new manufacturing sources and fills
its open staffing positions, all of which are believed to be reasonably
attainable during that time frame.

                                      F-21
<PAGE>

             REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS

To the Board of Directors of BeadleNet, LLC:

  We have audited the accompanying balance sheets of BeadleNet, LLC (the
Company) and its predecessor as of October 3, 1999 and December 31, 1998, and
the related statements of operations, capital deficiency, and cash flows for
the period from January 1, 1999 (date of incorporation) through October 3,
1999, and the period from June 1, 1998 (date of inception) through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

  In our opinion, such financial statements present fairly, in all material
respects, the financial position of BeadleNet, LLC as of October 3, 1999, and
of its predecessor as of December 31, 1998, and the results of operations and
cash flows of the Company for the period from January 1, 1999 (date of
incorporation) through October 3, 1999, and of its predecessor for the period
from June 1, 1998 (date of inception) through December 31, 1998, in conformity
with generally accepted accounting principles.

  As discussed in Note 7, the Company sold substantially all of its assets on
October 19, 1999 and ceased operations. Effective November 25, 1999, the
Company was dissolved.

                                          DELOITTE & TOUCHE LLP

Costa Mesa, California
December 24, 1999

                                      F-22
<PAGE>

                                 BEADLENET, LLC

                                 BALANCE SHEETS

                  As of October 3, 1999 and December 31, 1998

<TABLE>
<CAPTION>
                                                                      1998
                                                        1999      (Predecessor)
                                                     -----------  -------------
<S>                                                  <C>          <C>
ASSETS
Current assets:
  Cash.............................................. $     8,337    $     --
  Accounts receivable, net of allowance for doubtful
   accounts of $17,062 (1999).......................      23,097          --
                                                     -----------    ---------
    Total current assets............................      31,434          --
Property and equipment, net.........................      58,464       25,068
                                                     -----------    ---------
    Total assets.................................... $    89,898    $  25,068
                                                     ===========    =========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
  Accounts payable.................................. $    45,732    $     --
  Accrued expenses..................................      50,163          --
  Deferred revenue..................................     136,829          --
  Note payable to Productivity Enhancement Products,
   Inc..............................................     910,785      212,291
                                                     -----------    ---------
Total current liabilities...........................   1,143,509      212,291

Commitments (Note 5)
Capital deficiency:
  Member units, no par value: 100,000,000 units
   authorized; 10,000,000 units issued and
   outstanding (1999)...............................     658,291          --
  Accumulated deficit...............................  (1,711,902)    (187,223)
                                                     -----------    ---------
  Net capital deficiency............................  (1,053,611)    (187,223)
                                                     -----------    ---------
    Total liabilities and capital deficiency........ $    89,898    $  25,068
                                                     ===========    =========
</TABLE>


                            See accompanying notes.

                                      F-23
<PAGE>

                                 BEADLENET, LLC

                            STATEMENTS OF OPERATIONS

 For the period from January 1, 1999 (date of incorporation) through October 3,
                                     1999,
 and the period from June 1, 1998 (date of inception) through December 31, 1998

<TABLE>
<CAPTION>
                                             January 1, 1999    June 1, 1998
                                             (Incorporation) (Inception) through
                                                 through      December 31, 1998
                                             October 3, 1999    (Predecessor)
                                             --------------- -------------------
<S>                                          <C>             <C>
Operating expenses:
  Research and development..................   $   380,332        $ 187,223
  Selling, general and administrative.......     1,117,064              --
                                               -----------        ---------
    Total operating expenses................     1,497,396          187,223
                                               -----------        ---------
Other expense, net..........................        27,283              --
                                               -----------        ---------
Net loss....................................   $(1,524,679)       $(187,223)
                                               ===========        =========
</TABLE>



                            See accompanying notes.

                                      F-24
<PAGE>

                                 BEADLENET, LLC

                        STATEMENTS OF CAPITAL DEFICIENCY

 For the period from January 1, 1999 (date of incorporation) through October 3,
                                     1999,
 and the period from June 1, 1998 (date of inception) through December 31, 1998

<TABLE>
<CAPTION>
                                   Members' Units
                                -------------------- Accumulated
                                  Units     Amount     Deficit        Total
                                ---------- --------- ------------  ------------
<S>                             <C>        <C>       <C>           <C>
Balance, June 1, 1998 (date of
 inception)...................         --  $     --  $        --   $        --
Net loss......................         --        --      (187,223)     (187,223)
                                                     ------------  ------------
Balance, December 31, 1998....         --        --      (187,223)     (187,223)
                                ---------- --------- ------------  ------------
  Conversion of note payable
   to Productivity Enhancement
   Products, Inc. into
   members' units.............   6,751,000   212,291          --        212,291
  Issuance of members' units
   to an officer..............   2,894,000    91,000          --         91,000
  Members' contributions for
   cash.......................     355,000   355,000          --        355,000
  Net loss....................         --        --    (1,524,679)   (1,524,679)
                                ---------- --------- ------------  ------------
Balance, October 3, 1999......  10,000,000 $ 658,921 $ (1,711,902) $ (1,053,611)
                                ========== ========= ============  ============
</TABLE>


                            See accompanying notes.

                                      F-25
<PAGE>

                                 BEADLENET, LLC

                            STATEMENTS OF CASH FLOWS

 For the period from January 1, 1999 (date of incorporation) through October 3,
                                     1999,
 and the period from June 1, 1998 (date of inception) through December 31, 1998

<TABLE>
<CAPTION>
                                          Period from
                                        January 1, 1999
                                        (Incorporation) Period from June 1, 1998
                                            through       (Inception) through
                                        October 3, 1999    December 31, 1998
                                        --------------- ------------------------
<S>                                     <C>             <C>
Cash flows from operating activities:
Net loss..............................   $ (1,524,679)         $ (187,223)
Adjustments used to reconcile net loss
 to net cash used in operating
 activities:
  Depreciation and amortization.......         16,335               7,613
  Members' contribution in the form of
   services in exchange for note
   payable to Productivity Enhancement
   Products, Inc......................        910,785             179,610
Compensation expense related to the
 issuance of members' units to an
 officer..............................         91,000                 --
Changes in operating assets and
 liabilities:
  Accounts receivable.................        (23,097)                --
  Accounts payable....................         45,732                 --
  Accrued expenses....................         50,163                 --
  Deferred revenue....................        136,829                 --
                                         ------------          ----------
Net cash used in operating
 activities...........................       (296,932)                --
Cash flows from investing activities:
Purchases of property and equipment...        (49,731)                --
                                         ------------          ----------
Cash flows from financing activities:
Proceeds from members' contributions..        355,000                 --
                                         ------------          ----------
Net increase in cash..................          8,337                 --
Cash, beginning of period.............
                                         ------------          ----------
Cash, end of period...................   $      8,337          $      --
                                         ============          ==========
Noncash items:
Conversion of note payable to
 Productivity Enhancement Products,
 Inc. into members' units.............   $    212,291          $      --
                                         ============          ==========
Acquisition of property and equipment
 in exchange for note payable to
 Productivity Enhancement Products,
 Inc..................................   $        --           $   32,681
                                         ============          ==========
</TABLE>

                            See accompanying notes.

                                      F-26
<PAGE>

                                 BEADLENET, LLC

                         NOTES TO FINANCIAL STATEMENTS

1. Nature of Operations

  BeadleNet, LLC (BeadleNet, which includes its predecessor) is a provider of
secure Internet and networking solutions that are designed to meet the changing
technology needs of small- and medium-sized businesses and households with
multiple computers. BeadleNet's headquarters are located in Laguna Hills,
California.

  BeadleNet was incorporated on January 1, 1999 as a majority-owned subsidiary
of Productivity Enhancement Products, Inc. (PEP). From June 1, 1998 (the date
of inception of BeadleNet's business) through December 31, 1998, research and
development efforts towards new technology products were conducted by PEP and
some of its key employees. The financial statements as of December 31, 1998 and
for the period from June 1, 1998 through December 31, 1998 reflect the
operations of the predecessor while they were a part of PEP. On January 1,
1999, certain technology products developed from these efforts were transferred
from PEP to BeadleNet for further development and marketing in connection with
the formation of BeadleNet, LLC.

  The financial statements include expenses, which have been allocated to
BeadleNet by PEP on a specific identification basis, plus its allocated share
of the costs associated with resources BeadleNet shares with PEP. Allocations
from PEP for those shared resources have been made primarily on a proportional
cost method based on space occupied. Management believes these allocations are
reasonable. The financial statements of BeadleNet do not necessarily reflect
the results of operations or financial position that would have existed had
BeadleNet been an independent company.

2. Summary of Significant Accounting Policies

Property and Equipment

  Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-
line method over the assets' lives, which range from three to five years.

  When assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in operations for the period. Renewals and betterments
that extend the life of an existing asset are capitalized, while normal repairs
and maintenance costs are expensed as incurred.

Revenue Recognition

  BeadleNet offers its customers the right to free software upgrades and
customer support on an unlimited basis. Because the value of these upgrades and
customer support is not readily determinable under the requirements of SOP 97-
2, "Software Revenue Recognition," BeadleNet has deferred all revenues in the
amount of $136,829 as of October 3, 1999.

Income Taxes

  As a limited liability company, BeadleNet is not subject to federal and state
income taxes. BeadleNet's taxable income or loss is allocated to each of its
members based on the member's ownership interest in BeadleNet. Each member's
tax status, in turn, determines the appropriate income tax for its allocated
share of BeadleNet's taxable income or loss. BeadleNet is subject to a minimum
California franchise tax of $800.

Stock-Based Compensation

  BeadleNet accounts for equity-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees."

                                      F-27
<PAGE>

                                 BEADLENET, LLC

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


Concentration of Credit Risk

  BeadleNet's revenues will be generated primarily from product sales.
BeadleNet performs ongoing credit evaluations of its customers and does not
require collateral for its receivables. BeadleNet establishes an allowance for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.

Software Development Costs

  Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
has been established, any additional costs are capitalized in accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed." Because BeadleNet believes that its current process for
developing software is essentially completed concurrently with the
establishment of technological feasibility, no software development costs have
been capitalized as of October 3, 1999 and December 31, 1998.

Research and Development

  BeadleNet incurs costs in connection with research and development programs.
These costs are expensed as incurred. Research and development expenses were
$380,332 and $187,223 for the period from January 1, 1999 (date of
incorporation) through October 3, 1999 and the period from June 1, 1998 (date
of inception) through December 31, 1998, respectively.

Customer Concentration

  During the period from January 1, 1999 (date of incorporation) through
October 3, 1999, deferred revenues from two customers accounted for
approximately 16% and 12% of total deferred revenues, respectively. The loss
of, or reduction in, deferred revenues to these customers would have a material
adverse effect on BeadleNet's business, operating results, and financial
condition.

Use of Estimates

  The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

New Accounting Pronouncements

  For the periods presented in the accompanying financial statements, BeadleNet
has adopted SFAS No. 130, "Reporting Comprehensive Income." There was no
difference between comprehensive loss and amounts currently reported in the
accompanying financial statements.

  BeadleNet has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Under the requirements of SFAS No. 131,
BeadleNet operates under a single segment based on information used by
management to run the business.

                                      F-28
<PAGE>

                                 BEADLENET, LLC

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


3. Property and Equipment

  Property and equipment at October 3, 1999 and December 31, 1998 consists of
the following:

<TABLE>
<CAPTION>
                                                               1999      1998
                                                             --------  --------
   <S>                                                       <C>       <C>
   Machinery and other equipment............................ $ 40,115  $ 32,681
   Office equipment.........................................   30,678       --
   Leasehold improvements...................................   11,619       --
                                                             --------  --------
                                                               82,412    32,681
   Less accumulated depreciation and amortization...........  (23,948)   (7,613)
                                                             --------  --------
                                                             $ 58,464  $ 25,068
                                                             ========  ========
</TABLE>

4. Note Payable to Productivity Enhancement Products, Inc.

  Beginning on January 1, 1999 (the date of BeadleNet's incorporation), PEP
charged BeadleNet a management fee for administrative functions performed by
PEP. Total management fees charged to BeadleNet were $97,855 for the period
from January 1, 1999 (date of incorporation) through October 3, 1999. No
management fees were allocated to BeadleNet prior to January 1, 1999. These
management fees have been included in the note payable due to PEP in the
accompanying financial statements.

  At October 3, 1999, the note payable due to PEP totaled $910,785. The note
payable bears interest at 9% and all outstanding principal and interest is due
and payable by January 1, 2001. BeadleNet recorded interest expense on this
note payable in the amount of $30,817 for the period from January 1, 1999 (date
of incorporation) through October 3, 1999.

  The note payable was paid in full as part of the Asset Purchase Agreement
described in Note 7.

5. Commitments

  BeadleNet leases office space under an operating lease that expires during
August 2000. At October 3, 1999, future annual minimum lease payments under
this noncancelable operating lease arrangement are as follows:

<TABLE>
   <S>                                                                 <C>
   1999 (through December 31, 1999)................................... $  4,587
   2000...............................................................   12,232
                                                                       --------
                                                                       $ 16,819
                                                                       ========
</TABLE>

  Rental expense under this operating lease was approximately $15,519 for the
period from January 1, 1999 (date of incorporation) through October 3, 1999.
Rental expense for the periods prior to January 1, 1999, (date of
incorporation), were allocated from PEP based on space occupied.

6. Capital Deficiency

Contributions

  During the period from June 1, 1998 (date of inception of BeadleNet's
business) through December 31, 1998, PEP and some of its key employees
conducted research and development efforts to develop new technology products.
The cost of these services was $179,610. In exchange for these services and
certain

                                      F-29
<PAGE>

                                 BEADLENET, LLC

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

property and equipment with a cost of $32,681, BeadleNet issued PEP a note
payable in the amount of $212,291. On January 1, 1999 (incorporation date),
BeadleNet issued to PEP a total of 6,751,000 members' units in exchange for the
note payable. On the same date, BeadleNet also issued a total of 2,894,000
members' units to an officer of BeadleNet for no consideration. BeadleNet has
recorded compensation expense of $91,000 for this issuance during the period
from January 1, 1999 (date of incorporation) through October 3, 1999.

  From May 1999 to September 1999, BeadleNet received $355,000 in cash for the
sale of members' units, at $1.00 per unit, to unrelated parties.

Equity Incentive Plan

  In January 1999, BeadleNet adopted the 1999 Equity Incentive Plan (the Plan),
which provides for the granting of up to 1,500,000 incentive and nonstatutory
equity options to purchase members' units to officers, key employees, Board
members, and service providers. The incentive and nonstatutory equity options
may not be issued at prices less than 85% of the fair market value at the date
of grant. All options expire at a maximum of 10 years from the date of grant.
Incentive and nonstatutory equity options vest ratably over five years. As of
October 3, 1999, there were 613,990 equity options available for grant under
the Plan.

  Equity option activity under the Plan is as follows:

<TABLE>
<CAPTION>
                                                                  Weighted
                                                       Shares     average
                                                        under  exercise price
                                                       option    per share
                                                       ------- --------------
   <S>                                                 <C>     <C>
   Outstanding, January 1, 1999 (date of
    incorporation)....................................     --      $ --
   Granted............................................ 886,010     $1.00
                                                       -------
   Outstanding, October 3, 1999....................... 886,010     $1.00
                                                       =======
</TABLE>

  The following table summarizes information about equity options outstanding
as of October 3, 1999:

<TABLE>
<CAPTION>
                                    Weighted
                                    average         Weighted                   Weighted
                      Number       remaining        average       Number       average
   Exercise price   outstanding contractual life exercise price exercisable exercise price
   --------------   ----------- ---------------- -------------- ----------- --------------
   <S>              <C>         <C>              <C>            <C>         <C>
       $1.00          866,010         9.56           $ 1.00          --         $ 1.00
</TABLE>

  BeadleNet applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for the Plan. Had
compensation cost for the Plan been determined based on the fair value at the
date of grant consistent with the method of SFAS No. 123, BeadleNet's net loss
for the period from January 1, 1999 (date of incorporation) through October 3,
1999, would have been the pro forma amount indicated below:

<TABLE>
   <S>                                                            <C>
   Net loss, as reported......................................... $ (1,524,679)
   Net loss, pro forma........................................... $ (1,631,499)
</TABLE>

  The weighted average fair value of options granted during the period from
January 1, 1999 (date of incorporation) through October 3, 1999 was $0.45 per
share. The fair value of options granted under the Plan was estimated on the
date of grant using the Black-Scholes option-pricing model, with the following
weighted average assumptions: expected volatility of zero, no dividend yield,
risk-free interest rate of 6.0% and an expected life of 10 years.

                                      F-30
<PAGE>

                                 BEADLENET, LLC

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


  On June 1, 1999, BeadleNet granted 80,000 equity options to a service
provider. As a result, BeadleNet will record a total of $35,328 in expense
related to these options over the vesting period. As of October 3, 1999, none
of these options were vested and BeadleNet has recorded no compensation expense
related to these equity options.

7. Subsequent Events

  On October 19, 1999, BeadleNet sold substantially all of its assets to
WatchGuard Technologies, Inc. (WatchGuard) under an Asset Purchase Agreement
and BeadleNet's operations ceased. Under the terms of the Asset Purchase
Agreement, WatchGuard paid an aggregate purchase price of $7,256,000,
consisting of $2,406,000 in cash and $4,850,000 in common stock of WatchGuard,
in exchange for substantially all of the assets of BeadleNet. The proceeds were
distributed to the holders of BeadleNet's members' units based on percentage
ownership. WatchGuard also assumed and repaid $1,000,000 of the outstanding
intercompany indebtedness owed by BeadleNet to PEP as of the date of the Asset
Purchase Agreement.

  WatchGuard will make an additional payment of $400,000 in cash and $600,000
in common stock of WatchGuard to the holders of BeadleNet's member units based
on percentage ownership, if software technology items specified in the Asset
Purchase Agreement are completed and released to market before January 1, 2000.

  Effective November 25, 1999, BeadleNet was dissolved.

                                      F-31
<PAGE>

                   UNAUDITED PRO FORMA FINANCIAL INFORMATION

  The following unaudited pro forma combined condensed statement of operations
give effect to the BeadleNet acquisition, which occurred on October 19, 1999,
using the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The unaudited pro
forma combined condensed statement of operations for the year ended December
31, 1999 represents the historical statements of operations for WatchGuard and
for the period from January 1, 1999 through October 3, 1999 for BeadleNet,
adjusted to give effect to the BeadleNet acquisition as if it had occurred on
January 1, 1999.

  The unaudited pro forma combined condensed statement of operations is for
illustrative purposes only and does not purport to represent what WatchGuard's
results of operations would have been if the acquisition had occurred on such
dates or to project WatchGuard's results of operations as of any future date or
for any future period. The unaudited pro forma combined condensed statement of
operations, including the related notes, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical financial
statements of WatchGuard for the year ended December 31, 1999, as well as the
historical financial statements and the related notes of BeadleNet.

  The unaudited pro forma adjustments have been applied to the financial
information derived from the financial statements of WatchGuard and BeadleNet
to account for the acquisition as a purchase and, accordingly, the assets
acquired and liabilities assumed are reflected at their estimated fair values.

  The unaudited pro forma financial information has been prepared based on the
assumptions described in the notes to the financial statements and includes
assumptions relating to the allocation of the consideration paid for the assets
of WatchGuard based on the estimates of their fair value. In the opinion of
WatchGuard, all adjustments necessary to present fairly such unaudited pro
forma financial information have been made based on the terms and structure of
the acquisition.

                                      F-32
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

      UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                           Year ended December 31, 1999
                                    --------------------------------------------
                                                           Pro Forma   Pro Forma
                                    WatchGuard BeadleNet  Adjustments  Balances
                                    ---------- ---------  -----------  ---------
<S>                                 <C>        <C>        <C>          <C>
Revenues...........................  $ 20,619  $    --     $    --     $  20,619
Cost of revenues...................     7,964       --          --         7,964
                                     --------  --------    --------    ---------
Gross margin.......................    12,655       --          --        12,655
Operating expenses:
  Operating expenses, excluding
   acquisition costs and
   amortization....................    25,202     1,498         319 a     27,019
  Acquisition related costs,
   including amortization of
   goodwill and purchased
   intangibles.....................     3,626       --       (2,155)b      1,471
                                     --------  --------    --------    ---------
Total operating expenses...........    28,828     1,498      (1,836)      28,490
                                     --------  --------    --------    ---------
Loss from operations...............   (16,173)   (1,498)      1,836      (15,835)
Other expense:
  Interest income, net.............       155       --          --           155
  Other expense, net...............       --        (27)        --           (27)
                                     --------  --------    --------    ---------
Net loss...........................  $(16,018) $ (1,525)   $ (1,836)   $ (15,707)
                                     ========  ========    ========    =========
Net loss per share: basic and
 diluted...........................  $  (1.80)                         $   (1.69)
                                     ========                          =========
Weighted average number of common
 shares outstanding................     8,903                   370        9,273
                                     ========              ========    =========
</TABLE>


                            See accompanying notes.

                                      F-33
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

       UNAUDITED NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS

1. Basis of Presentation

  On October 19, 1999, WatchGuard acquired the assets of BeadleNet, LLC
("BeadleNet"), a California limited liability company, pursuant to an Asset
Purchase Agreement dated as of October 19, 1999, among BeadleNet, Productivity
Enhancement Products, Inc. ("PEP"), a member of BeadleNet, Danny M. Beadle, the
founder and a member of BeadleNet and the principal shareholder of PEP, and
WatchGuard. WatchGuard accounted for the acquisition using the purchase method
of accounting. The results of operations of BeadleNet and the fair value of the
assets acquired have been included in the financial statements beginning on the
acquisition date.

  The total BeadleNet acquisition cost of $9,556,000 is comprised of: (1)
$3,406,000 in cash paid at closing, including $1,000,000 paid to PEP in
satisfaction of BeadleNet's outstanding liabilities to PEP; (2) 335,931
unregistered shares of WatchGuard common stock issued at closing with a fair
value of $4,850,000; (3) an additional $1 million in contingent consideration,
comprised of $400,000 in cash and 20,189 unregistered shares of WatchGuard
common stock with a fair value of $600,000, which became due upon completion of
certain technology items in late December 1999 and was paid in January 2000;
and (4) estimated direct acquisition costs of $300,000.

  The aggregate purchase price was allocated, based on estimated fair values on
the acquisition date, as follows:

<TABLE>
   <S>                                                               <C>
   Inventory.......................................................  $    5,000
   Equipment.......................................................      69,000
   Intangibles:
     Acquired workforce............................................     204,000
     Tradenames....................................................     409,000
     Developed technology..........................................     503,000
     Goodwill......................................................   4,985,000
                                                                     ----------
       Total intangibles...........................................   6,101,000
   Acquired in-process research and development....................   3,381,000
                                                                     ----------
   Total purchase price............................................  $9,556,000
                                                                     ==========
</TABLE>

  Values assigned to the acquired in-process research and development,
developed technology and tradenames were determined using a discounted cash
flow analysis. The value assigned to the workforce in place was based on
replacement cost.

  To determine the value of the in-process research and development, WatchGuard
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, and associated
risks, which included the inherent difficulties and uncertainties in completing
the project and achieving technological feasibility and risks related to the
viability of and potential changes in future target markets. This analysis
resulted in amounts assigned to in-process research and development projects
that had not yet reached technological feasibility and do not have alternative
future uses. Estimates of fair values of the assets and liabilities of
BeadleNet have been combined with the WatchGuard column in the unaudited pro
forma combined condensed financial statements.

  The $3,381,000 allocated to acquired in-process research and development was
expensed on the date of acquisition. These costs were not included in the pro
forma combined condensed statements of operations because they are considered
to be a one-time nonrecurring charge. The lives assigned to the identified
intangible assets ranged from two to four years and the life assigned to
goodwill was five years. Amortization expense for these intangibles was
$245,000 in the fourth quarter of 1999 and was recorded based on the straight-
line method.


                                      F-34
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

UNAUDITED NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS--(Continued)


  In connection with the acquisition, WatchGuard entered into an employment
agreement and a stock vesting agreement with Mr. Beadle. Pursuant to the
employment agreement, WatchGuard granted Mr. Beadle an option, vesting over a
period of four years, to purchase 250,000 shares of WatchGuard common stock at
an exercise price of $14.44 per share, the fair value of the stock on the date
the option was granted. In consideration of certain of Mr. Beadle's obligations
in the employment agreement, including his agreement not to compete with
WatchGuard for a period of three years after his employment terminates,
WatchGuard also issued to Mr. Beadle 51,948 unregistered shares of WatchGuard
common stock, valued at $750,000 on the closing date of the acquisition. The
value of this stock has been recorded as deferred stock compensation expense
and is being amortized on a straight-line basis over the two-year employment
agreement period. Amortization of this deferred stock compensation was $73,000
in the fourth quarter of 1999. Under the stock vesting agreement, 34,632 of
these shares will be subject to forfeiture if Mr. Beadle's employment is
terminated for cause or if he resigns. One half of these shares will no longer
be subject to forfeiture on October 19, 2000, and the remainder will no longer
be subject to forfeiture on October 19, 2001.

2. Pro Forma Adjustments for BeadleNet


  The capitalized intangible components of the consideration for this
transaction, which include goodwill and other purchased intangibles, will be
amortized on a straight-line basis over a period ranging between 26 months to
five years. The deferred stock-based compensation, which was the result of
restricted shares issued pursuant to the employment agreement entered into by
WatchGuard and one key employee of BeadleNet, will be amortized over two years.
In-process research and development costs in the amount of $3,381,000 were
immediately expensed upon purchase.

  Pro forma adjustments were made to:

  (a)  give effect to amortization of deferred stock compensation; and

  (b)  exclude in-process research and development costs because they are
       considered a one-time nonrecurring charge and give effect to
       amortization of capitalized intangibles.

3. Pro Forma Loss per Common Share

  Basic and diluted pro forma earnings per share is computed using the weighted
average number of WatchGuard common shares outstanding during the period plus
shares of WatchGuard common stock issued in connection with the BeadleNet
acquisition, which are not subject to forfeiture. Shares issued in connection
with the BeadleNet acquisition are assumed to be issued and outstanding on
January 1, 1999.

4. Conforming and Reclassification Adjustments

  There were no adjustments required to conform the accounting policies of
BeadleNet. There have been no intercompany transactions.

                                      F-35
<PAGE>

                    [LOGO OF WATCHGUARD TECHNOLOGIES, INC.]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

  The following table states the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the common stock being registered by this registration
statement. All amounts shown are estimates, except the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.

<TABLE>
     <S>                                                               <C>
     Securities and Exchange Commission registration fee.............. $ 26,760
     NASD filing fee..................................................   10,637
     Nasdaq National Market fee for listing of additional shares......   17,500
     Blue Sky fees and expenses.......................................   10,000
     Printing and engraving expenses..................................  150,000
     Legal fees and expenses..........................................  200,000
     Accounting fees and expenses.....................................  100,000
     Transfer agent and registrar fees................................   15,000
     Miscellaneous expenses...........................................   20,103
                                                                       --------
       Total.......................................................... $550,000
                                                                       ========
</TABLE>

Item 14. Indemnification of Directors and Officers

  Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers, as well as other
employees and individuals, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard
applies in the case of derivative actions, except that indemnification extends
only to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that other indemnification may also be granted by a corporation's charter,
bylaws, disinterested director vote, stockholder vote, agreement or otherwise.

  Section 10 of the registrant's restated bylaws (Exhibit 3.2) requires
indemnification to the full extent permitted under Delaware law. Subject to any
restrictions imposed by Delaware law, the registrant's bylaws provide an
unconditional right to indemnification for all expense, liability and loss
(including attorneys' fees, judgment, fines, ERISA excise taxes or penalties
and amounts paid in settlement) actually and reasonably incurred or suffered by
any person in connection with any actual or threatened action, suit or
proceeding, whether civil, criminal, administrative or investigative
(including, to the extent permitted by law, any derivative action) by reason of
the fact that the person is or was serving as a director or officer of the
registrant or that, being or having been a director or officer of the
registrant, the person is or was serving at the registrant's request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including service with respect to an
employee benefit plan. The bylaws also provide that the registrant may, by
action of the registrant's board of directors, provide indemnification to its
employees and agents with the same scope and effect as the above
indemnification of directors and officers.

  Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary

                                      II-1
<PAGE>

damages for breach of fiduciary duty as a director, except for liability for
(i) any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payments of
unlawful dividends or unlawful stock repurchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.

  Article 10 of the registrant's Restated Certificate of Incorporation (Exhibit
3.1) provides that to the full extent that the DGCL permits the limitation or
elimination of the liability of directors, the registrant's directors shall not
be liable to the registrant or its stockholders for monetary damages for breach
of fiduciary duty as a director. Any amendment to or repeal of Article 10 shall
not adversely affect any right or protection of the registrant's directors for
or with respect to any acts or omissions of the directors occurring before the
amendment or repeal.

  The registrant maintains directors' and officers' liability insurance, under
which the registrant's directors and officers may be indemnified against
liability they may incur for serving in their capacities as directors and
officers of the registrant.

Item 15. Recent Sales of Unregistered Securities

  Since the registrant's inception in February 1996, the registrant has issued
and sold unregistered securities as follows. The numbers below reflect the 2-
for-1 split of the registrant's common stock on May 26, 1999.

  1. On March 11, 1996, the registrant issued 1,000,000 shares of Series A
Preferred Stock to the registrant's two cofounders for a consideration of $0.05
per share, or an aggregate of $50,000. On July 18, 1996 the registrant issued
350,878 shares of Series B Preferred Stock, which were later reclassified into
2,000,004 shares of Series A Preferred Stock, to the registrant's two
cofounders, for a consideration of $0.05 per share, or an aggregate of
$100,000. These 3,000,004 shares of Series A Preferred Stock converted into
3,000,004 shares of common stock at the time of our initial public offering.

  2. On May 9, 1997, May 29, 1997 and March 12, 1998, the registrant issued
2,355,276 shares of Series B Preferred Stock, which converted into 2,355,276
shares of common stock at the time of our initial public offering, to seven
investors for a consideration of $2.59 per share, or an aggregate of
$6,100,165.

  3. On June 11, 1997, in accordance with an Asset Purchase Agreement among the
registrant, Mazama Software Labs, Inc. and the shareholders of Mazama, the
registrant issued 400,000 shares of common stock to Mazama in connection with
the registrant's purchase of certain of Mazama's assets.

  4. On July 24, 1996, September 24, 1996, September 25, 1996 and January 28,
1997, the registrant issued warrants for the purchase of an aggregate of
165,000 shares of common stock, with an exercise price of $0.025 per share, to
five consultants in exchange for services. Of these warrants, warrants for
149,972 shares have been exercised and warrants for 15,000 shares remain
outstanding.

  5. On March 23, 1998, the registrant issued a warrant for the purchase of
10,000 shares of common stock, with an exercise price of $0.13 per share, to a
bank in connection with a debt financing. This warrant was exercised for 9,959
shares.

  6. On April 24, 1998, the registrant issued 1,357,378 shares of Series C
Preferred Stock, which converted into 1,357,378 shares of common stock at the
time of our initial public offering, to eight investors for a consideration of
$5.157 per share, or an aggregate of $6,999,998.

  7. On June 17, 1998, the registrant issued a warrant for the purchase of
200,000 shares of common stock, with an exercise price of $0.39 per share, to a
service provider in exchange for assistance with product specifications and
design.

  8. From March 8, 1996 through December 31, 1999, the registrant granted stock
options to purchase 9,588,334 shares of common stock, with exercise prices
ranging from $0.025 to $32.31 per share, to employees under the registrant's
1996 Stock Option Plan. Of these options, options for 1,478,347 shares have
been

                                      II-2
<PAGE>

canceled without being exercised, options for 1,607,307 shares have been
exercised and options for 6,502,680 shares remain outstanding.

   9. On March 9, 1999, the registrant issued warrants for the purchase of an
aggregate of 42,856 shares of common stock, with an exercise price of $7.00 per
share, to six investors in connection with a debt financing. Of these warrants,
warrants for 31,319 shares were exercised.

  10. On May 26, 1999, the registrant issued warrants for the purchase of
14,500 shares of common stock, with an exercise price of $13.00 per share, to a
bank in connection with a debt financing. Of these warrants, warrants for
10,000 shares remain outstanding and warrants for 4,500 shares were cancelled.

  11. On October 19, 1999, the registrant issued 335,931 shares of common stock
to BeadleNet, LLC in connection with the acquisition of substantially all of
BeadleNet's assets.

  12. On October 19, 1999, the registrant granted a stock option to purchase
250,000 shares of common stock at an exercise price of $14.44 per share and
issued 51,948 shares of restricted stock to an employee, in connection with an
employment agreement.

  13. In January 2000, the registrant issued 20,189 shares of common stock to
BeadleNet, LLC in connection with the acquisition of substantially all of
BeadleNet's assets.

  The sales and issuances of securities described in paragraphs 1, 2, 3, 5, 6,
7, 9, 10, 11 and 13 above were exempt from Securities Act registration under
Section 4(2) of the Securities Act, on the basis that the transactions did not
involve a public offering.

  The sales and issuances of securities described in paragraphs 4, 8 and 12
above were exempt from Securities Act registration under Rule 701 under the
Securities Act, on the basis that these securities were offered and sold either
in accordance with a written compensatory benefit plan or in accordance with
written contracts relating to compensation.

  No underwriters were used in connection with these sales and issuances.

                                      II-3
<PAGE>

Item 16. Exhibits and Financial Statement Schedules

  (a) Exhibits

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Number                               Description
 ------                               -----------
 <C>    <S>
  1.1   Form of Underwriting Agreement.

  3.1*  Restated Certificate of Incorporation of the registrant.

  3.2*  Restated Bylaws of the registrant.

  5.1++ Opinion of Perkins Coie LLP as to the legality of the shares.

 10.1*  Lease Agreement, dated as of March 15, 1996, between COM Realty, Inc.
        and the registrant.

 10.2*  Lease Agreement, dated as of October 10, 1997, between Burke-State
        Bldg. LLC and the registrant.

 10.3*  Lease Agreement, dated as of August 17, 1998, between Cederstrand
        Rentals and the registrant.

 10.4*  Amended and Restated Loan and Security Agreement, dated as of March 20,
        1998, between Silicon Valley Bank and the registrant.

 10.5*  Loan Modification Agreement, dated as of September 18, 1998, between
        Silicon Valley Bank and the registrant.

 10.6*  1996 Stock Incentive Compensation Plan.

 10.7*  Standardized Adoption Agreement Prototype Cash or Deferred Profit-
        Sharing Plan and Trust (401(k) plan), effective as of September 1,
        1998.

 10.8+* Development and Supply Agreement, dated as of March 25, 1998, between
        SMART Modular Technologies, Inc. and the registrant.

 10.9+* OEM Master License Agreement, dated as of August 14, 1997, between RSA
        Data Security, Inc. and the registrant.

 10.10W Asset Purchase Agreement dated as of October 19, 1999, by and among
        BeadleNet, LLC, Productivity Enhancement Products, Inc., Danny M.
        Beadle and WatchGuard Technologies, Inc.

 10.11W Employment Agreement dated as of October 19, 1999, by and between Danny
        M. Beadle and WatchGuard Technologies, Inc.

 10.12W Stock Vesting Agreement dated as of October 19, 1999, by and between
        Danny M. Beadle and WatchGuard Technologies, Inc.
 23.1   Consent of Ernst & Young LLP, independent auditors.

 23.2   Consent of Deloitte & Touche LLP, independent auditors.

 23.3++ Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
        5.1).

 24.1++ Power of Attorney.
 99.1++ Report of Ernst & Young LLP, independent auditors, on financial
        statement schedule.
</TABLE>
- --------

+  Portions of these exhibits have been omitted based on a grant of
   confidential treatment by the Securities and Exchange Commission. The
   omitted portions of the exhibits have been filed separately with the SEC.
*  Incorporated by reference to the Registration Statement on Form S-1 (No.
   333-76587) filed by the registrant on April 20, 1999, as amended.
W  Incorporated by reference to the Current Report on Form 8-K (File No. 000-
   26819) filed by the registrant on November 2, 1999, as amended.

++ Previously filed.

                                      II-4

<PAGE>

  (b) Financial Statement Schedules

  Schedule II--Valuation and Qualifying Accounts

  All financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the registrant or in the related notes to the financial statements.

Item 17.  Undertakings

  Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act, and will be governed
by the final adjudication of such issue.

  The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

  The undersigned registrant hereby undertakes that

    (1) for purposes of determining any liability under the Securities Act of
  1933, the information omitted from the form of prospectus filed as part of
  this registration statement in reliance upon Rule 430A and contained in a
  form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
  (4) or 497(h) under the Securities Act shall be deemed to be part of this
  registration statement as of the time it was declared effective; and

    (2) for the purpose of determining any liability under the Securities Act
  of 1933, each post-effective amendment that contains a form of prospectus
  shall be deemed to be a new registration statement relating to the
  securities offered therein, and the offering of such securities at that
  time shall be deemed to be the initial bona fide offering thereof.


                                      II-5
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Seattle, State of Washington, on the 11th day of February, 2000.

                                          WATCHGUARD TECHNOLOGIES, INC.

                                                /s/ Christopher G. Slatt
                                          By: _________________________________
                                                    Christopher G. Slatt
                                               President and Chief Executive
                                                          Officer

  Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 11th day of February, 2000.

<TABLE>
<S>                                    <C>
     /s/ Christopher G. Slatt          President, Chief Executive Officer and
______________________________________  Chairman of the Board (Principal Executive
         Christopher G. Slatt           Officer)

        /s/ Steven N. Moore            Executive Vice President of Finance, Chief
______________________________________  Financial Officer, Secretary Treasurer and
           Steven N. Moore              Director (Principal Financial and
                                        Accounting Officer)

        * Stuart J. Ellman             Director
______________________________________
           Stuart J. Ellman

       * Andrew W. Verhalen            Director
______________________________________
          Andrew W. Verhalen

      * Charles P. Waite, Jr.          Director
______________________________________
        Charles P. Waite, Jr.

       /s/ Steven N. Moore
*By: _________________________________
           Steven N. Moore
           Attorney-in-Fact
</TABLE>


                                      II-6
<PAGE>

                         WATCHGUARD TECHNOLOGIES, INC.

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

<TABLE>
<CAPTION>
        Column A           Column B         Column C          Column D      Column E
- ------------------------ ------------ --------------------- ------------   ----------
                                            Additions
                                      ---------------------
                                      Charged to Charged to
                          Balance at   Revenue,    Other                   Balance at
                         Beginning of  Costs or  Accounts-- Deductions--     End of
      Description           Period     Expenses   Describe    Describe       Period
- ------------------------ ------------ ---------- ---------- ------------   ----------
<S>                      <C>          <C>        <C>        <C>            <C>
Year ended December 31,
 1997
  Allowance for
   uncollectible
   accounts.............    $   8      $   122     $  --      $     6        $ 124
  Sales return reserve..    $ --       $   --      $  --      $   --         $ --
Year ended December 31,
 1998
  Allowance for
   uncollectible
   accounts.............    $ 124      $   418     $  --      $    93 (A)    $ 449
  Sales return reserve..    $ --       $ 1,655     $  --      $ 1,040 (B)    $ 615
Year ended December 31,
 1999
  Allowance for
   uncollectible
   accounts.............    $ 449      $   129     $  --      $   401 (A)    $ 177
  Sales return reserve..    $ 615      $ 1,083     $  --      $ 1,148 (B)    $ 550
</TABLE>
- --------
(A)  Deductions consist of write-offs of uncollectible accounts, net of
     recoveries.

(B)  Deductions consist of product returns.

                                      S-1
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Number                               Description
 ------                               -----------
 <C>    <S>
  1.1   Form of Underwriting Agreement.

  3.1*  Restated Certificate of Incorporation of the registrant.

  3.2*  Restated Bylaws of the registrant.

  5.1++ Opinion of Perkins Coie LLP as to the legality of the shares.

 10.1*  Lease Agreement, dated as of March 15, 1996, between COM Realty, Inc.
        and the registrant.

 10.2*  Lease Agreement, dated as of October 10, 1997, between Burke-State
        Bldg. LLC and the registrant.

 10.3*  Lease Agreement, dated as of August 17, 1998, between Cederstrand
        Rentals and the registrant.

 10.4*  Amended and Restated Loan and Security Agreement, dated as of March 20,
        1998, between Silicon Valley Bank and the registrant.

 10.5*  Loan Modification Agreement, dated as of September 18, 1998, between
        Silicon Valley Bank and the registrant.

 10.6*  1996 Stock Incentive Compensation Plan.

 10.7*  Standardized Adoption Agreement Prototype Cash or Deferred Profit-
        Sharing Plan and Trust (401(k) plan), effective as of September 1,
        1998.

 10.8+* Development and Supply Agreement, dated as of March 25, 1998, between
        SMART Modular Technologies, Inc. and the registrant.

 10.9+* OEM Master License Agreement, dated as of August 14, 1997, between RSA
        Data Security, Inc. and the registrant.

 10.10W Asset Purchase Agreement dated as of October 19, 1999, by and among
        BeadleNet, LLC, Productivity Enhancement Products, Inc., Danny M.
        Beadle and WatchGuard Technologies, Inc.

 10.11W Employment Agreement dated as of October 19, 1999, by and between Danny
        M. Beadle and WatchGuard Technologies, Inc.

 10.12W Stock Vesting Agreement dated as of October 19, 1999, by and between
        Danny M. Beadle and WatchGuard Technologies, Inc.
 23.1   Consent of Ernst & Young LLP, independent auditors.

 23.2   Consent of Deloitte & Touche LLP, independent auditors.

 23.3++ Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
        5.1).

 24.1++ Power of Attorney.

 99.1++ Report of Ernst & Young LLP, independent auditors, on financial
        statement schedule.
</TABLE>
- --------

+  Portions of these exhibits have been omitted based on a grant of
   confidential treatment by the Securities and Exchange Commission. The
   omitted portions of the exhibits have been filed separately with the SEC.
*  Incorporated by reference to the Registration Statement on Form S-1 (No.
   333-76587) filed by the registrant on April 20, 1999, as amended.
W  Incorporated by reference to the Current Report on Form 8-K (File No. 000-
   26819) filed by the registrant on November 2, 1999, as amended.

++ Previously filed.


<PAGE>

                                                                     Exhibit 1.1


                                3,450,000 Shares

                         WatchGuard Technologies, Inc.

                                  Common Stock
                          ($0.001 par value per share)

                             UNDERWRITING AGREEMENT


                                                              February ___, 2000

Credit Suisse First Boston Corporation
Dain Rauscher Wessels,
 a division of Dain Rauscher Incorporated
Soundview Technology Group, Inc.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629

Dear Sirs:

     1.   Introductory.  WatchGuard Technologies, Inc., a Delaware corporation
("Company") proposes to issue and sell 1,500,000 shares of its Common Stock, par
value $0.001 per share ("Securities") and the stockholders listed in Schedule A
hereto ("Selling Stockholders") propose severally to sell an aggregate of
1,500,000 outstanding shares of the Securities (such 3,000,000 shares of
Securities being hereinafter referred to as the "Firm Securities"). The Selling
Stockholders also propose to sell to the Underwriters, at the option of the
Underwriters, an aggregate of not more than 450,000 additional outstanding
shares of the Company's Securities, as set forth below (such 450,000 additional
shares being hereinafter referred to as the "Optional Securities"). The Firm
Securities and the Optional Securities are herein collectively called the
"Offered Securities". The Company and the Selling Stockholders hereby agree with
the several Underwriters named in Schedule B hereto ("Underwriters") as follows:

     2.   Representations and Warranties of the Company and the Selling
Stockholders.  (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:

          (i)  A registration statement (No. 333-95049) relating to the Offered
     Securities, including a form of prospectus, has been filed with the
     Securities and Exchange Commission ("Commission") and either (A) has been
     declared effective under the Securities Act of 1933 ("Act") and is not
     proposed to be amended or (B) is proposed to be amended by amendment or
     post-effective amendment. If such registration statement (the "initial
     registration statement") has been declared effective, either (A) an
     additional registration statement (the "additional registration statement")
     relating to the Offered Securities may have been filed with the Commission
     pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
     become effective upon filing pursuant to such Rule and the Offered
     Securities all have been duly registered under the Act pursuant to the
     initial registration statement and, if applicable, the additional
     registration statement or (B) such an additional registration statement is
     proposed to be filed with the Commission pursuant to Rule 462(b) and will
     become effective upon filing pursuant to such Rule, and upon such filing
     the Offered Securities will all have been duly registered under the Act
     pursuant to the initial registration statement and such additional
     registration

                                       1
<PAGE>

     statement. If the Company does not propose to amend the initial
     registration statement or if an additional registration statement has been
     filed and the Company does not propose to amend it, and if any post-
     effective amendment to either such registration statement has been filed
     with the Commission prior to the execution and delivery of this Agreement,
     the most recent amendment (if any) to each such registration statement has
     been declared effective by the Commission or has become effective upon
     filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the
     case of the additional registration statement, Rule 462(b). For purposes of
     this Agreement, "Effective Time" with respect to the initial registration
     statement or, if filed prior to the execution and delivery of this
     Agreement, the additional registration statement means (A) if the Company
     has advised the Representatives that it does not propose to amend such
     registration statement, the date and time as of which such registration
     statement, or the most recent post-effective amendment thereto (if any)
     filed prior to the execution and delivery of this Agreement, was declared
     effective by the Commission or has become effective upon filing pursuant to
     Rule 462(c), or (B) if the Company has advised the Representatives that it
     proposes to file an amendment or post-effective amendment to such
     registration statement, the date and time as of which such registration
     statement, as amended by such amendment or post-effective amendment, as the
     case may be, is declared effective by the Commission. If an additional
     registration statement has not been filed prior to the execution and
     delivery of this Agreement but the Company has advised the Representatives
     that it proposes to file one, "Effective Time" with respect to such
     additional registration statement means the date and time as of which such
     registration statement is filed and becomes effective pursuant to Rule
     462(b). "Effective Date" with respect to the initial registration statement
     or the additional registration statement (if any) means the date of the
     Effective Time thereof. The initial registration statement, as amended at
     its Effective Time, including all information contained in the additional
     registration statement (if any) and deemed to be a part of the initial
     registration statement as of the Effective Time of the additional
     registration statement pursuant to the General Instructions of the Form on
     which it is filed and including all information (if any) deemed to be a
     part of the initial registration statement as of its Effective Time
     pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
     referred to as the "Initial Registration Statement". The additional
     registration statement, as amended at its Effective Time, including the
     contents of the initial registration statement incorporated by reference
     therein and including all information (if any) deemed to be a part of the
     additional registration statement as of its Effective Time pursuant to Rule
     430A(b), is hereinafter referred to as the "Additional Registration
     Statement". The Initial Registration Statement and the Additional
     Registration Statement are hereinafter referred to collectively as the
     "Registration Statements" and individually as a "Registration Statement".
     The form of prospectus relating to the Offered Securities, as first filed
     with the Commission pursuant to and in accordance with Rule 424(b) ("Rule
     424(b)") under the Act or (if no such filing is required) as included in a
     Registration Statement, is hereinafter referred to as the "Prospectus". No
     document has been or will be prepared or distributed in reliance on Rule
     434 under the Act.

          (ii)  If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement: (A) on the Effective
     Date of the Initial Registration Statement, the Initial Registration
     Statement conformed in all material respects to the requirements of the Act
     and the rules and regulations of the Commission ("Rules and Regulations")
     and did not include any untrue statement of a material fact or omit to
     state any material fact required to be stated therein or necessary to make
     the statements therein not misleading (B) on the Effective Date of the
     Additional Registration Statement (if any), each Registration Statement
     conformed or will conform, in all material respects to the requirements of
     the Act and the Rules and Regulations and did not include, or will not
     include, any untrue statement of a material fact and did not omit, or will
     not omit, to state any material fact required to be stated therein or
     necessary to make the statements therein not misleading, and (C) on the
     date of this Agreement, the Initial Registration Statement and, if the
     Effective Time of the Additional Registration Statement is prior to the
     execution and delivery of this Agreement, the Additional Registration
     Statement each conforms, and at the time of filing of the Prospectus
     pursuant to Rule 424(b) or (if no such filing is required) at the Effective
     Date of the Additional Registration

                                       2
<PAGE>

     Statement in which the Prospectus is included, each Registration Statement
     and the Prospectus will conform in all material respects to the
     requirements of the Act and the Rules and Regulations, and neither of such
     documents includes, or will include, any untrue statement of a material
     fact or omits, or will omit, to state any material fact required to be
     stated therein or necessary to make the statements therein not misleading.
     If the Effective Time of the Initial Registration Statement is subsequent
     to the execution and delivery of this Agreement: on the Effective Date of
     the Initial Registration Statement, the Initial Registration Statement and
     the Prospectus will conform in all material respects to the requirements of
     the Act and the Rules and Regulations, neither of such documents will
     include any untrue statement of a material fact or will omit to state any
     material fact required to be stated therein or necessary to make the
     statements therein not misleading and no Additional Registration Statement
     has been or will be filed. The two preceding sentences do not apply to
     statements in or omissions from a Registration Statement or the Prospectus
     based upon written information furnished to the Company by any Underwriter
     through the Representatives specifically for use therein, it being
     understood and agreed that the only such information is that described as
     such in Section 7(c) hereof.

          (iii)  The Company has been duly incorporated and is an existing
     corporation in good standing under the laws of the State of Delaware, with
     power and authority (corporate and other) to own its properties and conduct
     its business as described in the Prospectus; and the Company is duly
     qualified to do business as a foreign corporation in good standing in all
     other jurisdictions in which its ownership or lease of property or the
     conduct of its business requires such qualification, except where the
     failure to be so qualified would not, individually or in the aggregate,
     have a material adverse effect on the condition (financial or otherwise),
     business, properties or results of operations of the Company ("Material
     Adverse Effect").

          (iv)  The Company has no significant subsidiaries as defined in
     paragraph (w) of Rule 1.02 of Regulation S-X promulgated under the Act.

          (v)  The Offered Securities and all other outstanding shares of
     capital stock of the Company have been duly authorized and validly issued,
     fully paid and nonassessable and conform in all material respects to the
     description thereof contained in the Prospectus, the stockholders of the
     Company have no preemptive rights with respect to the Offered Securities
     and the outstanding Securities were not issued in violation of any pre-
     exemptive rights.

          (vi)  Except as disclosed in the Prospectus, there are no contracts,
     agreements or understandings between the Company and any person that would
     give rise to a valid claim against the Company or any Underwriter for a
     brokerage commission, finder's fee or other like payment in connection with
     this offering.

          (vii)  There are no contracts, agreements or understandings between
     the Company and any person granting such person the right to require the
     Company to file a registration statement under the Act with respect to any
     securities of the Company owned or to be owned by such person or to require
     the Company to include such securities in the securities registered
     pursuant to a Registration Statement or in any securities being registered
     pursuant to any other registration statement filed by the Company under the
     Act which have not been fully satisfied or validly waived with respect to
     the offering of the Offered Securities.

          (viii)  The Securities are both quoted and listed on The Nasdaq Stock
     Market's National Market.

          (ix)  No consent, approval, authorization, or order of, or filing
     with, any governmental agency or body or any court is required to be
     obtained or made by the Company for the consummation of the transactions
     contemplated by this Agreement in connection with the sale of the Offered
     Securities, except such as have been obtained and made or will be made
     under the Act and such as may be required by The Securities Exchange Act of
     1934, as amended (the "Exchange Act"), the National

                                       3
<PAGE>

     Association of Securities Dealers, Inc. ("NASD"), The Nasdaq Stock Market
     or under state securities laws.

          (x)  The execution, delivery and performance of this Agreement, and
     the consummation of the transactions herein contemplated will not result in
     a breach or violation of any of the terms and provisions of, or constitute
     a default under, (i) any statute, any rule, regulation or order of any
     governmental agency or body or any court, domestic or foreign, having
     jurisdiction over the Company or any of its properties, or (ii) any
     agreement or instrument to which the Company is a party or by which the
     Company is bound or to which any of the properties of the Company is
     subject, or (iii) the charter or by-laws of the Company, except with
     respect to (i) and (ii) for such breaches, violations or defaults that
     would not, individually or in the aggregate, have a Material Adverse
     Effect.

          (xi)  This Agreement has been duly authorized, executed and delivered
     by the Company.

          (xii)  Except as disclosed in the Prospectus, the Company has good and
     marketable title to all real properties and all other properties and assets
     owned by it, in each case free from liens, encumbrances and defects that
     would materially affect the value thereof or materially interfere with the
     use made or to be made thereof by them; and except as disclosed in the
     Prospectus, the Company holds any leased real or personal property under
     valid and enforceable leases with no exceptions that would materially
     interfere with the use made or to be made thereof by it.

          (xiii)  The Company possesses adequate certificates, authorities or
     permits issued by appropriate governmental agencies or bodies necessary to
     conduct the business now operated by it (except for such certificates,
     authorities or permits the failure of which to obtain would not,
     individually or in the aggregate, have a Material Adverse Effect) and has
     not received any notice of proceedings relating to the revocation or
     modification of any such certificate, authority or permit that, if
     determined adversely to the Company, would individually or in the aggregate
     have a Material Adverse Effect.

          (xiv)  No labor dispute with the employees of the Company exists or,
     to the knowledge of the Company, is imminent that could reasonably be
     expected to have a Material Adverse Effect.

          (xv)  Except as disclosed in the Prospectus, the Company owns,
     possesses or can acquire on reasonable terms, adequate trademarks, trade
     names and other rights to inventions, know-how, patents, copyrights,
     confidential information and other intellectual property (collectively,
     "intellectual property rights") necessary to conduct the business now
     operated by it, or presently employed by it, and has not received any
     notice of infringement of or conflict with asserted rights of others with
     respect to any intellectual property rights that, if determined adversely
     to the Company, would individually or in the aggregate have a Material
     Adverse Effect.

          (xvi)  Except as disclosed in the Prospectus, the Company is not in
     violation of any statute, any rule, regulation, decision or order of any
     governmental agency or body or any court, domestic or foreign, relating to
     the use, disposal or release of hazardous or toxic substances or relating
     to the protection or restoration of the environment or human exposure to
     hazardous or toxic substances (collectively, "environmental laws"), owns or
     operates any real property contaminated with any substance that is subject
     to any environmental laws, is liable for any off-site disposal or
     contamination pursuant to any environmental laws, or is subject to any
     claim relating to any environmental laws, which violation, contamination,
     liability or claim would individually or in the aggregate have Material
     Adverse Effect; and the Company is not aware of any pending investigation
     which might lead to such a claim.

          (xvii)  Except as disclosed in the Prospectus, there are no pending
     actions, suits or proceedings against or affecting the Company or any of
     its properties that, if determined adversely to the Company, could
     reasonably be expected to individually or in the aggregate have a Material
     Adverse

                                       4
<PAGE>

     Effect, or could reasonably be expected to materially and adversely affect
     the ability of the Company to perform its obligations under this Agreement,
     or which are otherwise material in the context of the sale of the Offered
     Securities; and to the Company's knowledge, no such actions, suits or
     proceedings are threatened or contemplated.

          (xviii)  The financial statements included in each Registration
     Statement and the Prospectus present fairly the financial position of the
     Company and its consolidated subsidiaries as of the dates shown and their
     results of operations and cash flows for the periods shown, and such
     financial statements have been prepared in conformity with the generally
     accepted accounting principles in the United States applied on a consistent
     basis; and the schedules included in each Registration Statement present
     fairly the information required to be stated therein.

          (xix)  Except as disclosed in the Prospectus, since the date of the
     latest audited financial statements included in the Prospectus there has
     been no material adverse change, nor any development or event involving a
     prospective material adverse change, in the condition (financial or other),
     business, properties or results of operations of the Company, and, except
     as disclosed in or contemplated by the Prospectus, there has been no
     dividend or distribution of any kind declared, paid or made by the Company
     on any class of its capital stock.

          (xx)  The Company is not and, after giving effect to the offering and
     sale of the Offered Securities and the application of the proceeds thereof
     as described in the Prospectus, will not be an "investment company" as
     defined in the Investment Company Act of 1940.

     (b)  Each Selling Stockholder severally represents and warrants to, and
agrees with, the several Underwriters that:

          (i)  Such Selling Stockholder has and on each Closing Date hereinafter
     mentioned will have valid and unencumbered title to the Offered Securities
     to be delivered by such Selling Stockholder on such Closing Date and full
     right, power and authority to enter into this Agreement and to sell,
     assign, transfer and deliver the Offered Securities to be delivered by such
     Selling Stockholder on such Closing Date hereunder; and upon the delivery
     of and payment for the Offered Securities on each Closing Date hereunder
     the several Underwriters will acquire valid and unencumbered title to the
     Offered Securities to be delivered by such Selling Stockholder on such
     Closing Date.

          (ii)  If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement:  (A) on the
     Effective Date of the Initial Registration Statement, the Initial
     Registration Statement conformed in all respects to the requirements of the
     Act and the Rules and Regulations and did not include any untrue statement
     of a material fact or omit to state any material fact required to be stated
     therein or necessary to make the statements therein not misleading, (B) on
     the Effective Date of the Additional Registration Statement (if any), each
     Registration Statement conformed, or will conform, in all respects to the
     requirements of the Act and the Rules and Regulations] did not include, or
     will not include, any untrue statement of a material fact and did not omit,
     or will not omit, to state any material fact required to be stated therein
     or necessary to make the statements therein not misleading, and (C) on the
     date of this Agreement, the Initial Registration Statement and, if the
     Effective Time of the Additional Registration Statement is prior to the
     execution and delivery of this Agreement, the Additional Registration
     Statement each conforms, and at the time of filing of the Prospectus
     pursuant to Rule 424(b) or (if no such filing is required) at the Effective
     Date of the Additional Registration Statement in which the Prospectus is
     included, each Registration Statement and the Prospectus will conform, in
     all respects to the requirements of the Act and the Rules and Regulations,
     and neither of such documents includes, or will include, any untrue
     statement of a material fact or omits, or will omit, to state any material
     fact required to be stated therein or necessary to make the statements
     therein not misleading.  If the Effective Time of the Initial Registration
     Statement is subsequent to the execution and delivery of this Agreement:
     on the

                                       5
<PAGE>

     Effective Date of the Initial Registration Statement, the Initial
     Registration Statement and the Prospectus will conform in all respects to
     the requirements of the Act and the Rules and Regulations, neither of such
     documents will include any untrue statement of a material fact or will omit
     to state any material fact required to be stated therein or necessary to
     make the statements therein not misleading. The two preceding sentences
     apply only to the extent that any statements in or omissions from a
     Registration Statement or the Prospectus are based on written information
     furnished to the Company by such Selling Stockholder specifically for use
     therein.

          (iii)  Except as disclosed in the Prospectus, there are no contracts,
     agreements or understandings between such Selling Stockholder and any
     person that would give rise to a valid claim against such Selling
     Stockholder or any Underwriter for a brokerage commission, finder's fee or
     other like payment in connection with this offering.

     3.   Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and each Selling Stockholder
agree, severally and not jointly, to sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
each Selling Stockholder, at a purchase price of $            per share, that
number of Firm Securities (rounded up or down, as determined by Credit Suisse
First Boston Corporation ("CSFBC") in its discretion, in order to avoid
fractions) obtained by multiplying 1,500,000  Firm Securities in the case of the
Company and the number of Firm Securities set forth opposite the name of such
Selling Stockholder in Schedule A hereto, in the case of a Selling Stockholder,
in each case by a fraction the numerator of which is the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule B hereto
and the denominator of which is the total number of Firm Securities.

     Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with ChaseMellon Shareholder
Services, L.L.C., as custodian ("Custodian").  Each Selling Stockholder agrees
that the shares represented by the certificates held in custody for the Selling
Stockholders under such Custody Agreements are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling Stockholders
for such custody are to that extent irrevocable, and that the obligations of the
Selling Stockholders hereunder shall not be terminated by operation of law,
whether by the death of any individual Selling Stockholder or the occurrence of
any other event, or in the case of a trust, by the death of any trustee or
trustees or the termination of such trust.  If any individual Selling
Stockholder or any such trustee or trustees should die, or if any other such
event should occur, or if any of such trusts should terminate, before the
delivery of the Offered Securities hereunder, certificates for such Offered
Securities shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death or other event or termination had
not occurred, regardless of whether or not the Custodian shall have received
notice of such death or other event or termination.

     The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, at the office of
, against payment of the purchase price in Federal (same day) funds by official
bank check or checks or wire transfer to an account at a bank acceptable to
CSFBC drawn to the order of the Company in the case of 1,500,000 shares of Firm
Securities and the Selling Stockholders in the amounts set forth on Schedule A
hereto in the case of 1,500,000 shares of Firm Securities, at the office of
, at            A.M., New York time, on                       , or at such other
time not later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "First Closing Date".  The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as CSFBC requests and
will be made available for checking and packaging at the office of
at least 24 hours prior to the First Closing Date.

     In addition, upon written notice from CSFBC given to the Company and the
Selling Stockholders from time to time not more than 30 days subsequent to the
date of the Prospectus, the Underwriters may purchase all or less than all of
the Optional Securities at the purchase price per Security to be paid for the
Firm

                                       6
<PAGE>

Securities. The Selling Stockholders agree, severally and not jointly, to sell
to the Underwriters the respective numbers of Optional Securities obtained by
multiplying the number of Optional Securities specified in such notice by a
fraction the numerator of which is the number of shares set forth opposite the
names of such Selling Stockholders in Schedule A hereto under the caption
"Number of Optional Securities to be Sold" in the case of the Selling
Stockholders and the denominator of which is the total number of Optional
Securities (subject to adjustment by CSFBC to eliminate fractions). Such
Optional Securities shall be purchased from each of the Selling Stockholder for
the account of each Underwriter in the same proportion as the number of Firm
Securities set forth opposite such Underwriter's name bears to the total number
of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and
may be purchased by the Underwriters only for the purpose of covering over-
allotments made in connection with the sale of the Firm Securities. No Optional
Securities shall be sold or delivered unless the Firm Securities previously have
been, or simultaneously are, sold and delivered. The right to purchase the
Optional Securities or any portion thereof may be exercised from time to time
and to the extent not previously exercised may be surrendered and terminated at
any time upon notice by CSFBC to the Company and the Selling Stockholders.

     Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company and the Custodian
will deliver the Optional Securities being purchased on each Optional Closing
Date to the Representatives for the accounts of the several Underwriters,
against payment of the purchase price therefor in Federal (same day) funds by
official bank check or checks or wire transfer to an account at a bank
acceptable to CSFBC drawn to the order of                       in the case of
Optional Securities, at the office of                     . The certificates for
the Optional Securities being purchased on each Optional Closing Date will be in
definitive form, in such denominations and registered in such names as CSFBC
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the office of
at a reasonable time in advance of such Optional Closing Date.

     4.   Offering by Underwriters.  It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.

     5.   Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders that:

          (a)  If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement, the Company will
     file the Prospectus with the Commission pursuant to and in accordance with
     subparagraph (1) (or, if applicable and if consented to by CSFBC,
     subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
     second business day following the execution and delivery of this Agreement
     or (B) the fifteenth business day after the Effective Date of the Initial
     Registration Statement.

     The Company will advise CSFBC promptly of any such filing pursuant to Rule
     424(b). If the Effective Time of the Initial Registration Statement is
     prior to the execution and delivery of this Agreement and an additional
     registration statement is necessary to register a portion of the Offered
     Securities under the Act but the Effective Time thereof has not occurred as
     of such execution and delivery, the Company will file the additional
     registration statement or, if filed, will file a post-effective amendment
     thereto with the Commission pursuant to and in accordance with Rule 462(b)
     on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
     if earlier, on or prior to the time the Prospectus is printed and
     distributed to any Underwriter, or will make such filing at such later date
     as shall have been consented to by CSFBC.

                                       7
<PAGE>

          (b)  The Company will advise CSFBC promptly of any proposal to amend
     or supplement the initial or any additional registration statement as filed
     or the related prospectus or the Initial Registration Statement, the
     Additional Registration Statement (if any) or the Prospectus and will not
     effect such amendment or supplementation without CSFBC's consent, which
     shall not be unreasonably withheld; and the Company will also advise CSFBC
     promptly of the effectiveness of each Registration Statement (if its
     Effective Time is subsequent to the execution and delivery of this
     Agreement) and of any amendment or supplementation of a Registration
     Statement or the Prospectus and of the institution by the Commission of any
     stop order proceedings in respect of a Registration Statement and will use
     its best efforts to prevent the issuance of any such stop order and to
     obtain as soon as possible its lifting, if issued.

          (c)  If, at any time when a prospectus relating to the Offered
     Securities is required to be delivered under the Act in connection with
     sales by any Underwriter or dealer, any event occurs as a result of which
     the Prospectus as then amended or supplemented would include an untrue
     statement of a material fact or omit to state any material fact necessary
     to make the statements therein, in the light of the circumstances under
     which they were made, not misleading, or if it is necessary at any time to
     amend the Prospectus to comply with the Act, the Company will promptly
     notify CSFBC of such event and will promptly prepare and file with the
     Commission, at its own expense, an amendment or supplement which will
     correct such statement or omission or an amendment which will effect such
     compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
     any such amendment or supplement shall constitute a waiver of any of the
     conditions set forth in Section 6.

          (d)  As soon as practicable, but not later than the Availability Date
     (as defined below), the Company will make generally available to its
     securityholders an earnings statement covering a period of at least 12
     months beginning after the Effective Date of the Initial Registration
     Statement (or, if later, the Effective Date of the Additional Registration
     Statement) which will satisfy the provisions of Section 11(a) of the Act.
     For the purpose of the preceding sentence, "Availability Date" means the
     45th day after the end of the fourth fiscal quarter following the fiscal
     quarter that includes such Effective Date, except that, if such fourth
     fiscal quarter is the last quarter of the Company's fiscal year,
     "Availability Date" means the 90th day after the end of such fourth fiscal
     quarter.

          (e)  The Company will furnish to the Representatives four copies of
     each Registration Statement each of which will be signed and will include
     all exhibits), each related preliminary prospectus, and, so long as a
     prospectus relating to the Offered Securities is required to be delivered
     under the Act in connection with sales by any Underwriter or dealer, the
     Prospectus and all amendments and supplements to such documents, in each
     case in such quantities as CSFBC requests. The Prospectus shall be so
     furnished on or prior to 3:00 P.M., New York time, on the business day
     following the later of the execution and delivery of this Agreement or the
     Effective Time of the Initial Registration Statement. All other such
     documents shall be so furnished as soon as available. The Company and the
     Selling Stockholders will pay the expenses of printing and distributing to
     the Underwriters all such documents.

          (f)  The Company will arrange for the qualification of the Offered
     Securities for sale under the laws of such jurisdictions as CSFBC
     designates and will continue such qualifications in effect so long as
     required for the distribution; provided, however, that the Company shall
     not be obligated to file any general consent to service of process or to
     qualify as a foreign corporation or as a securities dealer in any
     jurisdiction or to subject itself to taxation in any jurisdiction in which
     it is not otherwise so subject.

          (g)  During the period of five years hereafter, the Company will
     furnish to the Representatives and, upon request, to each of the other
     Underwriters, as soon as practicable after the end of each fiscal year, a
     copy of its annual report to stockholders for such year; and the Company
     will furnish to the Representatives (i) as soon as available, a copy of
     each report and any definitive proxy statement of

                                       8
<PAGE>

     the Company filed with the Commission under the Securities Exchange Act of
     1934 or mailed to stockholders, and (ii) from time to time, such other
     public information concerning the Company as CSFBC may reasonably request.

          (h)  For a period of 90 days after the date of the public offering of
     the Offered Securities, the Company will not offer, sell, contract to sell,
     pledge or otherwise dispose of, directly or indirectly, or file with the
     Commission a registration statement under the Act relating to, any
     additional shares of its Securities or securities convertible into or
     exchangeable or exercisable for any shares of its Securities, or publicly
     disclose the intention to make any such offer, sale, pledge, disposition or
     filing, without the prior written consent of CSFBC except (i) grants of
     employee stock options or restricted stock awards pursuant to the terms of
     a plan as in effect on the date hereof, (ii) issuances of Securities
     pursuant to the exercise of such options or the exercise of any other
     employee stock options outstanding on the date hereof, (iii) issuances
     of Securities upon exercise of warrants outstanding and substantially as in
     effect on the date hereof, (iv) issuances of Securities pursuant to the
     terms of an employee stock purchase plan as in effect on the date hereof,
     and (v) if CSFBC is provided with at least two (2) days' prior written
     notice, provided that the fair market value of such securities does not
     exceed $50 million, issuances of Securities in connection with strategic
     acquisitions or alliances or other business relationships approved by the
     Board.

          (i)  The Company and each Selling Stockholder agree with the several
     Underwriters that the Company and such Selling Stockholder will pay all
     expenses incident to the performance of the obligations of the Company and
     such Selling Stockholder, as the case may be, under this Agreement, for any
     filing fees and other expenses (including fees and disbursements of
     counsel) in connection with qualification of the Offered Securities for
     sale under the laws of such jurisdictions as CSFBC designates and the
     printing of memoranda relating thereto, for the filing fee incident to, and
     the reasonable fees and disbursements of counsel to the Underwriters in
     connection with, the review by the National Association of Securities
     Dealers, Inc. of the Offered Securities, for any travel expenses of the
     Company's officers and employees and any other expenses of the Company in
     connection with attending or hosting meetings with prospective purchasers
     of the Offered Securities, for any transfer taxes on the sale by the
     Selling Stockholders of the Offered Securities to the Underwriters and for
     expenses incurred in distributing preliminary prospectuses and the
     Prospectus (including any amendments and supplements thereto) to the
     Underwriters.

          (j)  Each Selling Stockholder agrees to deliver to CSFBC, attention:
     Transactions Advisory Group on or prior to the First Closing Date a
     properly completed and executed United States Treasury Department Form W-9
     (or other applicable form or statement specified by Treasury Department
     regulations in lieu thereof).

     6.   Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their obligations hereunder and to the following additional
conditions precedent:

          (a)  The Representatives shall have received a letter, dated the date
     of delivery thereof (which, if the Effective Time of the Initial
     Registration Statement is prior to the execution and delivery of this
     Agreement, shall be on or prior to the date of this Agreement or, if the
     Effective Time of the Initial Registration Statement is subsequent to the
     execution and delivery of this Agreement, shall be prior to the filing of
     the amendment or post-effective amendment to the registration statement to
     be filed shortly prior to such Effective Time), of Ernst & Young LLP
     confirming that they are independent public accountants within the meaning
     of the Act and the applicable published Rules and Regulations thereunder
     and stating to the effect that:

                                       9
<PAGE>

               (i)  in their opinion the financial statements and schedules
          examined by them and included or incorporated by reference in the
          Registration Statements comply as to form in all material respects
          with the applicable accounting requirements of the Act and the related
          published Rules and Regulations;

               (ii)  on the basis of a reading of the latest available interim
          financial statements of the Company, inquiries of officials of the
          Company who have responsibility for financial and accounting matters
          and other specified procedures, nothing came to their attention that
          caused them to believe that:

                    (A)  at the date of the latest available balance sheet read
               by such accountants, or at a subsequent specified date not more
               than three business days prior to the date of this Agreement,
               there was any change in the capital stock (except pursuant to the
               issuances under the Company's stock option plan or employee stock
               purchase plan or as otherwise described in the Prospectus) or any
               increase in short-term indebtedness or long-term debt of the
               Company or, at the date of the latest available balance sheet
               read by such accountants, there was any decrease in net current
               assets or net assets, as compared with amounts shown on the
               latest balance sheet included in the Prospectus; or

                    (B)  for the period from the closing date of the latest
               statement of operations, included in the Prospectus to the
               closing date of the latest available statement of operations,
               read by such accountants there were any decreases, as compared
               with the corresponding period of the previous year in net sales
               or net operating income in the total or per share amounts of
               income before extraordinary items or an increase in net loss;

          except in all cases set forth in clauses (A) and (B) above for
          changes, increases or decreases which the Prospectus discloses have
          occurred or may occur or which are described in such letter; and

               (iii)  they have compared specified dollar amounts (or
          percentages derived from such dollar amounts) and other financial
          information contained in the Registration Statements (in each case to
          the extent that such dollar amounts, percentages and other financial
          information are derived from the general accounting records of the
          Company and its subsidiaries subject to the internal controls of the
          Company's accounting system or are derived directly from such records
          by analysis or computation) with the results obtained from inquiries,
          a reading of such general accounting records and other procedures
          specified in such letter and have found such dollar amounts,
          percentages and other financial information to be in agreement with
          such results, except as otherwise specified in such letter.

     For purposes of this subsection, (i) if the Effective Time of the Initial
     Registration Statements is subsequent to the execution and delivery of this
     Agreement, "Registration Statements" shall mean the initial registration
     statement as proposed to be amended by the amendment or post-effective
     amendment to be filed shortly prior to its Effective Time, (ii) if the
     Effective Time of the Initial Registration Statements is prior to the
     execution and delivery of this Agreement but the Effective Time of the
     Additional Registration Statement is subsequent to such execution and
     delivery, "Registration Statements" shall mean the Initial Registration
     Statement and the additional registration statement as proposed to be filed
     or as proposed to be amended by the post-effective

                                       10
<PAGE>

     amendment to be filed shortly prior to its Effective Time, and (iii)
     "Prospectus" shall mean the prospectus included in the Registration
     Statements.

          (b)  If the Effective Time of the Initial Registration Statement is
     not prior to the execution and delivery of this Agreement, such Effective
     Time shall have occurred not later than 10:00 P.M., New York time, on the
     date of this Agreement or such later date as shall have been consented to
     by CSFBC. If the Effective Time of the Additional Registration Statement
     (if any) is not prior to the execution and delivery of this Agreement, such
     Effective Time shall have occurred not later than 10:00 P.M., New York
     time, on the date of this Agreement or, if earlier, the time the Prospectus
     is printed and distributed to any Underwriter, or shall have occurred at
     such later date as shall have been consented to by CSFBC. If the Effective
     Time of the Initial Registration Statement is prior to the execution and
     delivery of this Agreement, the Prospectus shall have been filed with the
     Commission in accordance with the Rules and Regulations and Section 5(a) of
     this Agreement. Prior to such Closing Date, no stop order suspending the
     effectiveness of a Registration Statement shall have been issued and no
     proceedings for that purpose shall have been instituted or, to the
     knowledge of any Selling Stockholder, the Company or the Representatives,
     shall be contemplated by the Commission.

          (c)  Subsequent to the execution and delivery of this Agreement, there
     shall not have occurred (i) any change, or any development or event
     involving a prospective change, in the condition (financial or other),
     business, properties or results of operations of the Company which, in the
     judgment of a majority in interest of the Underwriters, including the
     Representatives, is material and adverse and makes it impractical or
     inadvisable to proceed with completion of the public offering or the sale
     of and payment for the Offered Securities; (ii) any downgrading in the
     rating of any debt securities of the Company by any "nationally recognized
     statistical rating organization" (as defined for purposes of Rule 436(g)
     under the Act), or any public announcement that any such organization has
     under surveillance or review its rating of any debt securities of the
     Company (other than an announcement with positive implications of a
     possible upgrading, and no implication of a possible downgrading, of such
     rating); (iii) any material suspension or material limitation of trading in
     securities generally on the New York Stock Exchange, or any setting of
     minimum prices for trading on such exchange, or any suspension of trading
     of any securities of the Company on any exchange or in the over-the-counter
     market; (iv) any banking moratorium declared by U.S. Federal or New York
     authorities; or (v) any outbreak or escalation of major hostilities in
     which the United States is involved, any declaration of war by Congress or
     any other substantial national or international calamity or emergency if,
     in the judgment of a majority in interest of the Underwriters, including
     the Representatives, the effect of any such outbreak, escalation,
     declaration, calamity or emergency makes it impractical or inadvisable to
     proceed with completion of the public offering or the sale of and payment
     for the Offered Securities.

          (d)  The Representatives shall have received an opinion, dated such
     Closing Date, of Perkins Coie LLP, counsel for the Company, to the effect
     that:

               (i)  The Company has been duly incorporated and is an existing
          corporation in good standing under the laws of the State of  Delaware,
          with corporate power and authority to own its properties and conduct
          its business as described in the Prospectus; and the Company is duly
          qualified to do business as a foreign corporation in good standing in
          all other jurisdictions in which its ownership or lease of property or
          the conduct of its business requires such qualification;

               (ii)  The Offered Securities delivered on such Closing Date and
          all other outstanding shares of the Common Stock of the Company have
          been duly authorized and validly issued, are fully paid and
          nonassessable and conform to the description thereof contained in the
          Prospectus; and the stockholders of the Company have no preemptive
          rights with respect to the Securities;

                                       11
<PAGE>

               (iii)  There are no contracts, agreements or understandings known
          to such counsel between the Company and any person granting such
          person the right to require the Company to file a registration
          statement under the Act with respect to any securities of the Company
          owned or to be owned by such person or to require the Company to
          include such securities in the securities registered pursuant to the
          Registration Statement or in any securities being registered pursuant
          to any other registration statement filed by the Company under the
          Act;

               (iv)  The Company is not and, after giving effect to the offering
          and sale of the Offered Securities and the application of the proceeds
          thereof as described in the Prospectus, will not be an "investment
          company" as defined in the Investment Company Act of 1940.

               (v)  No consent, approval, authorization or order of, or filing
          with, any governmental agency or body or any court is required to be
          obtained or made by the Company or any Selling Stockholder for the
          consummation of the transactions contemplated by this Agreement or the
          Custody Agreement in connection with the sale of the Offered
          Securities, except such as have been obtained and made under the Act
          and such as may be required under state securities laws;

               (vi)  The execution, delivery and performance of this Agreement
          or the Custody Agreement and the consummation of the transactions
          herein or therein contemplated will not result in a breach or
          violation of any of the terms and provisions of, or constitute a
          default under, any statute, any rule, regulation or order of any
          governmental agency or body or any court having jurisdiction over the
          Company or any subsidiary of the Company or any of their properties,
          or any agreement or instrument to which the Company or any such
          subsidiary is a party or by which the Company or any such subsidiary
          is bound or to which any of the properties of the Company or any such
          subsidiary is subject, or the charter or by-laws of the Company or any
          such subsidiary;

               (vii)  The Initial Registration Statement was declared effective
          under the Act as of the date and time specified in such opinion, the
          Additional Registration Statement (if any) was filed and became
          effective under the Act as of the date and time (if determinable)
          specified in such opinion, the Prospectus either was filed with the
          Commission pursuant to the subparagraph of Rule 424(b) specified in
          such opinion on the date specified therein or was included in the
          Initial Registration Statement or the Additional Registration
          Statement (as the case may be), and, to the best of the knowledge of
          such counsel, no stop order suspending the effectiveness of a
          Registration Statement or any part thereof has been issued and no
          proceedings for that purpose have been instituted or are pending or
          contemplated under the Act, and each Registration Statement and the
          Prospectus, and each amendment or supplement thereto, as of their
          respective effective or issue dates, complied as to form in all
          material respects with the requirements of the Act and the Rules and
          Regulations; such counsel have no reason to believe that any part of a
          Registration Statement or any amendment thereto, as of its effective
          date or as of such Closing Date, contained any untrue statement of a
          material fact or omitted to state any material fact required to be
          stated therein or necessary to make the statements therein not
          misleading; or that the Prospectus or any amendment or supplement
          thereto, as of its issue date or as of such Closing Date, contained
          any untrue statement of a material fact or omitted to state any
          material fact necessary in order to make the statements therein, in
          the light of the circumstances under which they were made, not
          misleading; the descriptions in the Registration Statements and
          Prospectus of statutes, legal and governmental proceedings and
          contracts and other documents are accurate and fairly present the
          information required to be shown; and such counsel do not know of any
          legal or governmental proceedings required to be described in a
          Registration Statement or the Prospectus which are not described as
          required or of any contracts or documents of a character required to
          be described in a Registration Statement or the Prospectus or to be
          filed as exhibits to a Registration Statement which are not described
          and filed as required; it

                                       12
<PAGE>

          being understood that such counsel need express no opinion as to the
          financial statements or other financial data contained in the
          Registration Statements or the Prospectus; and

               (viii)  This Agreement has been duly authorized, executed and
          delivered by the Company.

          (e)  The Representatives shall have received the opinion contemplated
     in the Power of Attorney executed and delivered by each Selling Stockholder
     and an opinion, dated such Closing Date, of Perkins Coie LLP, counsel for
     the Selling Stockholders, to the effect that:

               (i)  As of the date of this opinion letter, each Selling
          Stockholder is the registered owner of the Selling Stockholder
          Securities to be sold by that Selling Stockholder pursuant to the
          Underwriting Agreement, which shares are represented by the
          certificates, or currently exercisable options to purchase shares,
          deposited with the Custodian, pursuant to the Custody Agreement. To
          our knowledge, each Selling Stockholder has full right, power and
          authority to sell, assign, transfer and deliver pursuant to the
          Underwriting Agreement the Selling Stockholder Securities listed with
          respect to that Selling Stockholder in Schedule A to the Underwriting
          Agreement. Upon the consummation of the sale of the Selling
          Stockholder Securities by the Selling Stockholders to the Underwriters
          pursuant to the Underwriting Agreement, the several Underwriters will
          be the owners of the Selling Stockholder Securities free of any
          adverse claim, assuming that the Underwriters have purchased the
          Selling Stockholder Securities for value, in good faith and without
          notice of any adverse claim, and any lien in favor of the Company or
          any restriction on transfer imposed by the Company;

               (ii)  No consent, approval, authorization or order of, or filing
          with, any governmental agency or body or any court is required to be
          obtained or made by any Selling Stockholder for the consummation of
          the transactions contemplated by the Custody Agreement or this
          Agreement in connection with the sale of the Offered Securities sold
          by the Selling Stockholders, except such as have been obtained and
          made under the Act and such as may be required under state securities
          laws;

               (iii)  The execution, delivery and performance of the Custody
          Agreement and this Agreement and the consummation of the transactions
          therein and herein contemplated will not result in a breach or
          violation of any of the terms and provisions of, or constitute a
          default under, any statute, any rule, regulation or order of any
          governmental agency or body or any court having jurisdiction over any
          Selling Stockholder or any of their properties or any agreement or
          instrument to which any Selling Stockholder is a party or by which any
          Selling Stockholder is bound or to which any of the properties of any
          Selling Stockholder is subject , or the charter or by-laws of any
          Selling Stockholder which is a corporation;

               (iv)  The Power of Attorney and related Custody Agreement with
          respect to each Selling Stockholder has been duly authorized, executed
          and delivered by such Selling Stockholder and constitute valid and
          legally binding obligations of each such Selling Stockholder
          enforceable in accordance with their terms, subject to bankruptcy,
          insolvency, fraudulent transfer, reorganization, moratorium and
          similar laws of general applicability relating to or affecting
          creditors' rights and to general equity principles; and

               (v)  This Agreement has been duly authorized, executed and
          delivered by each Selling Stockholder.

In giving this opinion, Perkins Coie LLP shall be entitled to rely upon the
opinions of Skadden, Arps, Slate, Meagher & Flom LLP with respect to each of RRE
Investors L.P. and RRE Investors Fund L.P., and Gunderson Dettmer Stough
Villeneuve Franklin & Hachigan, LLP with respect to each of Olympic Venture
Partners III, L.P., OVP III Entrepreneurs Fund L. P., Olympic Venture Partners
IV, L.P. and OVP IV Entrepreneurs Fund L.P., and on the representations and
warranties of each Selling Stockholder made in this Agreement, the Power of
Attorney and the Custody Agreement.

          (f)  The Representatives shall have received from Gray Cary Ware &
     Freidenrich, LLP, counsel for the Underwriters, such opinion or opinions,
     dated such Closing Date, with respect to the incorporation of the Company,
     the validity of the Offered Securities delivered on such Closing Date,

                                       13
<PAGE>

     the Registration Statements, the Prospectus and other related matters as
     the Representatives may require, and the Selling Stockholders and the
     Company shall have furnished to such counsel such documents as they request
     for the purpose of enabling them to pass upon such matters.

          (g)  The Representatives shall have received a certificate, dated such
     Closing Date, of the President or any Vice President and a principal
     financial or accounting officer of the Company in which such officers, to
     the best of their knowledge after reasonable investigation, shall state
     that: the representations and warranties of the Company in this Agreement
     are true and correct; the Company has complied with all agreements and
     satisfied all conditions on its part to be performed or satisfied hereunder
     at or prior to such Closing Date; no stop order suspending the
     effectiveness of any Registration Statement has been issued and no
     proceedings for that purpose have been instituted or are contemplated by
     the Commission; the Additional Registration Statement (if any) satisfying
     the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
     pursuant to Rule 462(b), including payment of the applicable filing fee in
     accordance with Rule 111(a) or (b) under the Act, prior to the time the
     Prospectus was printed and distributed to any Underwriter; and, subsequent
     to the respective date of the most recent financial statements in the
     Prospectus, there has been no material adverse change, nor any development
     or event involving a prospective material adverse change, in the condition
     (financial or other), business, properties or results of operations of the
     Company and its subsidiaries taken as a whole except as set forth in or
     contemplated by the Prospectus or as described in such certificate.

          (h)  The Representatives shall have received a letter, dated such
     Closing Date, of Ernst & Young LLP which meets the requirements of
     subsection (a) of this Section, except that the specified date referred to
     in such subsection will be a date not more than three days prior to such
     Closing Date for the purposes of this subsection.

          (i)  On or prior to the date of this Agreement, the Representatives
     shall have received lockup letters from each of the executive officers and
     directors of the Company listed in Schedule C hereto, each holder of 5% or
     more of the Company's Securities and each Selling Stockholder.

The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request.  CSFBC may in its sole discretion waive
on behalf of the Underwriters compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.

     7.   Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any who controls such Underwriter within the meaning of Section 15 of
the Act, against any losses, claims, damages or liabilities, joint or several,
to which such Underwriter may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives specifically for
use therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such in
subsection (c) below; provided, further that with respect to any untrue
statement in, or alleged untrue statement or omissions or alleged omission from
any preliminary prospectus, the indemnity agreement set forth in this Section
7(a)

                                       14
<PAGE>

shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased the Offered Securities
concerned, to the extent that a prospectus relating to such Offered Securities
was required to be delivered by such Underwriter under the Act in connection
with such purchase and any such loss, claim, damage or liability of such
Underwriter results from the fact that there was not sent or given to such
person, at or prior to the written confirmation of the sale of such Offered
Securities to such person, a copy of the Prospectus if the Company had
previously furnished copies thereof to such Underwriter.

     (b)  The Selling Stockholders, jointly and severally, will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person who controls such Underwriter within the meaning of Section 15 of the
Act, against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any Registration Statement, the Prospectus, or
any amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the Selling
Stockholders will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; provided, further, that
with respect to any untrue statement or alleged untrue statement in, or omission
or alleged omission from, any preliminary prospectus, the indemnity agreement
set forth in this Section 7(a) shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, claims, damages or liabilities
purchased the Offered Securities concerned, to the extent that a prospectus
relating to such Offered Securities was required to be delivered by such
Underwriter under the Act in connection with such purchase and any such loss,
claim, damage or liability of such Underwriter results from the fact that there
was not sent or given to such person, at or prior to the written confirmation of
the sale of such Offered Securities to such person, a copy of the Prospectus if
the Company had previously furnished copies thereof to such Underwriter.
provided, further, that the Selling Stockholders identified in part II of
Schedule A shall only be subject to such liability to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission is based
upon information provided by such Selling Stockholders or contained in a
representation or warranty given by such Selling Stockholders in this Agreement
or the Custody Agreement and provided, further, that the liability under this
subsection of each Selling Stockholder shall be limited to the aggregate gross
proceeds to such Selling Stockholder from the sale of Securities sold by such
Selling Stockholder.

     (c)  Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the Act, and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company and each Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only

                                       15
<PAGE>

such information furnished by any Underwriter consists of the following
information in the Prospectus furnished on behalf of each Underwriter: (i) the
concessions and reallowance figures appearing in the fourth paragraph under the
caption "Underwriting" and the information contained in the tenth paragraph
under the caption "Underwriting", (ii) the information in the Prospectus
furnished on the behalf of Wit Capital Corporation contained in the eleventh
paragraph under the caption "Underwriting", and (iii) the information in the
Prospectus furnished on the behalf of Dain Rauscher Wessels contained in the
twelfth paragraph under the caption "Underwriting".

     (d)  Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above.  In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.  No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such (i) settlement includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act by
or on behalf of an indemnified party.

     (e)  If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Stockholders bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.  The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.  No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not

                                       16
<PAGE>

guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.

     (f)  The obligations of the Company and the Selling Stockholders under this
Section shall be in addition to any liability which the Company and the Selling
Stockholders may otherwise have and shall extend, upon the same terms and
conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.

     8.  Default of Underwriters.  If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company and the Selling Stockholders for
the purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC, the Company and the Selling Stockholders for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter, the Company or the Selling Stockholders, except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.

     9.  Survival of Certain Representations and Obligations.  The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company and the Selling
Stockholders will, jointly and severally, reimburse the Underwriters for all
out-of-pocket expenses (including fees and disbursements of counsel) reasonably
incurred by them in connection with the offering of the Offered Securities.

     10.  Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department -
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at WatchGuard Technologies, Inc.,
316 Occidential Ave. South, Suite 200,

                                       17
<PAGE>

Seattle, Washington 98104, Attention: General Counsel, or, if sent to the
Selling Stockholders or any of them, will be mailed, delivered or telegraphed
and confirmed to the Selling Stockholders, c/o the Company, 316 Occidential Ave.
South, Suite 200, Seattle, Washington 98104; provided, however, that any notice
to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed
and confirmed to such Underwriter.

     11.  Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective personal representatives and
successors and the officers and directors and controlling persons referred to in
Section 7, and no other person will have any right or obligation hereunder.

     12.  Representation.  The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
CSFBC will be binding upon all the Underwriters. Steven N. Moore or Michael C.
Piraino, or either of them (the "Attorneys-in Fact"), will act for the Selling
Stockholders in connection with such transactions, and any action under or in
respect of this Agreement taken by either of the Attorneys-in-Fact will be
binding upon all Selling Stockholders.

     13.  Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.

     14.  Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.

     The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.

                                       18
<PAGE>

     If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement among the Selling
Stockholders, the Company and the several Underwriters in accordance with its
terms.

                                        Very truly yours,

                                        ........................................

                                        WATCHGUARD TECHNOLOGIES, INC.

                                        By......................................
                                        Name:  Steven N. Moore
                                        Title:  CFO



                                        SELLING STOCKHOLDERS LISTED ON
                                        SCHEDULE A

                                        By......................................
                                        Name:  .................................
                                                       Attorney-in-Fact


The foregoing Underwriting Agreement
is hereby confirmed and accepted as of
the date first above written.


  Credit Suisse First Boston Corporation
  Dain Rauscher Wessels,
     a division of Dain Rauscher Incorporated
  Soundview Technology Group, Inc.

  ...........................................

  ...........................................

     Acting on behalf of themselves and as
       the Representatives of the several
       Underwriters.


  By  Credit Suisse First Boston Corporation


  By.........................................

                                       19
<PAGE>

                                   SCHEDULE A

<TABLE>
<CAPTION>
                                                                                           Number of
                                                                       Number of           Optional
                                                                   Firm Securities       Securities to
                       Selling Stockholder                            to be Sold            be Sold
                       -------------------                         ---------------       -------------
<S>                                                                <C>                  <C>
Part I
- ------
     Chris Slatt.................................................        330,000             30,000
     Steve Moore.................................................        330,000             30,000

Part II
- -------
     Dennis Cloutier.............................................        175,000            100,000
     Mike Martucci...............................................        125,000             50,000
     David Bonn..................................................         90,000             30,000
     Olympic Venture Partners III, L.P...........................         42,000             46,000
     OVP III Entrepreneurs Fund L.P..............................          2,000              2,200
     Olympic Venture Partners IV, L.P............................         53,000             58,300
     OVP IV Entrepreneurs Fund...................................          3,000              3,300
     RRE Investors, L.P..........................................        207,301             82,920
     RRE Investors Fund, L.P.....................................        114,128             45,651













                                                                       ---------            -------
     Total.......................................................      1,500,000            450,000
                                                                       =========            =======
</TABLE>

                                       20
<PAGE>

                                   SCHEDULE B

<TABLE>
<CAPTION>
                                                                        Number of
                                                                     Firm Securities
Underwriter                                                          to be Purchased
- -----------                                                          ---------------
<S>                                                               <C>
Credit Suisse First Boston Corporation..........................
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.
Soundview Technology Group, Inc.................................













                                                                     ---------------
               Total............................................
                                                                     ===============
</TABLE>
<PAGE>

                                   SCHEDULE C


<PAGE>

                                                                    Exhibit 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

  We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated February 4,
2000, in the Registration Statement (Form S-1 No. 333-95049) and related
Prospectus of WatchGuard Technologies, Inc. for the registration of 3,450,000
shares of its common stock.

                                          ERNST & YOUNG LLP

Seattle, Washington
February 10, 2000

<PAGE>

                                                                    Exhibit 23.2

             CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS

  We consent to the use in Amendment No. 2 to Registration Statement No. 333-
95049 of WatchGuard Technologies, Inc. of our report related to BeadleNet, LLC
dated December 24, 1999, appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.

DELOITTE & TOUCHE LLP

Costa Mesa, California
February 11, 2000

<PAGE>

                                                                    Exhibit 99.1

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
                        ON FINANCIAL STATEMENT SCHEDULE

  We have audited the financial statements of WatchGuard Technologies, Inc. as
of December 31, 1998 and 1999 and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated February 4,
2000 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.

  In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                          ERNST & YOUNG LLP

Seattle, Washington
February 4, 2000


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