<PAGE>

    As filed with the Securities and Exchange Commission on August 27, 1999
                                                     Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                                ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     Under
                          The Securities Act of 1933

                                ---------------
                                SonicWALL, Inc.
            (Exact name of registrant as specified in its charter)

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

      5400 Betsy Ross Drive Santa Clara, California 95054 (408) 844-9900
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

                                ---------------
                                Sreekanth Ravi
                Chairman, President and Chief Executive Officer
                                SonicWALL, Inc.
      5400 Betsy Ross Drive Santa Clara, California 95054 (408) 844-9900
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                ---------------
                                  Copies to:
<TABLE>
<S>                             <C>
    Jerrold F. Petruzzelli                      Gregory K. Miller
    William T. Quicksilver                        John B. Turner
        David M. Pike                            Latham & Watkins
Manatt, Phelps & Phillips, LLP          505 Montgomery Street, Suite 1900
  3030 Hansen Way, Suite 100             San Francisco, California 94111
 Palo Alto, California 94301                Telephone: (415) 391-0600
  Telephone: (650) 856-1200                 Facsimile: (415) 395-8095
  Facsimile: (650) 856-1344
</TABLE>

                                ---------------
   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. [_]

                                ---------------
                       CALCULATION OF REGISTRATION FEES
<TABLE>
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
<CAPTION>
                                                    Proposed       Proposed
                                      Amount        Maximum        Maximum      Amount of
     Title of Each Class of            to be     Offering Price   Aggregate    Registration
   Securities to be Registered     Registered(1)  Per Share(2)  Offering Price     Fee
-------------------------------------------------------------------------------------------
<S>                                <C>           <C>            <C>            <C>
Common Stock, no par value......                       $         $46,000,000     $12,788
-------------------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
(1) Includes     shares which the underwriters have the option to purchase in
    over-allotment, if any.
(2) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(a).

                                ---------------
   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 our common stock until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is offering  +
+to sell our common stock, and seeking offers to buy our common stock, only in +
+states where the offer or sale is permitted.                                  +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                  SUBJECT TO COMPLETION, DATED          , 1999

                           [LOGO OF SONICWALL, INC.]

                                Shares of Common Stock

                                $      per share

                                  -----------

This is the initial public offering of SonicWALL, Inc. We are selling
shares of our common stock. In addition, the shareholders listed on page
have granted the underwriters a 30-day option to purchase up to an additional
       shares of common stock to cover any over-allotments. We will not receive
any of the proceeds from the sale of shares by the selling shareholders.

We expect the initial public offering price to be between $    and $    per
share. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol SNWL.

Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 6.

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.

                                  -----------

<TABLE>
<CAPTION>
                                                                 Per Share Total
                                                                 --------- -----
<S>                                                              <C>       <C>
Public offering price...........................................
Underwriting discounts and commissions..........................
Proceeds, before expenses to us.................................
</TABLE>

                                  -----------

The underwriters may purchase up to an additional         shares from certain
selling shareholders at the initial public offering price less the underwriting
discount, solely to cover over-allotments.

The underwriters expect to deliver the shares in San Francisco, California on
or about          , 1999.

                                  -----------

Bear, Stearns & Co. Inc.

                            Hambrecht & Quist

                                                      Thomas Weisel Partners LLC

                 The date of this prospectus is August   , 1999
<PAGE>

                             [SonicWALL, Inc. LOGO]

   GATEFOLD ARTWORK TEXT:

1. With SonicWALL, small to medium size businesses can deploy robust,
   affordable Internet security. SonicWALL DMZ allows organizations to deploy
   public servers, such as Web and E-commerce servers. While access to the DMZ
   is public, servers on the DMZ are protected against Internet based attacks.

2. A SonicWALL may be deployed at each branch office for complete Internet
   security: firewalling, VPN, and content filtering. A VPN can be created
   between each branch office and headquarters by using SonicWALLs at the
   branch office and an enterprise VPN/firewall solution, such as Check Point's
   Firewall-1, at headquarters.

3. With SonicWALL, mobile workers can use VPN to connect securely to the
   office.

4. With SonicWALL, schools & libraries can protect children from objectionable
   Web sites as well as securing the network from Internet hackers.

5. With SonicWALL, telecommuters with Cable Modem or DSL Internet accounts can
   get a secure Internet connection, use VPN to connect securely to the office
   and provide content filtering for children at home.

   GATEFOLD ARTWORK DESCRIPTION OF GRAPHICS:

   Diagram showing the Internet as an oval symbol and lines connecting from the
Internet through depiction of SonicWALL products to graphic for SME (office
building), telecommuter (house), school (school), branch office (office
building), corporate headquarters (office building), and mobile worker (laptop
computer).

   Image of firefighters behind graphic of SME. Image of devil behind graphic
of telecommuter. Image of woman behind graphic of school. Image of man holding
briefcase behind graphic of branch office and graphic of mobile worker.
<PAGE>

                               PROSPECTUS SUMMARY

   You should read this summary together with the more detailed information
regarding our company and the common stock being sold in this offering and our
consolidated financial statements and related notes to financial statements
appearing elsewhere in this prospectus. Because this is only a summary, you
should read the rest of the prospectus before you invest in our common stock.
Read this entire prospectus carefully, especially the risks described under
"Risk Factors."

   Unless otherwise indicated, the information in this prospectus assumes the
automatic conversion of each outstanding share of redeemable Series A
convertible preferred stock into two shares of common stock and no exercise of
the underwriter's option to purchase additional shares.

                                SonicWALL, Inc.

   SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise, or
SME, branch office, telecommuter and education markets. Our SonicWALL solution
is a high-performance, solid state appliance that provides robust, reliable,
easy-to-use and affordable Internet security. Our products enable our customers
to securely utilize Internet applications and services as an integral part of
their business. As of August 15, 1999, we have shipped more than 16,000 of our
Internet security appliances worldwide.

   Businesses and consumers are increasingly accessing the Internet for a wide
variety of uses including communications, information gathering and commerce.
Recently, new high-speed technologies have emerged that can better satisfy the
bandwidth requirements of the SME, branch office, telecommuter and education
markets at a fraction of the cost of traditional solutions. These technologies
include digital subscriber line, or DSL, and cable modems, which provide access
speeds of up to 100 times faster than traditional 28.8 kilobits per second, or
kbps, analog modems. Yankee Group estimates that in the United States DSL
subscribers will increase from 0 to 1.5 million from 1997 to 2001 and cable
modem subscribers will increase from 100,000 to 3.0 million over the same
period. "Always-on" Internet connections, such as DSL and cable, present unique
security issues and increase the risk that proprietary data or other sensitive
information might be compromised.

   Although the need for Internet security solutions is widespread, security
vendors generally have focused on providing solutions for large enterprises
with highly complex needs and extensive information technology, or IT, support
organizations. These solutions have typically involved expensive enterprise
firewall software that runs on a dedicated server or personal computer, or PC,
and require extensive support, constant monitoring, and regular updates to
maintain effectiveness. The expense and complexity of these solutions, which
often require additional products to incorporate virtual private networking, or
VPN, capabilities, Internet Protocol, or IP, address management, content
filtering, and other security features, are impractical for the majority of
SMEs, branch offices, telecommuters, and education users. These users are
increasingly demanding robust, reliable, easy-to-use and affordable Internet
security.

   Our SonicWALL product line provides our customers with a comprehensive
integrated security solution that includes firewall, content filtering and VPN
functionality so users can enjoy affordable, secure Internet communications.
The SonicWALL product family delivers a plug and play appliance solution that
is easy to install and use and minimizes the purchase, installation, and
maintenance costs of Internet security. With suggested retail prices ranging
from $495 to $2,995, versus competitive products which range in price from
approximately $5,000 to more than $15,000, our products enable customers to
reduce purchase costs and avoid hiring costly IT personnel. By using an
embedded single purpose operating system and a solid state design without
moving parts, our SonicWALL products are designed to maximize reliability and
uptime. The SonicWALL product line is scalable for networks ranging in size
from 1 to 1,000 users and is fully compatible with more expensive enterprise
wide security solutions offered by, among others, Check Point Software
Technologies, Ltd. and Cisco Systems, Inc.


                                       3
<PAGE>


   Our strategy is to become the industry standard Internet security solution
for broadband access users in the SME, branch office, telecommuter and
education markets. The key elements of our strategy include extending our
leadership position in our target markets, strengthening our SonicWALL brand
name, expanding our indirect distribution channels, developing our strategic
original equipment manufacturer, or OEM, relationships, leveraging our
installed base to sell new products and services, and continuing to develop new
products and reduce our manufacturing costs.

   We initially incorporated in California in 1991 as Sonic Systems. In August
1999 we changed our name to SonicWALL, Inc. References to "we," "our," "us" and
"the Company" in this prospectus refer to SonicWALL, Inc. Our executive offices
are located at 5400 Betsy Ross Drive, Santa Clara, California 95054, and our
telephone number is (408) 844-9900. Our Web site is located at
http://www.sonicwall.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 the SonicWALL name and our logo. This prospectus also
includes trademarks, service marks and trade names of other companies, which
remain the property of their owners.

                                  THE OFFERING

<TABLE>
<S>                               <C>
Common stock offered by
 SonicWALL, Inc..................              shares

Common stock to be outstanding
 after this offering.............              shares

Use of proceeds.................. General corporate purposes including working
                                  capital. See "Use of Proceeds."

Proposed Nasdaq National Market
 Symbol.......................... SNWL
</TABLE>

   The number of shares of common stock to be outstanding after this offering
is based upon shares outstanding as of June 30, 1999. This number excludes
           shares of common stock reserved for issuance under our stock plans
and            shares of common stock issuable upon exercise of outstanding
stock options.

                                   ----------

   Except where stated otherwise, the information we present in this prospectus
(1) gives effect to a 2 for 1 split of our common stock effected on August 25,
1999, (2) assumes the conversion of all outstanding shares of our redeemable
Series A convertible preferred stock into 2,876,754 shares of common stock at
the closing of this offering, and (3) assumes no exercise by the underwriters
of their over-allotment option.

                                       4
<PAGE>

                             SUMMARY FINANCIAL DATA
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                       Year Ended December       Six Months
                                               31,             Ended June 30,
                                      -----------------------  ---------------
                                       1996    1997    1998     1998    1999
                                      ------  ------  -------  ------  -------
<S>                                   <C>     <C>     <C>      <C>     <C>
Statement of Operations Data:
Revenue
 Internet Security..................  $  --   $  250  $ 2,349  $  405  $ 5,474
 Ethernet...........................   9,356   9,092    5,166   2,901    1,216
                                      ------  ------  -------  ------  -------
  Total revenue.....................   9,356   9,342    7,515   3,306    6,690
Cost of revenue.....................   5,915   4,842    3,308   1,652    1,998
                                      ------  ------  -------  ------  -------
Gross margin........................   3,441   4,500    4,207   1,654    4,692
                                      ------  ------  -------  ------  -------
Operating expenses..................
 Research and development...........   1,048   1,983    1,739     847      962
 Sales and marketing................   1,665   2,468    2,907   1,425    1,854
 General and administrative.........     432     644      753     310      694
 Deferred stock compensation........     --      --        42     --       783
                                      ------  ------  -------  ------  -------
  Total operating expenses..........   3,145   5,095    5,441   2,582    4,293
Income (loss) from operations.......     296    (595)  (1,234)   (928)     399
Other income (expense), net.........      22      29       54      22      132
                                      ------  ------  -------  ------  -------
Income (loss) before income taxes...     318    (566)  (1,180)   (906)     531
Benefit from (provision for) income
 taxes..............................    (350)     99       (6)    --      (493)
                                      ------  ------  -------  ------  -------
Net income (loss) ..................  $  (32) $ (467) $(1,186) $ (906) $    38
                                      ======  ======  =======  ======  =======
Basic net income (loss) per share...  $  --   $(0.06) $ (0.11) $(0.11) $   --
                                      ======  ======  =======  ======  =======
Diluted net income (loss) per
 share..............................  $  --   $(0.06) $ (0.11) $(0.11) $   --
                                      ======  ======  =======  ======  =======
Shares used in computing basic net
 income (loss) per share............   8,460   8,461   11,251   8,461   16,322
                                      ======  ======  =======  ======  =======
Shares used in computing diluted net
 income (loss) per share............   8,460   8,461   11,251   8,461   19,320
                                      ======  ======  =======  ======  =======
Pro forma basic net income per
 share..............................                                   $   --
                                                                       =======
Pro forma diluted net income per
 share..............................                                   $   --
                                                                       =======
Shares used in computing pro forma
 basic net income per share.........                                    18,420
                                                                       =======
Shares used in computing pro forma
 diluted net income per share.......                                    19,320
                                                                       =======
</TABLE>

<TABLE>
<CAPTION>
                                 June 30, 1999
                         -----------------------------
                                            Pro Forma
                         Actual  Pro Forma as Adjusted
                         ------- --------- -----------
<S>                      <C>     <C>       <C>
Consolidated Balance
 Sheet Data:
Cash and cash
 equivalents............ $ 6,769  $ 6,769
Total assets............  11,277   11,277
Redeemable Series A
 convertible preferred
 stock..................   4,971      --
Total shareholders'
 equity.................     318    5,289
</TABLE>

   The preceding table summarizes
  . actual balance sheet data;
  . pro forma balance sheet data assuming the conversion of all outstanding
    redeemable Series A convertible preferred stock into shares of common
    stock; and
  . pro forma balance as adjusted sheet data to give effect to (1) the sale
    by SonicWALL, Inc. of              shares of common stock in this
    offering at an assumed initial public offering price of $       per
    share, after deducting underwriting discounts and commissions and
    estimated offering expenses and (2) the conversion of all outstanding
    redeemable Series A convertible preferred stock into 2,876,754 shares of
    common stock.

   See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma basic and diluted net income per share.

                                       5
<PAGE>

                                  RISK FACTORS

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

We have just recently entered the emerging market for broadband Internet
security appliances, and we do not know if we will be successful in marketing
our products to our target customers.

   From inception in 1991, we were in the business of providing Ethernet
connectivity products for Apple Macintosh computers. In late 1997, we made a
strategic decision to concentrate our resources in the Internet security market
and introduced our SonicWALL line of products. We expect to stop shipment of
Ethernet products by December 1999.

   We believe that many potential customers in our target markets 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. Therefore, we will not succeed unless we
can educate our target markets about the need for Internet security and
convince potential customers of our ability to provide this security in a cost-
effective and easy-to-use 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.

   Even if we convince our target markets about the importance of and need for
Internet security, we do not know if this will result in the sale of our
products. We currently expect that almost all of our future revenue will be
generated through sales of our SonicWALL family of products, including related
services such as subscription and license fees. Our success depends on market
acceptance of our products and services.

We may be unable to manage our growth, and if we cannot do so, it could have a
material adverse effect on our business.

   Our business has grown rapidly in size and complexity in the last year. At
the end of 1998, we had 26 employees. At June 30, 1999, we had 45 employees, an
increase of approximately 73%. 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. If
our revenue increases, our current systems, management and resources will be
inadequate, and our organization will need to grow rapidly in order to meet the
demands placed on our business. If we cannot manage our growth effectively, our
business prospects will be materially adversely affected.

We incurred losses during the last three years and were marginally profitable
in the six months ended June 30, 1999. We do not know if we will remain
profitable in the future.

   We incurred losses in 1996, 1997 and 1998 and were marginally profitable for
the six months ended June 30, 1999. We do not know if we will remain profitable
in the future.

If we are unable to establish brand awareness, we may not be able to penetrate
our target markets and our sales may not increase.

   We believe that it is important to establish the SonicWall brand as quickly
as possible in order to successfully penetrate our target markets and increase
our revenue. Our failure to establish our brand could result in an inability:

    .  to execute our sales and marketing strategy;

                                       6
<PAGE>

    .  to maintain current and develop new relationships with key value
       added resellers, or VARs, distributors and systems integrators; and

    .  to expand our domestic and international sales efforts.

We have a limited operating history in the market for Internet security
products which makes our historical financial information of limited value in
evaluating our prospects.

   Because we changed our business focus from Ethernet connectivity products
for Macintosh computers to Internet security products in late 1997, our
historical financial information is of limited value in projecting future
operating results. We believe that comparing different periods of our operating
results is not meaningful and you should not rely on the results for any period
as an indication of our future performance.

   Our operating results could fluctuate on a quarterly or annual basis and
fall below expectations of public market analysts and investors, resulting in a
significant decrease in our stock price.

   We anticipate that our operating results will vary significantly on a
quarterly basis. As a result, we may perform below the expectations of public
market analysts and investors. If our results were to fall below expectations,
the price of our common stock may fall substantially.

   Due to the recent emergence of the market for Internet security appliances,
we cannot predict with certainty our revenue for a given period. We base our
spending levels for product development, sales and marketing, and other
operating expenses largely on our expected future revenue. A large proportion
of our expenses is fixed for a particular quarter or year, and therefore we may
be unable to decrease our spending in time to compensate for any unexpected
quarterly or annual shortfall in revenue. As a result, any shortfall in revenue
could cause our operating results to decline significantly, resulting in a
decrease in our stock price.

   We have limited experience in forecasting customer buying habits on a
quarterly or monthly basis. Although we have not yet experienced fluctuations
in our customers' purchases of our Internet security products on a seasonal
basis, companies in the computer industry frequently experience such
seasonality, and in the future this could happen to us.

We depend on two major customers for over 40% of our revenue, and if they or
others cancel or delay purchase orders, our revenue may decline and the price
of our stock may fall.

   To date, sales to a limited number of distributors and OEMs have accounted
for a significant portion of our revenue. In 1998, sales to Ingram Micro, Inc.
accounted for 34% of our revenue. For the six months ended June 30, 1999, sales
to Ingram Micro and Tech Data Corp. accounted for 32% and 9% of our revenue,
respectively. We cannot assure you that either of these existing customers will
continue to place orders with us, that orders by these existing customers will
continue at the levels of previous periods or that we will be able to obtain
large orders from new customers.

   If any of our major distributors or OEMs stops or delays its purchase of our
products, our revenue and profitability would be adversely affected. We
anticipate that sales of our products to relatively few customers will continue
to account for a significant portion of our revenue.

Our sales are usually done on a purchase order basis and we have no binding
purchase commitments from our distributors, resellers or OEMs, which could
result in a lack of sales.

   We sell our products to end users through distributors, resellers and OEMs.
Our success depends in large part on their performance. These customers:

    .  are not obligated to purchase or market our products and can stop
       doing so at any time;

    .  have no exclusive arrangements with us, and are not obligated to
       renew their agreements with us;

                                       7
<PAGE>

    .  receive discounts based upon expected volumes of products purchased
       or resold in a given period; and

    .  may, under certain circumstances, return products to us.

Average selling prices of our products may decrease, which may reduce our gross
margins.

   The average selling prices for our products may decline as a result of
competitive pricing pressures, promotional programs and customers who negotiate
price reductions in exchange for longer term purchase commitments. The pricing
of products depends on the specific features and functions of the products,
purchase volumes and the level of sales and service support. We expect
competition to increase in the future, and as we experience pricing pressure,
we anticipate that the average selling prices and gross margins for our
products will decrease over product life cycles. We cannot assure you that we
will be successful in developing and introducing on a timely basis new products
with enhanced features, or that these products, if introduced, will enable us
to maintain our average selling prices and gross margins at current levels.

If any of our major distributors, resellers or OEMs is unable to pay us, it
could have an adverse effect on our business.

   We have a high concentration of accounts receivable with a few customers.
Although we attempt to closely monitor the outstanding receivables which we
have with our major customers, their inability to pay us would have a material
adverse effect on our business. Their failure to pay us would adversely affect
our payments to suppliers and our creditworthiness which would make it more
difficult to conduct business. Any of these circumstances could materially
adversely affect our results of operations or financial condition.

We offer price protection to our major distributors, which could adversely
affect our results of operations.

   We provide our major distributors with price protection rights for
inventories of our products held by them. If we lower our prices for those
products, we may experience significant price adjustments for which we may not
have adequate allowances. New product introductions or price reductions by us
or our competitors could result in significant price adjustments.

If we experience delays in deliveries from suppliers or are unable to purchase
components or technologies from our key suppliers, our revenue could decline
and adversely affect our results of operations.

   Our SonicWALL products incorporate certain components or technologies which
are only available from single or limited sources of supply. We purchase such
products under purchase orders and technology licenses. Specifically, our
products rely upon microprocessors from Motorola, Inc. and Intel Corporation
and incorporate software products from third-party vendors. If we are unable to
purchase such components or maintain licenses from these suppliers, this may
delay or prevent product shipments and result in a loss of sales. We may not be
able to replace any of these supply sources on economically advantageous terms.

We are dependent on the widespread adoption of broadband access services, which
are currently in early stages of development, and if such services are not
widely adopted or we are unable to address the issues associated with the
development of such services, our sales will be adversely affected.

   Sales of our products depend on the increased use and widespread adoption of
broadband access services, such as cable, DSL, Integrated Services Digital
Network, or ISDN, Frame Relay and T-1. Our business, prospects, results of
operations and financial condition would be materially adversely affected if
the use of

                                       8
<PAGE>

broadband access services does not increase as anticipated or if our customers'
access to broadband services is limited. Critical issues concerning use of
broadband access services are unresolved and will likely affect the use of
broadband access services. These issues include:

    .  security;

    .  reliability;

    .  bandwidth;

    .  congestion;

    .  cost;

    .  ease of access; and

    .  quality of service.

   Even if these issues are resolved, if the market for products that provide
broadband access to the Internet fails to develop, or develops at a slower pace
than we project, our business, prospects, results of operations and financial
condition would be materially adversely affected.

   The broadband access services market is new and is characterized by rapid
technological change, frequent enhancements to existing products and new
product introductions, changes in customer requirements and evolving industry
standards. We may be unable to respond quickly or effectively to these
developments. The introduction of new products by competitors, market
acceptance of products based on new or alternative technologies, or the
emergence of new industry standards, could render our existing or future
products obsolete, which would materially adversely affect our business,
prospects, results of operations and financial condition.

   The emergence of new industry standards might require us to redesign our
products. If our products fail to comply with widely adopted industry
standards, our customers and potential customers may not purchase our products.
This would have a material adverse effect on our business, prospects, results
of operations and financial condition.

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 highly competitive, and we
expect competition to intensify in the future. There are few substantial
barriers to entry, and additional competition from existing competitors and new
market entrants will likely occur in the future. Current and potential
competitors in our markets include, but are not limited to:

    .  enterprise firewall software vendors such as Check Point Software
       and Axent Technologies, Inc.;

    .  network equipment manufacturers such as Cisco Systems, Lucent
       Technologies, Inc., Nortel Networks Corp., 3COM Corporation and
       Nokia Corp.;

    .  computer or network component manufacturers such as Intel
       Corporation;

    .  operating system software vendors such as Microsoft Corporation,
       Novell, Inc., and Sun Microsystems, Inc.; and

    .  security appliance suppliers such as Watchguard Technologies, Inc.

   Most of our competitors to date have generally targeted large enterprises'
security needs with firewall products that range in price from approximately
$5,000 to more than $15,000. At any time, any of these competitors may adapt
existing products for our target markets. Many of our current or potential
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
other resources than we do. Nothing prevents or hinders these actual or

                                       9
<PAGE>

potential competitors from entering our target markets at any time. In
addition, our competitors may bundle products competitive to 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. If these companies were to use their greater financial, technical
and marketing resources in our target markets, it could adversely affect our
business.

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

   To succeed, we must continually change and improve our products in response
to rapid technological developments and changes in operating systems, broadband
Internet access, application and networking software, computer and
communications hardware, programming tools, computer language technology and
other security threats. We may be unable to develop new products and services
or achieve and maintain market acceptance of them once they have come to
market. Product development for Internet security appliances requires
substantial engineering time and testing. Releasing new products and services
prematurely may result in quality problems, and delays may result in loss of
customer confidence and market share. In the past, we have on occasion
experienced delays in the scheduled introduction of new and enhanced products
and services, and we may experience delays in the future. When we do introduce
new or enhanced products and services, we may be unable to manage the
transition from the older products and services to minimize disruption in
customer ordering patterns, avoid excessive inventories of older products and
deliver enough new products and services to meet customer demand.

We may have to defend lawsuits or pay damages in connection with any 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. 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 others 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 computer and software contracts to be
unenforceable in certain circumstances. 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 security breach of our internal systems or those of our customers could harm
our business.

   Because we provide Internet security, we may become a greater target for
attacks by computer hackers. We will not succeed unless the marketplace is
confident that we provide effective Internet security protection. Networks
protected by our products may be vulnerable to electronic break-ins. 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 an actual or perceived breach
of Internet security occurs in our internal systems or those of our end-user
customers, regardless of whether we cause the breach, it could adversely affect
the market perception of our products and services. This could cause us to lose
current and potential customers, resellers, distributors or other business
partners.

We rely on contract manufacturers for all of our product manufacturing and
assembly, and if we cannot obtain such services, we may not be able to ship
products.

   We outsource all of our hardware manufacturing and assembly to third-party
manufacturers and assembly houses. We do not have long-term manufacturing
contracts with these vendors and while these vendors have

                                       10
<PAGE>

produced hardware with acceptable quality, quantity and cost in the past, they
may be unable or unwilling to meet our future demands. 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.

   We believe that the net proceeds from this offering, together with our
existing cash balances and our existing line of credit, will be sufficient to
meet our capital requirements for at least the next 12 months. However, if our
future revenue is insufficient to support the expenses of our operations and
the expansion of our business, we may 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. Our funding requirements depend on several factors, 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 funding requirements vary from our current plans, we may require additional
financing sooner than we anticipate. To the extent that the proceeds of this
offering and our existing sources of cash and cash flow from operations, if
any, are insufficient to fund our activities, we may need to raise additional
funds. If we issue additional stock to raise capital, your percentage ownership
in our Company would be reduced. Additional financing may not be available when
needed and, if such financing is available, it may not be available on terms
favorable to us.

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

   Unauthorized parties may misappropriate or infringe our trade secrets,
copyrights, trademarks and similar proprietary rights. We have not received any
patent protection for our technology or products. Even if we obtain such
patents, that does not guarantee that our patent rights are valuable, create a
competitive barrier, or will be free from infringement. We face additional risk
when conducting business in countries that have poorly developed or
inadequately enforced intellectual property laws. 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.

Potential 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.

   We may face infringement claims from third parties in the future. The
computer industry has seen frequent litigation over intellectual property
rights. We expect that infringement claims will be more frequent for Internet
participants as the number of products, services and competitors grows and
functionality of products and services overlaps.


                                       11
<PAGE>

Undetected product errors or defects could result in loss of revenue, 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 revenue and
claims against us.

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

   We compete for employees in California's Silicon Valley, one of the most
difficult employer environments in the United States. Our future success will
depend largely on the efforts and abilities of our current senior management
and our ability to attract and retain additional key development, technical,
operations, information systems, customer support and sales and marketing
personnel. We do not have employment contracts with any of our key employees,
who may leave us at any time. Specifically, the services of Sreekanth Ravi,
President and Chief Executive Officer, and Sudhakar Ravi, Vice President of
Engineering, would be difficult to replace. We do not maintain life insurance
for any of our key personnel. See "Management" for detailed information on our
key personnel.

Because of their significant stock ownership, our officers and directors will
be able to exert significant control over our future direction.

   Executive officers, directors, and entities affiliated with them, will, in
the aggregate, beneficially own approximately    % of our outstanding common
stock following the completion of this offering. These shareholders, if acting
together, would be able to significantly influence all matters requiring
shareholder approval, including the election of directors, mergers or other
forms of business combinations. See "Principal and Selling Shareholders."

Governmental regulations affecting Internet security could affect our revenue.

   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 certain 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 decrease 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 United States and international
Internet security market.

   Recently, political attention has resulted in legislative efforts to make
the Internet safe for children at schools and other educational institutions
receiving federal assistance by linking the receipt of federal funds to the
existence of content filtering and security software for such institutions'
Internet connections. Some have questioned the constitutionality or other
legality of such efforts, but we believe that any government controls or
attempts to regulate the Internet could have a material effect on our business.
A government requirement of Internet security for schools receiving federal
funds would encourage purchases of our SonicWALL products; a court ruling that
prohibited such a requirement after the requirement was in place might reduce
sales to these market segments.

                                       12
<PAGE>

Our failure or the failure of our key suppliers and customers to be Year 2000
compliant could negatively impact our business.

   The Year 2000 computer issue creates a variety of risks for us. If systems
do not correctly recognize date information when the year changes to 2000, our
business, results of operations and financial condition could be materially
adversely affected. The risks involve:

    .  potential warranty or other claims by our customers;

    .  errors in systems we use to run our business;

    .  errors in systems used by our suppliers;

    .  errors in systems used by our customers; and

    .  potential reduced spending by other companies on broadband Internet
       access products as a result of significant information systems
       spending on Year 2000 remediation.

   Our internal systems include both our information technology and non-
information technology systems. We have conducted an initial audit of our
material internal information technology systems, including both our own
software products and third-party software and hardware technology. We have not
yet initiated an assessment of our non-information technology systems. To the
extent that we are unable to test the technology provided by third-party
vendors, we are seeking assurances from these vendors that their systems are
Year 2000 compliant. We may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in our
internal information technology and non-information technology systems. These
unanticipated problems and costs could have a material adverse effect on our
business, results of operations and financial condition.

   We have contacted our critical suppliers to determine if the suppliers'
operations and the products and services provided to us are Year 2000
compliant. Where practicable, we will attempt to mitigate our risks with
respect to the failure of our suppliers to be Year 2000 compliant by locating
Year 2000 compliant replacement suppliers. However, our failure to mitigate our
Year 2000 risks remains a possibility and could have a material adverse impact
on our business, results of operations and financial condition.

   We have been informed by our contract manufacturers that they are working to
ensure that their manufacturing systems are Year 2000 compliant. However, they
may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in their internal information
technology and non-information technology systems. These unanticipated problems
and costs could cause manufacturing delays or difficulties for our products.
Additionally, we do not know whether our manufacturers' suppliers are Year 2000
compliant. The failure of a supplier to be Year 2000 compliant could also
adversely affect our manufacturers' operations. Any of these events could
materially adversely affect our business, results of operations and financial
condition.

   We believe that our SonicWALL product line is Year 2000 compliant. However,
despite testing by us and by current and potential customers, and despite
assurances from developers of products incorporated into SonicWALL, our
products may contain undetected errors or defects associated with Year 2000
date functions. We have assured our customers that SonicWALL is Year 2000
compliant. If our products are not Year 2000 compliant, this would result in
numerous customer claims, which could have a material adverse impact on our
business, results of operations and financial condition.

   We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or potential customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, spending on Year 2000 issues
could reduce or eliminate the budgets that our current or potential customers
could have for purchases of our products. As a result, our business, results of
operations and financial condition could be materially adversely affected.

                                       13
<PAGE>

   To date, our Year 2000 related costs have not been material. We have funded
these costs from available cash without separately accounting for these costs.
Although our future Year 2000 compliance costs are not expected to be
significant, we may experience unanticipated material problems and costs
associated with Year 2000 compliance that could adversely affect our business,
results of operations and financial condition. We are currently developing a
contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. The cost of developing
and implementing a Year 2000 contingency plan may be material.

   If our internal systems, our products or the internal systems at our
manufacturers are not Year 2000 compliant, our business, results of operation
and financial condition would be materially adversely affected.

Our management has broad discretion as to how to use the proceeds from this
offering and the proceeds may not be used appropriately.

   We expect to use the net proceeds of this offering primarily for working
capital and other general corporate purposes. In particular, we intend to
increase our spending on sales and marketing, research and development and
product management. We may also use some of the proceeds to acquire other
businesses, products or technology which would complement our existing
products, expand our market coverage or enhance our technological capabilities.
We have no specific plan as to how we will spend the proceeds of this offering.
If our management uses poor judgment in spending the proceeds, our business
will be adversely affected. We cannot assure you that investment of the
proceeds will yield a favorable return or any return. See "Use of Proceeds."

The price of our common stock may be volatile.

   The trading price of the shares being sold in this offering may fluctuate
widely as a result of a number of factors, most of which are outside our
control. Some of these factors include:

    .  quarter-to-quarter variations in our operating results;

    .  our announcements about the performance of our products and our
       competitors' announcements about performance of their products;

    .  changes in earnings estimates by, or failure to meet the
       expectations of, analysts;

    .  government regulatory action;

    .  increased price competition;

    .  developments or disputes concerning intellectual property rights;
       and

    .  general conditions in the computer industry.

   In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and computer software companies and which have often been unrelated
to the operating performance of these companies.

   We have negotiated the initial offering price of the common stock with our
underwriters. However, the initial offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the
market price of the common stock could fall below the initial offering price.
See "Underwriting."

Charter and bylaw provisions contain certain limitations in the authority of
shareholders to govern our affairs.

   Upon completion of this offering, our board of directors will have the
authority to issue shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by shareholders. The rights of
the holders of common stock will be

                                       14
<PAGE>

subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock.

   Our charter documents also provide for limitations on the ability of
shareholders to call special meetings and act by written consent and prohibit
cumulative voting for directors. The charter documents also limit the persons
who may call special meetings of the shareholders, prohibit shareholder actions
by written consent and establish advance notice requirements for nominations
for election to the board of directors or for proposing matters that can be
acted on by shareholders at shareholder meetings.

As our currently outstanding stock becomes eligible for sale, the introduction
of this stock into the market may cause our stock price to decline.

   If our shareholders sell substantial amounts of our common stock in the
public market following this offering, including shares issued upon the
exercise of outstanding options, the trading price of our common stock could
fall. Such sales also might make it more difficult for us to raise capital in
the future at a time and price that we deem appropriate. Upon completion of
this offering, we will have outstanding            shares of common stock
(based upon shares outstanding as of June 30, 1999), assuming no exercise of
outstanding options after June 30, 1999. Of these shares, the           shares
sold in this offering will be freely tradable. Other shares will be eligible
for sale in the public market after the date of this prospectus, substantially
all of which are subject to lock up agreements, as follows:

<TABLE>
<CAPTION>
                                                                    Number of
                    Date of Availability for Sale                     Shares
                    -----------------------------                   ----------
   <S>                                                              <C>
   180 days after the date of this prospectus...................... 16,589,194
   At various times after 180 days, when one-year holding periods
    expire.........................................................  2,711,400
</TABLE>

   After this offering, if certain conditions are met, the holders of
approximately 2,876,754 shares of common stock will be entitled to require us
to register their shares under the Securities Act of 1933, as amended (the
"Act"). These holders and holders of approximately 2,301,400 shares of common
stock have the right to participate in any registration of shares we undertake
on our own (except a registration of shares in connection with an employee
benefit plan or merger). If these shareholders exercise their registration
rights, a large number of our shares may be registered and sold in the public
market. This could adversely affect the trading price for our shares. If we
attempted to raise money through a registration and sale of our stock and these
shareholders forced us to allow them to participate in the registration, our
ability to raise the amount of money we need to execute our business plan could
be adversely affected. See "Description of Capital Stock--Registration Rights."

   Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale."

You will experience substantial dilution in the value of your shares
immediately following this offering.

   The price of the shares is substantially higher than the net tangible book
value per share. If you buy any shares in the offering, you will incur
immediate and substantial dilution in the pro forma net tangible book value of
each share. If others exercise options to purchase our common stock, you will
suffer further dilution. See "Dilution."

                                       15
<PAGE>

                 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

   Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:

    .  implementing our business strategy;

    .  developing and introducing new products;

    .  obtaining and expanding market acceptance of the products we offer;

    .  meeting our requirements with our customers; and

    .  competition in the Internet security market.

   In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. A
description of certain risks that could cause our results to vary appears under
the caption "Risk Factors" and elsewhere in this prospectus. These forward-
looking statements are made as of the date of this prospectus, and we assume no
obligation to update them or to explain the reasons why actual results may
differ. In light of these assumptions, risks and uncertainties, the forward-
looking events discussed in this prospectus might not occur.

                                       16
<PAGE>

                                USE OF PROCEEDS

   Our net proceeds from the sale and issuance of           shares of common
stock will be approximately $     million, at an offering price of $      per
share and after deducting the estimated underwriting discounts and commissions
and the estimated offering expenses payable by the Company.

   We intend to use the proceeds of this offering for working capital and to
fund our operations, including expansion of our sales and marketing operations
and our product offerings. We retain broad discretion as to how the proceeds of
this offering will be allocated among these purposes as well as other purposes
that may arise.

   We may use a portion of the net proceeds to acquire complementary
businesses, products or technologies. From time to time, we evaluate these
potential acquisitions and we anticipate continuing to make such evaluations.
We have no current plans, agreements or commitments with respect to any such
acquisitions. Pending any of these uses, we intend to invest the net proceeds
of this offering in short-term, interest-bearing, investment grade securities.

                                DIVIDEND POLICY

   We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain any future earnings for use
in our business. Our line of credit arrangement prohibits us from paying
dividends without the lender's prior consent.


                                       17
<PAGE>

                                 CAPITALIZATION

   The following table shows as of June 30, 1999:

    .  our actual capitalization;

    .  our pro forma capitalization assuming the conversion of all
       outstanding redeemable Series A convertible preferred stock into
       shares of common stock;

    .  our pro forma capitalization as adjusted to reflect the sale by us
       of           shares of common stock at an assumed initial public
       offering price of $        per share, after deducting underwriting
       discounts and commissions and estimated expenses we expect to pay.

  This table should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                       June 30, 1999
                                            ----------------------------------------
                                                                         Pro Forma
                                             Actual       Pro Forma     As Adjusted
                                            -----------  -----------   -------------
                                             (In thousands, except share data)
<S>                                         <C>          <C>           <C>
Preferred Stock: 10,000,000 preferred
 shares authorized,
 1,438,377 shares of redeemable Series A
 convertible preferred stock issued and
 outstanding, actual; no shares issued and
 outstanding, pro forma and pro forma as
 adjusted.................................. $     4,971         $ --      $     --
Shareholders' equity:
  Common stock: 200,000,000 shares
   authorized; 16,723,840 shares issued and
   outstanding, actual; 19,600,594 shares
   issued and outstanding, pro forma;
   shares issued and outstanding, pro forma
   as adjusted.............................       3,499         8,470
  Deferred stock compensation..............      (1,994)       (1,994)
  Notes receivable from shareholders.......        (492)         (492)
  Accumulated deficit......................        (695)         (695)
                                            -----------   -----------     ---------
    Total shareholders' equity.............         318         5,289
                                            -----------   -----------     ---------
    Total capitalization................... $     5,289   $     5,289     $
                                            ===========   ===========     =========
</TABLE>

  The number of shares of common stock issued and outstanding as of June 30,
1999 excludes:

    .  1,558,648 shares available for grant under our stock option plans;

    .  1,760,000 shares of common stock issuable upon exercise of options
       outstanding under our stock option plans, at a weighted average
       exercise price of $0.48 per share, of which options to purchase
       437,498 shares are currently exercisable; and

    .  250,000 shares of common stock available for issuance under our
       employee stock purchase plan.


                                       18
<PAGE>

                                    DILUTION

   If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial 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
then outstanding shares of common stock.

   Our pro forma net tangible book value at June 30, 1999, after giving effect
to the conversion of all outstanding redeemable Series A convertible preferred
stock into common stock, was $        , or $     per share of common stock.
After giving effect to the sale of            shares of common stock by us
offered through this prospectus at an assumed initial public offering price of
$          per share, less underwriting discounts and commissions and estimated
expenses we expect to pay, our net tangible book value at June 30, 1999 would
have been $       million, or $     per share. This represents an immediate
increase in the net tangible book value of $       per share to existing
shareholders and an immediate dilution of $       per share to new investors,
or approximately     % of the assumed initial offering price of $      per
share. The following table illustrates this per-share dilution:

<TABLE>
   <S>                                                             <C>   <C>
   Assumed initial public offering price per share................       $
     Net tangible book value per share at June 30, 1999........... $
     Increase due to the conversion of redeemable Series A
      convertible preferred stock.................................
     Pro forma net tangible book value per share at June 30,
      1999........................................................
     Increase per share attributable to the offering .............
                                                                   -----
   Net tangible book value per share after this offering..........
                                                                         -----
   Dilution per share to new investors............................       $
                                                                         =====
</TABLE>

   The following table shows, at June 30, 1999, the number of shares of common
stock purchased from us, after giving effect to the conversion of all
outstanding redeemable Series A convertible preferred stock into common stock,
the total consideration paid and the average price paid per share by existing
shareholders and by new investors purchasing common stock in this offering.

<TABLE>
<CAPTION>
                                   Shares
                                 Purchased    Total Consideration
                               -------------- -------------------- Average Price
                               Number Percent  Amount    Percent     Per-Share
                               ------ ------- -------------------- -------------
   <S>                         <C>    <C>     <C>       <C>        <C>
   Existing shareholders......                   $                      $
   New Investors..............
     Total....................                $
</TABLE>

   The number of shares of common stock issued and outstanding as of June 30,
1999 excludes:

    .  1,558,648 shares available for grant under our stock option plans;

    .  1,760,000 shares of common stock issuable upon exercise of options
       outstanding under our stock option plans, at a weighted average
       exercise price of $0.48 per share, of which options to purchase
       437,498 shares are currently exercisable; and

    .  250,000 shares of common stock available for issuance under our
       employee stock purchase plan.

                                       19
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA
                     (In thousands, except per share data)

   The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this prospectus. The consolidated statements
of operations data for each of the years in the three year period ended
December 31, 1998 and the six months ended June 30, 1999 and the balance sheet
data at December 31, 1997, 1998 and June 30, 1999 are derived from the audited
consolidated financial statements included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended December 31, 1994
and 1995 and the balance sheet data at December 31, 1994, 1995 and 1996 are
derived from audited financial statements which are not included in this
prospectus. The consolidated statement of operations data for the six months
ended June 30, 1998 are derived from unaudited financial statements included
elsewhere in this prospectus which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for fair presentation of our financial position and results of
operations for that period. The historical results are not necessarily
indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
                                                                    Six Months
                                                                       Ended
                               Year Ended December 31,               June 30,
                         ----------------------------------------  --------------
                          1994    1995     1996    1997    1998     1998    1999
                         ------  -------  ------  ------  -------  ------  ------
<S>                      <C>     <C>      <C>     <C>     <C>      <C>     <C>
Statement of Operations
 Data:
Revenue
  Internet security..... $  --   $   --   $  --   $  250  $ 2,349  $  405  $5,474
  Ethernet..............  8,996   10,482   9,356   9,092    5,166   2,901   1,216
                         ------  -------  ------  ------  -------  ------  ------
    Total revenue.......  8,996   10,482   9,356   9,342    7,515   3,306   6,690
Cost of revenue.........  5,971    6,411   5,915   4,842    3,308   1,652   1,998
                         ------  -------  ------  ------  -------  ------  ------
Gross margin............  3,025    4,071   3,441   4,500    4,207   1,654   4,692
                         ------  -------  ------  ------  -------  ------  ------
Operating expenses
  Research and
   development..........  1,077    1,241   1,048   1,983    1,739     847     962
  Sales and marketing...  1,322    1,856   1,665   2,468    2,907   1,425   1,854
  General and
   administrative.......    221      529     432     644      753     310     694
  Deferred stock
   compensation.........    --       --      --      --        42     --      783
                         ------  -------  ------  ------  -------  ------  ------
    Total operating
     expenses...........  2,620    3,626   3,145   5,095    5,441   2,582   4,293
                         ------  -------  ------  ------  -------  ------  ------
Income (loss) from
 operations.............    405      445     296    (595)  (1,234)   (928)    399
Other income (expense),
 net....................     (8)     (30)     22      29       54      22     132
                         ------  -------  ------  ------  -------  ------  ------
Income (loss) before
 income taxes...........    397      415     318    (566)  (1,180)   (906)    531
Benefit from (provision
 for) income taxes......    (99)    (164)   (350)     99       (6)    --     (493)
                         ------  -------  ------  ------  -------  ------  ------
Net income (loss)....... $  298  $   251  $  (32) $ (467) $(1,186) $ (906) $   38
                         ======  =======  ======  ======  =======  ======  ======
Basic net income (loss)
 per share.............. $ 0.03  $  0.03  $  --   $(0.06) $ (0.11) $(0.11) $  --
                         ======  =======  ======  ======  =======  ======  ======
Diluted net income
 (loss) per share....... $ 0.03  $  0.02  $  --   $(0.06) $ (0.11) $(0.11) $  --
                         ======  =======  ======  ======  =======  ======  ======
Shares used in
 calculation of basic
 net income (loss) per
 share..................  9,294    9,626   8,460   8,461   11,251   8,461  16,322
                         ======  =======  ======  ======  =======  ======  ======
Shares used in
 calculation of diluted
 net income (loss) per
 share..................  9,748   11,224   8,460   8,461   11,251   8,461  19,320
                         ======  =======  ======  ======  =======  ======  ======
Pro forma basic net
 income per share.......                                                   $  --
                                                                           ======
Pro forma diluted net
 income per share.......                                                   $  --
                                                                           ======
Shares used in the
 calculation of pro
 forma basic net income
 per share..............                                                   18,420
                                                                           ======
Shares used in the
 calculation of pro
 forma diluted net
 income per share.......                                                   19,320
                                                                           ======
</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                             December 31,
                                  ----------------------------------  June 30,
                                   1994   1995   1996   1997   1998     1999
                                  ------ ------ ------ ------ ------  --------
<S>                               <C>    <C>    <C>    <C>    <C>     <C>
Balance Sheet Data:
Cash and cash equivalents........ $  241 $  145 $1,036 $  787 $1,051  $ 6,769
Total assets.....................  3,320  2,810  3,448  2,374  2,584   11,277
Redeemable Series A convertible
 preferred stock.................    --     --     --     --     --     4,971
Total shareholders' equity
 (deficit)....................... $  702 $  964 $  932 $  465 $ (679) $   318
</TABLE>

   See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of basic and diluted net loss per share and pro
forma basic and diluted net loss per share.


                                       21
<PAGE>

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

   The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this prospectus. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend" or "continue," or
the negative of such terms and other comparable terminology. These statements
are only predictions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.

Overview

   SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise,
branch office, telecommuter and education markets. Our SonicWALL solution is a
high-performance, solid state appliance that provides robust, reliable, easy-
to-use and affordable Internet security. Our products enable our customers to
securely utilize Internet applications and services as an integral part of
their business. As of August 15, 1999, we have shipped more than 16,000 of our
Internet security appliances worldwide.

   From inception through 1996, our operating activities focused on the
development and marketing of Ethernet connectivity products for Apple Macintosh
computers. In late 1997, we introduced our first Internet security appliance,
the SonicWALL DMZ, and began volume shipments in 1998. We now focus all our
development, marketing and sales efforts on the Internet security appliance
market. While we continue to ship our Ethernet products, we plan to terminate
shipment of those products by December 1999. This has not required any
significant restructuring of our personnel, facilities, manufacturing or
operations. We do not expect any significant charges related to our Ethernet
product inventories or warranty obligations.

   Our SonicWALL product family is sold primarily through our distribution
partners who then resell our products to VARs and selected retail outlets.
These resellers then sell our products to end-users. In 1998 and the six months
ended June 30, 1999, sales to Ingram Micro accounted for 34% and 32% of our
total revenue, respectively. In the six months ended June 30, 1999, sales to
Tech Data accounted for 9% of our total revenue.

   Our revenue consists primarily of product sales and, to a lesser extent,
subscription fees from content filtering services and extended warranty
contract fees. We generally recognize revenue when we ship products to our
customers. Certain agreements with our distribution partners provide for rights
of return, stock rotation and co-op advertising rights. We provide an allowance
for sales returns and reserves for warranty and co-op advertising costs at the
time of revenue recognition. Ingram Micro has an unlimited right to return or
rotate its stock on-hand, and therefore we recognize revenue for product sales
to Ingram Micro when it has sold the product to its customers. Subscription
fees and extended warranty fees are deferred and amortized over the period of
the related contracts. Subscription and extended warranty fees to date have not
been material.

   To date, a significant portion of our revenue has been dependent on large
purchase orders from a limited number of distribution partners. These purchase
orders typically have short lead times and are subject to delay or cancellation
without penalty. We anticipate that our operating results for a given period
will continue to depend on a small number of customers. If we experience a
decline in revenue from any of our significant distribution partners in a given
quarter, our revenue for that quarter, or following quarters, will be adversely
affected. This could adversely affect our business, prospects, results of
operations and financial condition. Furthermore, if any of our significant
customers experience financial difficulties, our sales to these customers may
be reduced and we may have difficulty in collecting accounts receivable from
these customers. Any delay in large customer orders or customer financial
difficulties could have a material adverse effect on our business, prospects,
results of operations and financial condition.

                                       22
<PAGE>

   We currently use contract manufacturers to manufacture our products. We also
rely on single or limited source suppliers to provide key components of our
products. A significant portion of our cost of revenue is related to these
manufacturing and component suppliers. These relationships are subject to a
variety of risks.

   In 1998, we recorded total deferred stock compensation of approximately
$48,000 in connection with stock and stock options granted during 1998 at
prices subsequently deemed to be below fair market value on the date of grant.
Options granted are typically subject to a four year vesting period. Restricted
stock acquired through the exercise of unvested stock options is subject to our
right to repurchase the unvested stock at the price paid, which right lapses
over a four year period. We are amortizing the deferred stock compensation over
the vesting periods of the applicable options and the repurchase periods for
the restricted stock. In 1999, we have recorded approximately $2.8 million in
additional deferred stock compensation for stock options granted in the six
months ended June 30, 1999 at prices subsequently deemed to be below fair
market value on the date of grant. We amortized approximately $0.8 million of
deferred stock compensation for the six months ended June 30, 1999.

Results of Operations

   The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:

<TABLE>
<CAPTION>
                                        Year Ended             Six Months
                                       December 31,          Ended June 30,
                                     ---------------------   -----------------
                                     1996    1997    1998     1998      1999
                                     -----   -----   -----   -------   -------
<S>                                  <C>     <C>     <C>     <C>       <C>
Revenue
 Internet Security.................    -- %    2.7%   31.3%     12.3%     81.8%
 Ethernet..........................  100.0    97.3    68.7      87.7      18.2
                                     -----   -----   -----   -------   -------
  Total revenue....................  100.0   100.0   100.0     100.0     100.0

Cost of revenue....................   63.2    51.8    44.0      50.0      29.9
                                     -----   -----   -----   -------   -------

Gross margin.......................   36.8    48.2    56.0      50.0      70.1
                                     -----   -----   -----   -------   -------

Operating expenses
 Research and development..........   11.2    21.3    23.1      25.6      14.4
 Sales and marketing...............   17.8    26.4    38.7      43.1      27.7
 General and administrative........    4.6     6.9    10.0       9.4      10.3
 Deferred stock compensation.......    --      --      0.6       --       11.7
                                     -----   -----   -----   -------   -------
  Total operating expenses.........   33.6    54.6    72.4      78.1      64.1
                                     -----   -----   -----   -------   -------

Income (loss) from operations          3.2    (6.4)  (16.4)    (28.1)      6.0

Other income (expense), net........    0.2     0.3     0.7       0.7       2.0
                                     -----   -----   -----   -------   -------

Income (loss) before income taxes..    3.4    (6.1)  (15.7)    (27.4)      8.0

Benefit from (provision for) income
 taxes.............................   (3.7)    1.1    (0.1)    --         (7.4)
                                     -----   -----   -----   -------   -------
Net income (loss)..................   (0.3)%  (5.0)% (15.8)%   (27.4)%     0.6%
                                     =====   =====   =====   =======   =======
</TABLE>

Six Months Ended June 30, 1999 and 1998

   Internet security revenue. We shipped our first Internet security appliance
product, the SonicWALL DMZ, near the end of 1997, and in the first six months
of 1998 we were in the early stages of our sales and marketing efforts for this
product. Accordingly, Internet security revenue in the six months ended June
30,

                                       23
<PAGE>

1998 was minimal. Revenue from sales of our security appliance products
increased to $5.5 million in the six months ended June 30, 1999 from $0.4
million in the six months ended June 30, 1998. This revenue growth was due
primarily to the introduction of our second security appliance product, the
SonicWALL, in August 1998, and the introduction of our SonicWALL Pro product in
May 1999.

   Ethernet revenue. Revenue from our Ethernet products declined to $1.2
million in the six months ended June 30, 1999 from $2.9 million in the six
months ended June 30, 1998. This decrease was directly related to our 1997
decision to focus our development, sales and marketing efforts on our Internet
security appliance products. We expect revenue from our Ethernet products to
continue to decline through the remainder of 1999. We expect to stop shipment
of Ethernet products by December 1999.

   Cost of revenue; gross margin. Cost of revenue includes all costs associated
with the production of our products, including cost of materials, manufacturing
and assembly costs paid to contract manufacturers and related overhead costs
associated with our manufacturing operations personnel. Additionally, all
warranty costs and any inventory provisions or write-downs are expensed as cost
of revenue. Cost of revenue increased to $2.0 million in the six months ended
June 30, 1999 from $1.7 million in the six months ended June 30, 1998,
primarily as a result of increased product sales. Gross margin increased to
$4.7 million, or 70% of total revenue, in the six months ended June 30, 1999
from $1.7 million, or 50% of total revenue, in the six months ended June 30,
1998. The increase in gross margin relates primarily to the increase in sales
of higher gross margin security appliance products, and a decrease in sales of
lower gross margin Ethernet products. In addition, as the volume of units
shipped has increased, our cost of revenues has declined as a percentage of
revenue as a result of lower component costs due to higher purchase volumes,
and lower manufacturing and overhead costs per unit related to economies of
scale. Our gross margins are affected by fluctuations in manufacturing volumes,
component costs and the mix of products sold. In addition, an increase in total
sales to OEMs compared to total sales to our distribution partners will result
in a decrease in gross margins. We must manage each of these factors
effectively for our gross margins to remain at current levels.

   Research and development. Research and development expenses primarily
consist of personnel costs related to engineering and technical support,
contract consultants, outside testing services and equipment and supplies
associated with enhancing existing products and developing new products.
Research and development expenses increased to $1.0 million in the six months
ended June 30, 1999 from $0.8 million in the six months ended June 30, 1998.
Research and development spending increased in the six months ended June 30,
1999 by approximately $0.5 million related to the hiring of additional
personnel and increased overhead and consulting costs. This increase was offset
by a decrease of approximately $0.3 million in compensation paid to a founder
in the six months ended June 30, 1999.

   Sales and marketing. Sales and marketing expenses primarily consist of
personnel costs, including commissions, costs associated with the development
of our business and corporate identification, and costs related to customer
support, travel, trade shows, promotional and advertising costs. Sales and
marketing expenses increased to $1.9 million in the six months ended June 30,
1999 from $1.4 million in the six months ended June 30, 1998. This increase in
absolute dollars primarily relates to increased hiring of sales and marketing
personnel, increased travel and attendance at trade shows, increases in
customer support personnel and expanded sales and marketing efforts in
international markets. These increases were partially offset by a decrease in
compensation paid to a founder of $0.3 million in the six months ended June 30,
1999. We intend to increase sales and marketing expenses as we add personnel to
support our domestic and international sales and marketing efforts.

   General and administrative. General and administrative expenses primarily
consist of personnel costs for administrative officers and support personnel,
legal, accounting and consulting fees, and facility expenses. Our general and
administrative expenses increased to $0.7 million for the six months ended June
30, 1999 from $0.3 million in the six months ended June 30, 1998. This increase
was primarily due to increases in staffing and related personnel costs to
support our growth, as well as increased professional services costs.

                                       24
<PAGE>

   Deferred stock compensation. Amortization of deferred stock compensation was
$783,000 in the six months ended June 30, 1999. This amortization relates to
deferred compensation of $2.8 million, related to stock options granted in the
six months ended June 30, 1999. We are amortizing this amount over the vesting
periods of the applicable options. There was no amortization of deferred stock
compensation in the six months ended June 30, 1998.

   Other income (expense), net. Other income (expense), net consists primarily
of interest income on the Company's cash and cash equivalents, and increased to
$0.1 million for the six months ended June 30, 1999 from $22,000 in the six
months ended June 30, 1998. This increase was related primarily to higher
interest earnings on cash that increased in amount from $1.1 million to $6.8
million in the comparable period.

   Provision for income taxes. The provision for income taxes in the six months
ended June 30, 1999 was $0.5 million. There was no provision for income taxes
in the comparable 1998 period. In both periods, the provision for income taxes
is based on an estimated effective rate for each of the respective calendar
years. The effective tax rate in the six months ended June 30, 1999 was 37%
before the effect of amortization of deferred compensation, a permanent, non-
deductible book/tax difference. This effective rate reflects statutory federal
and state tax rates net of the estimated realization of deferred tax assets.
The Company incurred a loss in 1998 so there was no provision for income taxes
in the six months ended June 30, 1998.

Years Ended December 31, 1998, 1997 and 1996

   Internet security revenue. Internet security revenue increased to $2.3
million in 1998 from $0.3 million in 1997 and related primarily to a full year
of shipments of our expanded SonicWALL product offerings in 1998. There was no
Internet security revenue in 1996.

   Ethernet revenue. Ethernet revenue declined to $5.2 million in 1998 from
$9.1 million in 1997, which declined from $9.4 million in 1996. These declines
in Ethernet revenue related to our 1997 decision to focus development, sales
and marketing efforts on our Internet security appliance products. Our
development, marketing and sales efforts are now entirely focused on the
Internet security appliance market, and while we continue to ship our Ethernet
products, we plan to terminate shipment of these products by December 1999.

   Gross margin. In 1998, gross margin was $4.2 million, or 56% of revenue,
compared to $4.5 million, or 48% of revenue, in 1997. The percentage increase
in gross margin from 1997 to 1998 relates primarily to the increase in sales of
higher margin Internet security appliance products. In 1996, gross margin was
$3.4 million, or 37% of revenue. The increase in gross margin percentage from
1996 to 1997 is primarily attributable to the cost reduction associated with
the commencement of turnkey, offshore manufacturing of certain Ethernet
products in January 1997.

   Research and development. Research and development expenses decreased to
$1.7 million in 1998 from $2.0 million in 1997, and increased from $1.0 million
in 1996. This decrease from 1997 to 1998 relates primarily to a reduction in
compensation paid to a founder. The research and development expense increase
in 1997 over 1996 of $0.9 million was primarily related to increased personnel
and consulting costs associated partly with the development of the security
appliance products which commenced in 1997.

   Sales and marketing. Sales and marketing expenses increased to $2.9 million
in 1998 from $2.5 million in 1997 and from $1.7 million in 1996. These
increases were primarily due to the hiring of additional sales and marketing
personnel, as well as increases in travel, trade shows, promotional and
advertising costs.

   General and administrative. General and administrative expenses increased to
$0.8 million in 1998 from $0.6 million in 1997, and increased from $0.4 million
in 1996. These increases were due mainly to the addition of administrative
personnel, professional services fees and facility expenses to support the
growth of our operations.

                                       25
<PAGE>

   Deferred stock compensation. During 1998, we recorded deferred compensation
of $48,000 in connection with stock option grants of which $42,000 was
amortized in the year ended December 31, 1998. We are amortizing this amount
over the vesting periods of the applicable options.

Quarterly Results of Operations

   The following tables set forth our unaudited quarterly results of
operations, in dollars and as a percentage of total revenue, for the six
quarters ended June 30, 1999. You should read the following tables in
conjunction with the financial statements and related notes contained elsewhere
in this prospectus. We have prepared this unaudited information on the same
basis as our audited financial statements. These tables include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.

<TABLE>
<CAPTION>
                                                Three Months Ended
                         ----------------------------------------------------------------
                         March 31, June 30, September 30, December 31, March 31, June 30,
                           1998      1998       1998          1998       1999      1999
                         --------- -------- ------------- ------------ --------- --------
                                                  (in thousands)
<S>                      <C>       <C>      <C>           <C>          <C>       <C>
Revenue
  Internet Security.....  $  157    $  248     $  519        $1,425     $2,251    $3,223
  Ethernet..............   1,546     1,355      1,555           710        813       403
                          ------    ------     ------        ------     ------    ------
    Total revenue.......   1,703     1,603      2,074         2,135      3,064     3,626
                          ------    ------     ------        ------     ------    ------
Cost of revenue.........     833       819        833           823        943     1,055
                          ------    ------     ------        ------     ------    ------
Gross margin............     870       784      1,241         1,312      2,121     2,571
Operating expenses
  Research and
   development..........     398       449        432           460        448       514
  Sales and marketing...     674       752        694           787        811     1,043
  General and
   administrative.......     184       125        232           212        332       362
  Deferred stock
   compensation.........     --        --         --             42         15       768
                          ------    ------     ------        ------     ------    ------
    Total operating
     expenses...........   1,256     1,326      1,358         1,501      1,606     2,687
                          ------    ------     ------        ------     ------    ------
Income (loss) from
 operations.............    (386)     (542)      (117)         (189)       515      (116)
Other income (expense),
 net....................       9        13         14            18         41        91
                          ------    ------     ------        ------     ------    ------
Income (loss) before
 income taxes...........    (377)     (529)      (103)         (171)       556       (25)
Provision for income
 taxes..................     --        --         --              6        214       279
                          ------    ------     ------        ------     ------    ------
Net income (loss).......  $ (377)   $ (529)    $ (103)       $ (177)    $  342    $ (304)
                          ======    ======     ======        ======     ======    ======
</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>
                                            As a Percentage of Revenue
                         -----------------------------------------------------------------
                         March 31, June 30,  September 30, December 31, March 31, June 30,
                           1998      1998        1998          1998       1999      1999
                         --------- --------  ------------- ------------ --------- --------
<S>                      <C>       <C>       <C>           <C>          <C>       <C>
Revenue
  Internet Security.....     9.2 %   15.5 %       25.0 %       66.7 %      73.5%    88.9 %
  Ethernet..............    90.8     84.5         75.0         33.3        26.5     11.1
                           -----    -----        -----        -----       -----    -----
    Total revenue.......   100.0    100.0        100.0        100.0       100.0    100.0
                           -----    -----        -----        -----       -----    -----
Cost of revenue.........    48.9     51.1         40.2         38.5        30.8     29.1
                           -----    -----        -----        -----       -----    -----
Gross margin............    51.1     48.9         59.8         61.5        69.2     70.9
Operating expenses
  Research and
   development..........    23.4     28.0         20.8         21.5        14.6     14.1
  Sales and marketing...    39.6     46.9         33.5         36.9        26.5     28.8
  General and
   administrative.......    10.8      7.8         11.2          9.9        10.8     10.0
  Deferred stock
   compensation.........     --       --           --           2.0         0.5     21.2
                           -----    -----        -----        -----       -----    -----
    Total operating
     expenses...........    73.8     82.7         65.5         70.3        52.4     74.1
Income (loss) from
 operations.............   (22.7)   (33.8)        (5.7)        (8.8)       16.8     (3.2)
Other income (expense),
 net....................     0.5      0.8          0.7          0.8         1.3      2.5
                           -----    -----        -----        -----       -----    -----
Income (loss) before
 income taxes...........   (22.2)   (33.0)        (5.0)        (8.0)       18.1     (0.7)
Provision for income
 taxes..................     --       --           --           0.3         7.0      7.7
                           -----    -----        -----        -----       -----    -----
Net income (loss).......   (22.2)%  (33.0)%       (5.0)%       (8.3)%      11.1%    (8.4)%
                           =====    =====        =====        =====       =====    =====
</TABLE>

   Internet security revenue. Internet security revenue has increased in each
of the six quarters ended June 30, 1999, due to increasing market acceptance of
our security appliance solution and the expansion of our product line to
include the SonicWALL in August 1998 and SonicWALL Pro in May 1999.

   Ethernet revenue. Ethernet revenue remained relatively flat through the
first three quarters of 1998, and decreased significantly in the fourth quarter
of 1998 and the first two quarters of 1999. The overall decline in Ethernet
revenue relates primarily to our decision to focus our development, sales and
marketing resources exclusively on the security appliance product family. We
expect to stop shipment of Ethernet products by December 1999.

   Gross margin. Our gross margin has generally increased each quarter since
the quarter ended March 31, 1998. These increases have been due to the
introduction of our new security appliance products, which have higher average
selling prices and higher gross margins, the reduction of production costs on a
per unit basis as manufacturing volumes have increased, the reduction in
materials costs due to increased purchase volumes, and improved absorption of
manufacturing infrastructure costs.

   Operating expenses. Our operating expenses have increased in each of the six
quarters ended June 30, 1999 to $2.7 million in the quarter ended June 30, 1999
from $1.3 million in the quarter ended March 31, 1998. These increases related
primarily to development of new products, increased marketing of new products,
and increased investments in our internal infrastructure to support our growth.

Liquidity and Capital Resources

   Since our inception, we have financed our operations through cash flows from
operations, private sales of securities and, to a lesser extent, bank
borrowings. During the six months ended June 30, 1999, we generated $0.7
million in cash from operating activities. This increase resulted from a
significant increase in Internet security revenue, offset in part by a $1.3
million increase in accounts receivable and a $0.3 million increase in
inventories. We expect that accounts receivable and inventory will continue to
increase if our revenue continues to rise and that we will continue to increase
our investment in capital assets to expand our operations. During

                                       27
<PAGE>

1998, we generated $0.4 million in cash from operating activities, compared to
a $0.4 million decrease from operating activities in 1997. Investing activities
related to purchases of property and equipment used cash of $0.1 million in
1998 and $0.1 million in the six months ended June 30, 1999. In 1996 and 1997
purchases of property and equipment were immaterial.

   In February 1999, the Company completed a private placement of approximately
$5.0 million of redeemable Series A convertible preferred stock. The Company
conducted no significant financing activities in 1997 or 1998.

   Our principal source of liquidity as of June 30, 1999 consisted of $6.8
million in cash and cash equivalents. As of June 30, 1999 we have a credit
facility that provides for borrowings up to the lesser of $1.0 million or 80%
of eligible accounts receivable, as defined in the credit facility. Our line of
credit bears interest at the bank's reference rate plus 1.75% and borrowings
are secured by accounts receivable, inventories, property and equipment. The
credit facility may be terminated by the lender or us on thirty days prior
notice. As of June 30, 1999, there were no borrowings outstanding under this
credit facility.

   We believe that the market risk arising from our holdings of financial
instruments is not material.

   We believe the net proceeds of this offering, together with our existing
cash balances and available line of credit, will be sufficient to meet our cash
requirements at least through the next twelve months. However, we may be
required, or could elect, to seek additional funding prior to that time. Our
future capital requirements will depend on many factors, including our rate of
revenue growth, the timing and extent of spending to support product
development efforts and expansion of sales and marketing, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of our products. We cannot assure you that additional equity or debt
financing, if required, will be available on acceptable terms or at all.

Year 2000 Readiness Disclosure

 Internal Operations

   Historically, computer programs used two digits rather than four to
designate specific years. Computer programs that use two digits to designate a
specific year may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
This is known as the Year 2000 problem.

   We have relationships with, and are to varying degrees dependent upon, a
large number of third parties that provide information, goods and services to
us or who manufacture and ship our products. Our business, results of
operations and financial condition could be materially adversely affected if
any of the third parties with whom we have relationships were to experience
significant Year 2000 related problems. In addition, our business, results of
operations and financial condition could be materially adversely affected if
any of our key customers encounter significant Year 2000 related problems that
cause them to delay or cancel substantial purchase orders or product
deliveries.

   We have been informed by Flash Electronics, Inc. and All Quality Services,
Inc., or AQS, our contract manufacturers, that their manufacturing systems are
Year 2000 compliant or they are working to ensure compliance. However, they may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in their internal information
technology and non-information technology systems. These unanticipated problems
and costs could have a material adverse effect on their business, results of
operations and financial condition. The failure of a supplier to Flash
Electronics or AQS to be Year 2000 compliant could adversely affect either
firm's operations, which in turn could materially adversely affect our
business, results of operations and financial condition.

                                       28
<PAGE>

   Our products are ultimately used with a number of different hardware and
software products, and to the extent any third-party products are not Year 2000
compliant, the interoperability of our products could be adversely affected.
Given the large number of third-party components used in conjunction with our
products and our limited resources, we do not expect to review third-party
products for Year 2000 compliance.

   We have conducted an initial audit of our critical internal financial,
informational and operational systems to identify and evaluate those areas that
may be affected as a result of the Year 2000 problem. To date, we have not
incurred material expense associated with our efforts to become Year 2000
compliant and do not anticipate that any future costs associated with our Year
2000 remediation efforts will exceed $100,000. In addition, we have not
deferred any material information technology projects as a result of our Year
2000 problem activities.

   Although we plan to complete modifications or upgrades of our systems prior
to the year 2000, we may not be able to develop and implement a plan that
adequately addresses the Year 2000 problem in a timely manner. If we are not
able to address the Year 2000 problem adequately, we may be unable to conduct
our business. This would have a material adverse effect on our results of
operations and financial condition.

 Products

   We have tested and continue to test all our SonicWALL product offerings for
Year 2000 problems. To date, we know of no such problems which have not been
corrected. We do not currently expect any significant Year 2000 problems to
arise with our products. We have generally represented to our channel partners
and our end users that our products are Year 2000 compliant. If that turns out
to be untrue, these parties, and others, may make claims against us which may
result in litigation, product returns, or falling sales.

   The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. Our ability to achieve Year 2000
compliance and the level of incremental costs associated with compliance could
be adversely affected by, among other things, availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unidentified problems, identified in the ongoing
compliance review.

Disclosures About Market Risk

   Our exposure to market risk for changes in interest rates relates primarily
to our cash and cash equivalents. We do not use derivative financial
instruments in our investment portfolio. As stated in our investment policy, we
are averse to principal loss and ensure the safety and preservation of our
invested funds by limiting default and market risk. We mitigate default risk by
investing in only investment-grade instruments.

   We invoice all of our foreign customers from the United States in U.S.
dollars and all revenue is collected in U.S. dollars. In addition, we do not
have any cash balances denominated in foreign currencies. As a result, we do
not have significant market risks associated with foreign currencies or related
to sales and collections.

                                       29
<PAGE>

                                    BUSINESS

Overview

   SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the SME, branch office, telecommuter
and education markets. Our SonicWALL solution is a high-performance, solid
state appliance that provides robust, reliable, easy-to-use and affordable
Internet security. Our products enable our customers to securely utilize
Internet applications and services as an integral part of their business. As of
August 15, 1999, we have shipped more than 16,000 of our Internet security
appliances worldwide.

   Our SonicWALL product line provides our customers with a comprehensive
integrated security solution that includes firewall, content filtering, and VPN
functionality so users can enjoy affordable, secure Internet communications.
The SonicWALL product family delivers a plug and play appliance solution that
is easy to install and use and minimizes the purchase, installation, and
maintenance costs of Internet security. With suggested retail prices ranging
from $495 to $2,995, versus competitive products which range in price from
approximately $5,000 to more than $15,000, our products enable customers to
reduce purchase costs and avoid hiring costly IT personnel. By using an
embedded single purpose operating system and a solid state design without
moving parts, our SonicWALL products are designed to maximize reliability and
uptime. The SonicWALL product line is scalable for networks ranging in size
from 1 to 1,000 users and is fully compatible with more expensive enterprise
wide security solutions offered by, among others, Check Point Software and
Cisco Systems.

Industry Background

Growth of Internet Usage By Small to Medium Enterprise, Branch Office,
Telecommuter, and Education Markets

   Businesses and consumers are increasingly accessing the Internet for a wide
variety of uses including communications, information gathering and commerce.
Because it is an affordable means of achieving global reach and brand
awareness, the Internet is a particularly attractive vehicle for small and
medium size businesses as they endeavor to access and share information with a
large number of geographically dispersed customers, employees and business
partners. For example, of the 87.4 million devices estimated by IDC to have
Internet access in 1998, approximately 60% were used by small businesses and
home offices. IDC estimates that the proportion of small businesses, those with
less than 100 people, accessing the Internet in the United States will increase
from approximately 50% in 1998 to approximately 65% by 2001, to a total of 4.7
million businesses.

   Today's large business enterprise is characterized by many branch offices,
mobile workers, and telecommuters, all of whom connect electronically to the
corporate office and each other. Because of the confidential nature of business
data, these connections must be secure. Virtual private networks provide secure
Internet connections between the business enterprise and dispersed employees
and business partners. Communicating using VPNs offers significant cost savings
over alternative solutions such as private leased line or frame relay networks.
In fact, TeleChoice estimates that VPNs can cut telecommunication costs by as
much as 90% over private leased line networks, and for this reason, VPN use is
expected to grow rapidly. Infonetics Research projects worldwide expenditures
on VPNs will grow by 100% per year through 2001 when they are expected to reach
$11.9 billion.

   The Internet also has become a vital tool of information access and
communication for schools and libraries. According to the National Center for
Education Statistics, there were over 96,000 K-12 public schools and libraries
in the United States in 1998, of which 89% of schools and 35% of libraries were
connected to the Internet. The growth in Internet connectivity in this market,
combined with the proliferation of objectionable Web sites, has created a need
for Internet security products that include content filtering capabilities.

 Increasing Demand for Broadband Access Technologies

   Many SMEs and branch offices have addressed the need for Internet access by
installing a single computer with a dial-up connection that is shared
throughout the office, or by installing a dedicated network data

                                       30
<PAGE>

connection at a significantly greater expense, such as a T-1 line. Recently,
new high-speed technologies have emerged that can better satisfy the bandwidth
requirements of SMEs at a fraction of the cost of traditional solutions. These
technologies include DSL and cable modems, which provide access speeds of up to
100 times faster than traditional 28.8 kbps analog modems. In addition, new
generations of Internet-based applications, such as business to business e-
commerce, sales force automation and enterprise resource planning, or ERP,
continue to emerge that require higher bandwidth than is available through
dial-up solutions. As DSL and cable services have become more affordable and
widely available, SMEs, branch offices, and telecommuters are increasingly
deploying these technologies as their Internet access solution. Yankee Group
estimates that in the United States DSL subscribers will increase from 0 to 1.5
million from 1997 to 2001, and cable modem subscribers will increase from
100,000 to 3.0 million over the same period.

 Importance of Internet Security

   Secure access to the Internet is a growing concern for most Internet users.
"Always-on" Internet connections, such as DSL and cable, present unique
security issues for SMEs, branch offices, and telecommuters and increase the
risk that computer hackers, disgruntled employees, contractors or competitors
might successfully access proprietary data or other sensitive information. In
addition, as more Web-enabled, mission critical business applications are
developed and offered by vendors such as Oracle Corp., PeopleSoft Inc., Siebel
Systems Inc., and SAP AG, the amount of sensitive data transmitted over the
Internet has increased and led organizations to look for high performance,
robust solutions to address these security needs.

   Many Internet users also seek solutions that enable control over access to
undesirable content, either to avoid potential legal liability or to eliminate
distracting activity by employees or other users. In addition, public attention
has recently focused on the advantages of using filtering software to screen
offensive material for children accessing the Internet at libraries, schools,
and other public institutions.

   The market for Internet security products includes a variety of applications
to address these issues, such as firewall, content filtering, Internet
Protocol, address management and VPN. According to IDC, the market for Internet
security products increased over 45% in 1998 to $3.2 billion and is expected to
grow at a compounded annual growth rate of 21% to $8.3 billion by 2003.
Firewall products represent the fastest growing segment, with an expected
compounded annual growth rate of 27% over the same period.

 Lack of a Cost Effective, High Performance Security Solution for the Broadband
 Access Market

   Although the need for Internet security solutions is widespread, security
vendors generally have focused on providing solutions for large enterprises
with highly complex needs and extensive information technology support
organizations. These solutions have typically involved expensive enterprise
firewall software that runs on a dedicated server or personal computer and
requires extensive support, constant monitoring and regular updates by IT
personnel to maintain its effectiveness. The expense and complexity of these
solutions, which often require additional products to incorporate VPN
capabilities, IP address management or content filtering, are impractical for
the majority of SMEs due to their more limited resources. While there are low
cost security products currently on the market, we believe these products
generally provide limited functionality, are difficult to install and
configure, and provide relatively low performance.

The SonicWALL Solution

   SonicWALL is a leading provider of Internet security solutions designed for
broadband access customers in the SME, branch office, telecommuter and
education markets. Our SonicWALL solution is a high performance, solid state
appliance that provides robust, reliable, easy-to-use and affordable Internet
security. SonicWALL products enable our customers to securely utilize Internet
applications and services as an integral part of their business. As of August
15, 1999, we have shipped more than 16,000 of our Internet security appliances
worldwide. The SonicWALL solution provides our customers with the following key
benefits:

    .  High Performance, Robust Security. The SonicWALL product family
       provides a comprehensive integrated security solution that includes
       firewall, content filtering and VPN

                                       31
<PAGE>

       functionality. Our firewall security protects private networks
       against Internet-based theft, destruction, or modification of data,
       and automatically notifies customers if their network is under
       attack. SonicWALL has been awarded the internationally recognized
       International Computer Security Association, or ICSA, Firewall
       Certification, the same certification awarded to significantly more
       expensive products sold by Check Point Software and Cisco Systems.
       Our VPN capabilities enable affordable, secure communications among
       remote offices, mobile employees and business partners over the
       Internet. Our content filtering enables businesses, schools and
       libraries to restrict access to objectionable or inappropriate Web
       sites.

    .  Ease of Installation and Use. The SonicWALL product family delivers
       a plug-and-play appliance solution that is designed for easy
       installation and use. Installation involves simply connecting
       SonicWALL between the private network and the broadband Internet
       access device. SonicWALL is easily configured and managed through a
       Web browser-based interface. No reconfiguration of any PC
       application is required. Our solution is pre-configured to interface
       with all major Internet access technologies, including cable, DSL,
       ISDN, Frame Relay, and T-1. In addition, SonicWALL's AutoUpdate
       capability automatically notifies all registered customers via e-
       mail when bug fixes or new features and products that have been
       purchased are available for download from our Web site.

    .  Low Total Cost of Ownership. The SonicWALL product design minimizes
       the purchase, installation and maintenance costs of Internet
       security. The suggested retail prices of our products range from
       $495 to $2,995, versus competitive products which range in price
       from approximately $5,000 to more than $15,000. Our affordable,
       easy-to-manage Internet security appliances also enable customers to
       avoid the expense of hiring costly information technology personnel
       who may otherwise be required to implement and maintain an effective
       Internet security solution.

    .  Reliability. The SonicWALL product design maximizes reliability and
       uptime. Our product uses an embedded single purpose operating system
       and a solid state design which contains no moving parts. Most
       competitors' products consist of software installed on general
       purpose host computers which use the Windows NT or UNIX operating
       systems. General purpose operating systems such as these are
       designed to run multiple applications, creating an environment in
       which random system crashes are commonplace. Moreover, since general
       purpose computers contain many moving parts, such as hard disk
       drives, floppy drives, fans and switching power supplies, they are
       more prone to hardware failures over time. These software and
       hardware failures can compromise Internet security.

    .  Scalability and Compatibility. The SonicWALL product family is
       designed to provide comprehensive Internet security for networks
       ranging in size from 1 to 1,000 users. Our products consist of three
       separate models designed to serve the specific security needs of our
       target markets. Our products vary with respect to the number of
       supported users, the number of ports and feature options such as VPN
       or content filtering. In addition to serving the security needs of
       the SME market, SonicWALL products are a fully compatible, perimeter
       security solution for large, distributed enterprises and their
       branch offices and telecommuters. Our products are designed to
       interoperate with enterprise security products offered by, among
       others, Check Point Software and Cisco Systems.

Strategy

   Our goal is to extend our leadership position and become the industry
standard Internet security solution for broadband access users in our target
markets--the SME, branch office, telecommuter, and education markets. Key
elements of our strategy include:

    .  Extend Our Leadership Position in Target Markets. We believe that we
       have established a market leadership position as a provider of
       Internet security solutions designed for our target

                                       32
<PAGE>

       markets by offering robust, reliable, easy-to-use products at
       attractive prices. We intend to continue to focus our product
       development efforts, distribution strategies, and marketing programs
       to satisfy the growing needs of these markets. We believe that
       security solutions currently offered by most vendors are relatively
       expensive, technically complex, and generally unable to satisfy
       these target markets.

    .  Strengthen the SonicWALL Brand. We believe that strong brand
       recognition in our target markets is important to our long term
       success. We intend to continue to strengthen our SonicWALL brand
       name through industry trade shows, our Web site, advertising, direct
       mailings to both our VARs and our end users, and public relations.
       Our reputation as a reliable, high performance, easy-to-use and
       affordable Internet security solution contributes to our resellers'
       sales efforts.

    .  Expand Our Indirect Channel. Our target markets are generally served
       by a two-tier distribution channel. We have successfully penetrated
       these markets with over 800 VARs, systems integrators, and
       distributors, who sell our products in over thirty countries,
       including large distributors such as Ingram Micro and Tech Data. We
       intend to build and expand our base of indirect channel
       relationships through additional marketing programs, hiring
       additional marketing staff, and increased advertising.

    .  Develop Strategic OEM Relationships. We intend to leverage the brand
       awareness and worldwide channels of major networking and
       telecommunications equipment suppliers to further penetrate our
       target markets. We presently have OEM agreements with two companies
       shipping our products: Ramp Networks, a manufacturer of shared
       Internet access devices for small offices, and COM21, a supplier of
       cable modems. We are pursuing relationships with other broadband
       access equipment providers with the intent of further penetrating
       our target markets.

    .  Leverage Our Installed Base. We intend to develop new subscription
       services and add on products to generate additional revenue from our
       installed base. We have dedicated marketing personnel and programs
       that focus on selling products and services to this existing base of
       customers. We have actively sought registration of our customers
       through our AutoUpdate feature and we have experienced a
       registration rate of nearly 50% to date. This has enabled us to
       pursue cost effective, targeted marketing campaigns to our installed
       base. Each SonicWALL model is configured to allow end-users to
       easily and conveniently download new features and products that have
       been purchased, either through our resellers or our Web site. Such
       sales could include additional functionality such as VPN or
       additional recurring revenue opportunities such as content filtering
       services.

    .  Continue to Develop New Products and Reduce Manufacturing Costs. We
       intend to use our product design and development expertise to expand
       our product offerings and reduce our manufacturing costs. New
       products and services may include offerings such as bandwidth
       management, e-mail spam filtering and virus scanning. We are working
       to achieve a higher level of Application Specific Integrated
       Circuit, or ASIC, design and integration to reduce product costs and
       increase product performance. We believe that these new product
       offerings and associated cost reductions will strengthen our market
       position and assist us in penetrating new markets.

                                       33
<PAGE>

Products and Services

   The SonicWALL product family provides cost effective and high performance
Internet security solutions for the small and medium size enterprise, branch
office, telecommuter, and education markets. We design our products to address
the specific needs of customers within each of these market segments. Our
products vary with respect to the number of supported users, the number of
ports, product features, processor speed and scalability. All of our products
provide firewall security and are capable of delivering features such as
content filtering and VPN in a single, integrated security appliance that is
managed through an intuitive and easy-to-use Web browser-based interface.

[DESCRIPTION OF GRAPHICS:
  Diagram showing WebServer, E-Commerce Server and three PC's connected to a
  SonicWALL DMZ or PRO security appliance on the left side, which is
  connected to a modem router in the middle of the graphic which is connected
  to an oval on the right side of the graphic with the words "THE INTERNET"
  in the center of the oval.]

   SonicWALL. SonicWALL has two 10Base-T Ethernet ports and is designed to
provide security for smaller networks using broadband connections to the
Internet such as cable and DSL. SonicWALL provides protection against
unauthorized access to the private network, filters out objectionable Web
sites, and manages the complexity of IP addressing. It also has a VPN option to
give telecommuters and small remote offices affordable and secure connectivity
to the main office. SonicWALL supports 10, 50 or unlimited user connections
depending on the model purchased.

   SonicWALL DMZ. SonicWALL DMZ is designed to meet the Internet security needs
of small and medium size networks in business and education. In addition to the
features provided by SonicWALL, SonicWALL DMZ provides a third port, a DMZ, or
De-Militarized Zone, that enables the use of public Web and e-commerce servers
by supporting different security options to be defined for two different
network zones. Public servers on the DMZ port are accessible from the Internet
and the private network, but are protected from Internet-based attacks.
SonicWALL DMZ supports unlimited users.

   SonicWALL PRO. SonicWALL PRO has three 10/100Base-T Fast Ethernet ports and
is designed to meet the Internet security needs of medium and large size
businesses and branch offices. SonicWALL PRO supports all of the features found
in other SonicWALL models, and offers a more powerful and scalable platform for
larger networks requiring Fast Ethernet connectivity, high performance VPN and
future expansion options. SonicWALL PRO supports unlimited users.

                                       34
<PAGE>

   The following table provides a summary of SonicWALL models:


<TABLE>
<CAPTION>
         SonicWALL Model             SonicWALL        SonicWALL DMZ      SonicWALL PRO
----------------------------------------------------------------------------------------

  <S>                            <C>                <C>                <C>
  Target Markets                 . Telecommuter     . Small to medium  . Medium to large
                                                      size business      size business
                                 . Small to medium  . Education        . Branch offices
                                   size business
----------------------------------------------------------------------------------------

  Virtual Private Networking          Optional           Optional           Standard
----------------------------------------------------------------------------------------

  Number of Users                10, 50, Unlimited      Unlimited          Unlimited
----------------------------------------------------------------------------------------

  LAN and WAN Ports                      X                  X                  X
----------------------------------------------------------------------------------------

  DMZ Port for Public Servers                               X                  X
----------------------------------------------------------------------------------------

  Expandable Memory and PCI                                                    X
   Expansion Slot
----------------------------------------------------------------------------------------

  Type of Ports                       10Base-T           10Base-T         10/100Base-T
                                     (Ethernet)         (Ethernet)       (Fast Ethernet)
----------------------------------------------------------------------------------------

  Microprocessor                      Motorola           Motorola            Intel
                                   33MHz MC 68360     33MHz MC 68360    233MHz StrongARM
----------------------------------------------------------------------------------------

  List Price                       $495 - $1,495          $1,795             $2,995
</TABLE>


   End users may also purchase various product upgrades and subscriptions, such
as updated content filter lists, VPN, number of user upgrades, and extended
warranties and premium support contracts.


<TABLE>
<CAPTION>
     Upgrade or Subscription                  Description                   List Price
----------------------------------------------------------------------------------------

  <S>                           <C>                                      <C>
  VPN Upgrade                   Activates optional virtual private
                                networking feature for SonicWALL and
                                SonicWALL DMZ models                        $495 - $695
----------------------------------------------------------------------------------------

  Number of User Upgrade        Adds support for additional users for
                                user-limited models (SonicWALL/10 and
                                SonicWALL/50)                              $650 - $1,300
----------------------------------------------------------------------------------------

  Content Filter Subscription   Annual subscription to a continuously
                                updated list of Internet sites             $175 - $695 /
                                containing objectionable content               year
----------------------------------------------------------------------------------------

  Extended Warranty and         Annual extended warranty on SonicWALL
  Premium Support               hardware and premium technical support     $80 - $675 /
                                contract                                       year
</TABLE>


                                       35
<PAGE>

[DESCRIPTION OF GRAPHICS:
  Diagram showing the Internet as an oval symbol and lines connecting from
  the Internet through depiction of SonicWALL products to graphic for SME
  (office building), telecommuter (house), school or library (school), branch
  office (office building), corporate headquarters (office building), and
  mobile worker (laptop computer).]

   The SonicWALL product family shares a common set of Internet security
features that have been tailored to meet the needs of our target markets:

   Firewall Security. Our firewall security protects private networks against
Internet-based theft, destruction, or modification of data, and automatically
notifies customers if their networks are under attack. SonicWALL has been
awarded the internationally recognized ICSA Firewall Certification, the same
certification awarded to significantly more expensive products sold by Check
Point Software and Cisco Systems. In addition, SonicWALL is pre-configured to
automatically detect and thwart Denial of Service attacks such as Ping of
Death, SYN Flood, LAND Attack, and IP Spoofing.

   Virtual Private Networking. Our VPN capabilities enable affordable and
secure communications over the Internet between branch offices, telecommuters,
mobile workers and business partners. SonicWALL VPN uses industry-standard data
encryption algorithms and interoperates with other VPN products such as Check
Point Software's Firewall-1.

   Content Filtering. Our content filtering feature enables businesses,
families, schools and libraries to control access to objectionable or
inappropriate Web sites. SonicWALL can filter Internet content by URL or
keyword. We offer a content filter subscription service that provides a list of
objectionable Web sites that is automatically updated on a weekly basis.

   IP Address Management. SonicWALL includes Network Address Translation, or
NAT, which allows a customer to connect multiple users on their private network
to the Internet using a single public IP address. SonicWALL also includes
Dynamic Host Configuration Protocol, or DHCP, Client and Server capabilities.
DHCP Client allows SonicWALL to automatically acquire its IP address settings
from the Internet Service Provider, or ISP. DHCP Server allows computers on the
private network to automatically acquire IP address settings from SonicWALL,
simplifying client PC configuration.

                                       36
<PAGE>

   AutoUpdate. Our AutoUpdate feature automatically notifies all registered
customers via e-mail when bug fixes or new products that have been purchased
are available for download from our Web site. With AutoUpdate, we give our
customers an easy-to-use method to address rapidly evolving Internet security
issues.

   Logging and Reporting. SonicWALL maintains an event log of potential
security concerns which can be viewed with a Web browser or automatically sent
to any e-mail address on a periodic basis. SonicWALL notifies the administrator
of high-priority security issues, such as an attack on a server, by immediately
sending an alert message to a priority e-mail account such as an e-mail pager.
SonicWALL also provides pre-defined reports that show different views of
Internet usage, such as the most commonly accessed Web sites.

   Web Browser-Based Management. SonicWALL is easily and securely configured
and managed through a Web browser-based interface. The SonicWALL interface
effectively insulates the user from the underlying complexity of Internet
security, while providing enough flexibility to meet the diverse needs of our
customers.

Case Studies

   SonicWALL customers range from home users with Internet cable or DSL access
to global companies with numerous branch offices and telecommuters. The
following case studies illustrate how our customers are using our products and
services.

 Small to Medium Size Enterprise

   The Charlotte Hornets professional basketball franchise depends on the
Internet for league communications, marketing and public relations. The
Hornets' office uses an always-on broadband Internet connection that requires
Internet security to protect confidential franchise and league information. A
SonicWALL DMZ is used to provide firewall protection for all computers on the
private network. Four Web sites and other servers are hosted on the DMZ port,
where they are accessible from the Internet, but protected from Internet
attacks.

 Branch Office

   Pixar, an Academy Award-winning computer animation studio with technical,
creative and production capabilities, develops well-known computer-animated
feature films. In addition to its headquarters in Richmond, California, Pixar
has six branch offices with always-on broadband Internet connections that
require firewall security to protect the computers on their private networks
and VPN connectivity to allow secure communications with headquarters. A
SonicWALL at each branch office provides Pixar with firewall security. With the
SonicWALL VPN upgrade at each branch office and Check Point Software's
Firewall-1 at headquarters, Pixar has created a secure distributed network that
allows employees in different offices to collaborate on projects and to
disseminate confidential information securely over the Internet throughout the
enterprise.

 Telecommuter

   Mr. Marshall subscribes to Excite@Home's high speed Internet cable access
service in Fremont, California. Recently, Mr. Marshall's employer installed a
SonicWALL PRO at the office to allow telecommuters to use VPN for secure access
to sensitive resources on the company's private network, such as file servers
and databases. Mr. Marshall installed a SonicWALL/10 with the VPN upgrade at
home to create a VPN connection to his company's private network, allowing him
to securely collaborate on projects and distribute private information with
other employees over the Internet.

 Education

   The Santa Clara County California Library system offers free Internet access
to all members of the community from any of its computer terminals located
throughout nine community libraries. Responding to

                                       37
<PAGE>

community concerns, the Library's governing body mandated the use of content
filtering to restrict access to sexually explicit Internet sites in the
children's rooms of all Library branches. Following a six-week study during
which multiple security and filtering products were analyzed, the Library
installed a SonicWALL DMZ with our content filtering subscription service to
restrict access to objectionable Web sites. SonicWALL DMZ is configured to
allow adult patrons to decide between filtered or unfiltered access while the
computers in the children's rooms are always filtered. In addition to content
filtering, SonicWALL DMZ provides firewall security for all of the Library's
computers.

Sales and Marketing

   Our sales and marketing efforts focus on successfully penetrating the SME,
branch office, telecommuter, and education markets. Our marketing programs
promote SonicWALL brand awareness and reputation as a reliable, high
performance, easy-to-use, and affordable Internet security appliance. We try to
strengthen our brand through a variety of marketing programs which include on-
going public relations, our Web site, advertising, direct mail, industry and
regional trade shows and channel partner seminar participation. We intend to
rapidly expand our indirect channel relationships through additional marketing
programs, additional marketing staff, and increased advertising.

   We believe that SonicWALL products are ideally suited for the indirect
channel. We primarily market and sell our products through a two-tiered
distribution structure consisting of distributors and value added resellers,
both in the United States and over 30 countries. Resellers include systems
integrators, ISPs, dealers, mail order catalogs, and on-line catalogs. This
network of over 800 VARs then sells our products to end-users in our target
markets. Our distribution agreements are non-exclusive. We also sell directly
to select partners in the United States that commit to certain volume and
training requirements.

   We divide our sales organization regionally into three areas: the United
States and Canada; the Pacific Rim and Latin America; and Europe, the Middle
East, and Africa. Regional sales representatives manage our relationships with
our network of distributors, value added resellers and select direct partners,
help our value added reseller network sell and support key customer accounts,
and act as a liaison between our value added reseller network and our marketing
organization. The regional sales representative's primary responsibility is to
help the indirect channel succeed and grow within the territory. We also have
an inside tele-sales group that supports the indirect channel, and a dedicated
business development organization whose responsibilities include identifying,
promoting, and managing strategic partnerships with ISPs and industry leaders,
OEM relationships, and inbound technology license arrangements.

   Domestic Channel. In the United States, our master distributors are Ingram
Micro and Tech Data. Ingram Micro accounted for 34% of our revenue in 1998 and
32% in the six months ended June 30, 1999. Tech Data began distributing our
products in February 1999, and in the six months ended June 30, 1999, accounted
for approximately 9% of total revenue.

   We have designed three general programs for domestic value added resellers.
These offer various benefits and product discounts depending on the level of
purchases that the reseller commits to or achieves. The basic program is the
Sonic Reseller level which offers access to privileged information and sales
and marketing materials. Next we offer a Sonic Silver level, which extends
those benefits by adding access to an expanded set of sales and marketing
tools, as well as priority technical support. The top level is Sonic Gold,
where additional benefits such as sales leads and market development funds are
available. Sonic Reseller, Silver, and Gold Partners all source our products
through a master distributor. We also have a Sonic Platinum Partner program for
selected key strategic partners which includes Gold Partner benefits plus
access to additional discounted demonstration units and market development
funds. We work directly with these Platinum Partners.

   International Channel. We believe there is a strong international market for
our products. International sales represented 32% of our revenue in 1998 and
approximately 35% of revenue in the six months ended June 30, 1999.

                                       38
<PAGE>

   We direct all of our international VARs to the master distributor in each
territory. We support master distributor channel programs and marketing efforts
by offering customizable marketing materials, sales tools, leads, co-operative
marketing funds, joint advertising, discounted demonstration units, and
training. We also participate in regional press tours, trade shows, and
seminars. Our largest international distributor is Sumitomo Software
Development in Japan. Additional key international distributors include ME
Networks in Switzerland, Connect AS in Norway, Tekdata Distribution in England,
and Network Innovation in Sweden.

   OEM Channel. We enter into select OEM relationships in order to leverage the
channels of well established companies that sell into our target markets. We
believe these partnerships expand our overall market while having a minor
impact on our own channel sales. We currently sell our products or services
through OEM partnerships with Com21, a leading provider of cable modems, and
Ramp Networks, a leading provider of networking equipment to small businesses.

Customer Service and Technical Support

   We offer our customers a comprehensive range of support programs through a
customer service and technical support organization which provides product
maintenance and technical support services on a worldwide basis. Our technical
support staff is located in Santa Clara, California. In addition to standard
support, we offer premium support services which an end user customer located
in the United States can purchase from us or our channel partners.

   Standard Support. Included during the warranty period, standard support is a
unique Web-based technical support mechanism whereby distributors, channel
partners, and end users can use our extensive on-line technical support
resource database. If the resource database does not answer a question, the
user can immediately enter a query or "trouble ticket" on-line and our customer
service organization will then generate a response via phone, fax, or e-mail.

   Premium Support. Available for purchase only in the continental United
States, our annual subscription-based Premium Support program offers extended
benefits to the Standard Support offering. Premium Support benefits include:

    .expedited response time;

    .access to a dedicated toll-free support telephone number;

    .overnight replacement of defective units; and

    .free shipping for units which we authorize for return.

   Our products include a standard one-year warranty, which can be extended at
additional cost. The warranty provides access to our standard technical support
services along with repair or replacement guarantees for units with product
defects.

                                       39
<PAGE>

Customers

   As of August 15, 1999, we have shipped over 16,000 Internet Security
Appliances to our global reseller channel, which resells our products to a wide
variety of end users. The following is a partial list of select SonicWALL
distributors, resellers and end users:

<TABLE>
<S>                                      <C>
End Users                                Distributors
 . Albany County School District          .Ingram Micro (US)
 . American Express                       .Tech Data (US)
 . Bank of Nova Scotia                    .Connect AS (Norway)
 . Centurion/Bank of Ireland              .ME Networks (Switzerland)
 . Charlotte Hornets                      .Network Innovation (Sweden)
 . City of Santa Cruz                     .Sumitomo Software Development (Japan)
 . Comision Federal de Electricidad       .Tekdata Distribution (UK)
 . Commercial Bank of San Francisco
 . Compaq Computer Corporation            Resellers
 . Duke University                        .Broadband Access Networking Group
 . General Magic                          .CompUSA
 . Johns Hopkins University               .GE Network Services
 . Los Angeles Lakers                     .Graybar
 . Lucent Technologies                    .IKON
 . Pixar                                  .Inacom
 . PricewaterhouseCoopers LLP             .Nippon Telephone & Telegraph (Japan)
 . Santa Clara County California Library  .PSINet
 . Sun Microsystems                       .Solunet
 . Wells Fargo                            .SwissCom (Switzerland)
 . Yankee Group                           .Verio
</TABLE>

Technology

   We have designed our SonicWALL product family using a unique combination of
proprietary hardware and software that delivers comprehensive Internet security
with exceptional ease-of-use and industry-leading price/performance.

   The SonicWALL product family currently has two base hardware configurations:

    .  SonicWALL and SonicWALL DMZ. These SonicWALL products use the 33MHz
       Motorola 68360 microprocessor. Both products have two 10 megabit per
       second (Mbps) Ethernet ports. A LAN port connects the SonicWALL to
       the user's internal, private network. A Wide Area Network, or WAN,
       port connects to the external, public network. The SonicWALL DMZ has
       a third 10 Mbps Ethernet port (DMZ) which connects to public servers
       that are separated from both the public and private networks but
       still protected from security breaches.

    .  SonicWALL PRO. The SonicWALL PRO product uses Intel's 233MHz
       StrongARM 110 microprocessor, and has three 10/100 Mbps Fast
       Ethernet ports. These three ports function just like the SonicWALL
       DMZ. For feature expansion, the SonicWALL PRO has an internal
       Peripheral Component Interconnect, or PCI, interface, upgradeable
       RAM, and flash memory.

   The SonicWALL product family consists of the following core modules:

    .  Firewall. The core technology is the stateful packet inspection
       firewall software. Stateful packet inspection is generally accepted
       as the most advanced and secure method of implementing an Internet
       firewall. It examines all layers of the packet (from the physical
       layer

                                       40
<PAGE>

       up to application layer) and determines whether to accept or reject
       the requested communication based on state information derived from
       previous communications and the applications in use. Stateful packet
       inspection dynamically adjusts based on the changing state of the
       communication running across the firewall and is invisible to users
       on the protected network. It therefore requires no client PC
       configuration. Our SonicWALL firewall protects against a known set of
       security threats.

    .  Content Filter. The SonicWALL Internet content filter blocks
       objectionable content using a list of forbidden URLs and keywords. We
       license Microsystems Software's CyberNOT list of URLs and adapt it
       for our products. Each SonicWALL can automatically download an
       updated URL list weekly to keep pace with the dynamic nature of
       Internet content.

    .  IP Address Management. We have developed tools to hide the complexity
       of IP addressing. NAT allows networks to share a small number of
       valid public IP addresses with an equal or larger number of client
       computers on the LAN. This is a common challenge in new broadband-
       connected networks. Our DHCP Server and Client tools allow both the
       firewall and the client computers behind it to obtain their
       respective IP addresses dynamically from a server and thereby
       eliminate the need for manual configuration.

    .  Virtual Private Networking. We developed VPN support for the
       SonicWALL family to provide a means for our customers to use the
       Internet for secure communication between LANs, and from remote
       clients to LANs. SonicWALL VPN complies with the Internet Protocol
       Security (IPSec) standard and supports three data encryption methods:
       56 bit Data Encryption Standard (DES); 168 bit Data Encryption
       Standard (Triple-DES); and 56 bit ARCFour (ARC4). By building our VPN
       technology on industry standards--IPSec, DES and Triple-DES--we have
       been able to establish VPN interoperability with other leading VPN
       solutions such as Check Point Software's FW-1.

    .  Web Browser-Based Management Interface. Our products have an
       intuitive and easy-to-use Web-based management interface for rapid
       installation, configuration and maintenance, without the need for a
       dedicated information technology staff to install and maintain the
       solution. This interface can be easily accessed from any Web browser
       on the internal, private network. This interface can also be accessed
       remotely in a secure manner using the VPN feature described above.

Research and Development

   We believe that our future competitive position will depend in large part
on our ability to develop new and enhanced Internet security solutions and our
ability to meet the rapidly changing needs of our target customers who have
broadband access to the Internet. We focus our research and development on
evolving Internet security needs. In addition, we have also made substantial
investments in hardware and ASIC technologies which are critical to drive
product cost reductions and higher performance solutions. Current activities
include:

    .  virtual private networking improvements such as public key
       infrastructure support and strong authentication;

    .  other security and filtering improvements such as intrusion
       detection, virus scanning and e-mail spam filtering; and

    .  new management capabilities such as bandwidth management and a new
       distributed management framework.

   All of our research and development activities are conducted at our
principal facility in Santa Clara, California.

                                      41
<PAGE>

Competition

   The market for Internet security products is highly competitive, and we
expect competition to intensify in the future. There are few substantial
barriers to entry, and additional competition from existing competitors and new
market entrants will occur in the future. Current and potential competitors in
our markets include, but are not limited to:

    .  enterprise firewall software vendors such as Check Point Software
       and Axent Technologies;

    .  network equipment manufacturers such as Cisco Systems, Lucent
       Technologies, Nortel Networks, 3COM and Nokia;

    .  computer or network component manufacturers such as Intel
       Corporation;

    .  operating system software vendors such as Microsoft Corporation,
       Novell and Sun Microsystems; and

    .  security appliance suppliers such as Watchguard Technologies.

   Most of our competitors to date have generally targeted large enterprises'
security needs with firewall products that are typically very complex and
expensive ranging in price from approximately $5,000 to more than $15,000, and
requiring active management by IT personnel. At any time, any of these
competitors may adapt existing products for our target markets. Many of our
current or potential competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical, marketing and other resources than we do. Nothing prevents or
hinders these actual or potential competitors from entering our target markets
at any time. In addition, our competitors may bundle products competitive to
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. If these companies were to use their
greater financial, technical and marketing resources in our target markets, it
could adversely affect our business.

Proprietary Rights

   We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. 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. Although
we are currently investigating patent protection for certain proprietary
technology, we have not yet received any patent protection for our technology
or products. Even if we obtain such patents, that does not guarantee that our
patent rights are valuable, create a competitive barrier, or will be free from
infringement. We face additional risk when conducting business in countries
that have poorly developed or inadequately enforced intellectual property laws.
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.

U.S. Government Export Regulation Compliance

   Our products are subject to federal export restrictions on encryption
strength. Recent federal legislation, however, has increased exportable
encryption strength and allows the export of any-strength encryption to
designated business sectors overseas, including U.S. subsidiaries, banks,
financial institutions, insurance companies and health and medical end users.
In addition, we have obtained a federal export license that allows us to export
encryption technology to commercial entities in approved countries. With these
expanded export rights, we may export strong encryption to a wide range of
foreign end-users, subject to limitations and record-keeping requirements. To
comply with these constraints, we obtain from our distributors and resellers
detailed information about each foreign end-user customer that will obtain
strong encryption.

                                       42
<PAGE>

Manufacturing

   We outsource our manufacturing to two contract manufacturers, Flash
Electronics and AQS. The manufacturing processes and procedures for both of
these manufacturers are ISO 9002 certified. Outsourcing our manufacturing
enables us to reduce fixed overhead and personnel costs and to provide
flexibility in meeting market demand.

   We design and develop all the key components of our products, including
printed circuit boards and software. In addition, we determine the components
that are incorporated in our products and select the appropriate suppliers of
these components. Product testing and burn-in is performed by our contract
manufacturers using tests that we specify.

Employees

   As of June 30, 1999, we had 45 employees. Of these, 23 were employed in
sales and marketing, 5 in finance and administration, 10 in research and
development and 7 in 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 Santa Clara, California. We occupy approximately 8,700
square feet in this facility, under a lease that expires in August 2001.

Legal Proceedings

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

                                       43
<PAGE>

                                   MANAGEMENT

Executive Officers, Directors and Key Employees

   The following table lists the executive officers, directors and key
employees of SonicWALL as of June 30, 1999.

<TABLE>
<CAPTION>
Name                      Age                           Position
----                      ---                           --------
<S>                       <C> <C>
Sreekanth Ravi(1).......   33 Chairman of the Board, President and Chief Executive Officer

Sudhakar Ravi(1)........   34 Vice President, Engineering and Director

Michael J. Sheridan(1)..   34 Vice President, Finance and Chief Financial Officer

Steven R. Perricone.....   38 Vice President, Sales

Richard Pearce..........   38 Vice President, Business Development

Fara Zarrabi............   58 Vice President, Operations

Jerrold F.
 Petruzzelli(2).........   46 Secretary and Director

David A. Shrigley(3)....   51 Director

Robert M.
 Williams(2)(3).........   44 Director
</TABLE>
----------
(1)Executive officer
(2)Member of audit committee
(3)Member of compensation committee

   We have no employment agreements with our executive officers or key
employees.

   Sreekanth Ravi has served as our Chairman of the Board, President and Chief
Executive Officer since co-founding SonicWALL, Inc. in February 1991. Prior to
SonicWALL, Inc., Mr. Ravi was the founder and chief executive officer of
Generation Systems, a manufacturer of high performance video products, which he
later sold to a publicly held computer products company in 1990. Mr. Ravi
received a bachelor of science degree in electrical engineering from the
University of Illinois, Champaign-Urbana. Sreekanth Ravi and Sudhakar Ravi are
brothers.

   Sudhakar Ravi has served as our Vice President, Engineering and director
since co-founding SonicWALL, Inc. in February 1991. Prior to SonicWALL, Inc.,
Mr. Ravi was involved in semiconductor research at Stanford University. Mr.
Ravi received a bachelor of science degree from the University of Illinois,
Champaign-Urbana and a masters of science degree in computer science from
Stanford University. Sudhakar Ravi and Sreekanth Ravi are brothers.

   Michael J. Sheridan has served as our Chief Financial Officer since joining
SonicWALL, Inc. in May 1999. Mr. Sheridan joined SonicWALL, Inc. from Genesys
Telecommunications Laboratories, Inc., an enterprise software company in the
call center automation industry, where he served as Vice President of Finance
from January 1998 to May 1999, and served as Corporate Controller from November
1996 to December 1997. From August 1995 to November 1996, Mr. Sheridan was the
Corporate Controller for Network Appliance, Inc., a network file server
manufacturer. From 1986 to 1995, Mr. Sheridan was an audit professional with
Arthur Andersen, where he was involved primarily in high technology clients.
Mr. Sheridan received a bachelor's degree in commerce from Santa Clara
University and is a Certified Public Accountant.

   Steven R. Perricone has served as our Vice President, Sales since joining
SonicWALL, Inc. in April 1998. Mr. Perricone joined SonicWALL, Inc. from
Structured Internetworks, an IP bandwidth management company, where he served
as Vice President of Worldwide Sales and Support from July 1997 to April 1998.
From July 1994 to June 1997, Mr. Perricone was Vice President of Worldwide
Sales at Network TeleSystems, a provider of TCP/IP client and server technology
for Internet access. Prior to Network TeleSystems, Mr. Perricone held various
sales management positions at Emulex and Xylogics (now part of Nortel Networks
Corp.). Mr. Perricone received a bachelor's degree in business from California
State University.

                                       44
<PAGE>

   Richard Pearce, Ph.D. has served as our Vice President, Business Development
since joining SonicWALL, Inc. in June 1999. Dr. Pearce joined SonicWALL, Inc.
from WinNet MCS, Inc., a high-bandwidth wireless communications company where
he served as Vice President of Marketing from December 1998 to June 1999. Prior
to joining WinNet, Dr. Pearce was Director of Business Development for Bay
Networks (a Nortel Networks Corp. company) from August 1996 to November 1998,
responsible for defining and managing programs to add IP technology to Nortel's
product lines. He was also responsible for identifying and developing market
opportunities enabled by the innovative mixing of Nortel products and
technologies. Prior to Bay Networks' acquisition by Nortel, Dr. Pearce was
responsible for developing emerging market opportunities for Bay Networks. Dr.
Pearce received a bachelor of science degree in applied physics & electronics
and a Ph.D. in data networking from Durham University in the United Kingdom.

   Fara Zarrabi has served as our Vice President, Operations since joining
SonicWALL, Inc. in July 1999. Mr. Zarrabi joined SonicWALL, Inc. from Genesys
Telecommunications Laboratories, Inc., where he was Director of Operations from
February 1997 to June 1999. Prior to Genesys Telecommunications, Mr. Zarrabi
was the Director of Operations at Network Appliance, Inc., from February 1996
to February 1997. From May 1994 to February 1996, Mr. Zarrabi was Director of
Manufacturing Operations at Radius, Inc., a manufacturer of computer graphics
and video hardware. Mr. Zarrabi received a bachelor's degree in electronic
engineering from the University of California, Berkeley.

   Jerrold F. Petruzzelli has served as our Secretary and a director since
October 1993. Mr. Petruzzelli has been a partner of Manatt, Phelps & Phillips,
LLP, legal counsel to SonicWALL, Inc., since June 1999 and previously was a
partner of Holtzmann Wise & Shepard, legal counsel to the Company, from January
1990 to July 1995, and a partner of Wise & Shepard LLP, legal counsel to the
Company, from July 1995 to June 1999, at which time Wise & Shepard LLP merged
with Manatt, Phelps & Phillips, LLP. Mr. Petruzzelli received a bachelor of
arts degree from Yale University and a J.D. degree from the University of
Chicago.

   David S. Shrigley has been a director since July 1999. From November 1996 to
April 1999, Mr. Shrigley was Executive Vice President, Sales and Services of
Nortel Networks Corp., a network telecommunications company. From December 1978
to November 1996, Mr. Shrigley was an employee of Intel Corporation, a
semiconductor manufacturing company, where he was last employed as Vice
President, Corporate Marketing. Mr. Shrigley received a bachelor of science
degree in business administration from Franklin University.

   Robert M. Williams has been a director since May 1999. Since January 1998,
Mr. Williams has been a general partner of Bay Partners, a venture capital
firm. From May 1993 to December 1997, Mr. Williams was Vice President,
Marketing and Business Development of NetManage, Inc., a networking software
product development and sales company. Before then, Mr. Williams held various
marketing positions at several companies, including Verity, Inc., an Internet
text engine developer, and Ingres Corp., a developer of relational database
management software. Mr. Williams received a bachelor of arts degree from
Dartmouth College and a MBA from the Stanford Graduate School of Business.

Committees of the Board of Directors

   The compensation committee of our board of directors consists of Messrs.
Shrigley and Williams. 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. Petruzzelli and Williams. The audit
committee:

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

                                       45
<PAGE>

    .  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 August, 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 SonicWALL, Inc. are eligible to participate in
our stock option plans.

Director and Officer Indemnification and Liability

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

    .  acts or omissions that involve intentional misconduct or a knowing
       and culpable violation of law;

    .  acts or omissions that a director believes to be contrary to the
       best interest of the corporation or its shareholders or that involve
       the absence of good faith on the part of the director;

    .  any transaction from which a director derived an improper personal
       benefit;

    .  acts or omissions that show a reckless disregard for the director's
       duty to the corporation or its shareholders in circumstances in
       which the director was aware, or should have been aware, in the
       ordinary course of performing a director's duties, of a risk of
       serious injury to the corporation or its shareholders;

    .  acts or omissions that constitute an unexcused pattern of
       inattention that amounts to an abdication of the director's duty to
       the corporation or its shareholders;

    .  unlawful payments of dividends or unlawful stock repurchases or
       redemptions, unlawful distribution of assets to shareholders or
       unlawful loans or guarantees to directors, officers and others; or

    .  any transaction between a director and the Company.

   Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by California law, including circumstances in which
indemnification is otherwise discretionary under California law. We have
entered into indemnification agreements with our directors and officers
containing provisions that are in some respects broader than the specific
indemnification provisions contained in the California Corporations Code. The
indemnification agreements may require us:

    .  to indemnify our directors and officers against liabilities that may
       arise by reason of their status or service as directors or officers,
       other than liabilities arising from willful misconduct of a culpable
       nature;

    .  to advance their expenses incurred as a result of any proceeding
       against them as to which they could be indemnified; and

    .  to obtain directors' and officers' insurance if available on
       reasonable terms.

   At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation

                                       46
<PAGE>

or proceeding that might result in a claim for indemnification. We believe that
our charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.

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

Compensation Committee Interlocks and Insider Participation

   Our board of directors' compensation committee currently consists of Messrs.
Shrigley and Williams. None of these individuals has at any time been an
employee or officer of SonicWALL, Inc. Until the compensation committee was
formed in August 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.

Executive Compensation

   The following table provides information concerning the compensation
received for services rendered to SonicWALL, Inc. in all capacities during the
year ended December 31, 1998, by our chief executive officer and each of the
other most highly compensated executive officers or key employees of SonicWALL,
Inc. whose compensation exceeded $100,000 in fiscal 1998.


                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                    Long-Term
                                                                                   Compensation
                                                                                      Awards
                                                                                 ----------------
                               Annual Compensation
                               --------------------                  Securities
Name and Principal                                    Other Annual   Underlying     All Other
Position                  Year Salary ($) Bonus ($) Compensation ($) Options (#) Compensation ($)
------------------        ---- ---------- --------- ---------------- ----------- ----------------
<S>                       <C>  <C>        <C>       <C>              <C>         <C>
Sreekanth Ravi........... 1998  $240,000  $732,345        N/A            N/A        $13,846(1)
  President and Chief
  Executive Officer
Sudhakar Ravi............ 1998  $240,000  $816,871        N/A            N/A        $13,846(1)
  Vice President,
  Engineering
Steven R. Perricone...... 1998  $ 78,231  $ 23,389        N/A          600,000      $ 1,538(1)
  Vice President, Sales
Michael J. Sheridan(2)... 1998    N/A        N/A          N/A            N/A           N/A
  Vice President, Finance
  and Chief Financial
  Officer
</TABLE>
----------
(1) Cash payment in lieu of vacation days
(2) Hired in May 1999

                                       47
<PAGE>

   The following table provides information regarding stock options we granted
in fiscal 1998 to our chief executive officer and the other executive officers
or key employees whose compensation exceeded $100,000 in fiscal 1998. The table
includes the potential realizable value over the five-year 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
                                                                        Annual Rates of
                         Number of   Percent of                           Stock Price
                         Securities Total Options                       Appreciation for
                         Underlying  Granted to   Exercise                Option Term
                          Options   Employees in   Price   Expiration --------------------
 Name                    Granted(#)  Fiscal Year   ($/Sh)     Date      5%($)     10%($)
 ----                    ---------- ------------- -------- ---------- -------------------- ---
<S>                      <C>        <C>           <C>      <C>        <C>       <C>        <C>
Sreekanth Ravi..........    N/A          N/A        N/A       N/A        N/A        N/A
Sudhakar Ravi...........    N/A          N/A        N/A       N/A        N/A        N/A
Steven R. Perricone.....  600,000         59%      $0.125   7/23/08   $         $
Michael J. Sheridan.....    N/A          N/A        N/A       N/A        N/A        N/A
</TABLE>

   Options vest and become exercisable over four years, provided the employee
remains employed at the Company. In 1998, we granted options to purchase up to
an aggregate of 1,015,000 shares to employees, directors and consultants. We
granted all options under our stock option plans 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 options exercised during
1998 and unexercised options held as of December 31, 1998 by our chief
executive officer and the other executive officers or key employees whose
compensation exceeded $100,000 in fiscal 1998. The value of realized and the
value of unexercised in-the-money options is calculated on the basis of an
assumed initial public offering price of $      per share as the fair market
value at December 31, 1998.

                Aggregate Option Exercises FY-End Option Values

<TABLE>
<CAPTION>
                                                    Number of
                         Number of            Securities Underlying     Value of Unexercised
                          Shares             Unexercised Options at    In-the-Money Options at
                         Acquired              Fiscal Year End (#)       Fiscal Year-End($)
                            on      Value   ------------------------- -------------------------
          Name           Exercise  Realized Exercisable Unexercisable Exercisable Unexercisable
          ----           --------- -------- ----------- ------------- ----------- -------------
<S>                      <C>       <C>      <C>         <C>           <C>         <C>
Sreekanth Ravi.......... 1,067,440                  0            0       $            $
Sudhakar Ravi........... 1,067,440                  0            0
Steven R. Perricone.....         0            111,600      488,400
Michael J. Sheridan.....       N/A                N/A          N/A         N/A          N/A
</TABLE>

Employee Benefit Plans

 1998 and 1994 Stock Option Plans

   The 1998 stock option plan provides for the grant of incentive stock
options, as defined in Section 422 of the Internal Revenue Code, to employees
and the grant of nonstatutory stock options to employees, non-employee
directors and consultants. The purposes of the 1998 stock option plan are:

    .  to attract and retain the best available personnel;

                                       48
<PAGE>

    .  to provide additional incentives to our employees and consultants;
       and

    .  to promote the success of our business.

   The 1998 stock option plan was adopted by our board of directors in July
1998, approved by our stockholders in July 1998, and amended by the
shareholders to increase the number of shares available for grant thereunder in
February 1999. Unless terminated earlier by the board of directors, the 1998
stock option plan will terminate in July 2008. The 1998 stock option plan was
amended by our board of directors in August 1999 to include some of the
provisions provided below. These amendments were approved by our shareholders
in August 1999. The number of shares reserved for issuance under the 1998 stock
option plan will be subject to an automatic annual increase in the first day of
2000 through 2008 equal to the lesser of:

    .  2,000,000 shares;

    .  4% of our outstanding common stock on the last day of the
       immediately preceding fiscal year; or

    .  a number of shares determined by the administrator.

   The compensation committee currently administers the 1998 stock option plan.
The administrator of the 1998 stock option plan determines numbers of shares
subject to options, vesting schedules and exercise prices for options granted
under the 1998 stock option plan.

   The exercise price of incentive stock options must be at least equal to 100%
of the fair market value of our common stock on the date of grant, and at least
equal to 110% of the fair market value in the case of incentive stock options
granted to an employee who holds, at the time the option is granted, more than
10% of the total voting power of all classes of our stock or any parent's or
subsidiary's stock. Nonstatutory stock options will have an exercise price of
at least 85% of the fair market value of our stock. Payment of the exercise
price may be made in cash or other form of consideration approved by the
administrator. The administrator determines the term of options, which may not
exceed ten years, or five years in the case of an incentive stock option
granted to an employee who holds, at the time the option is granted, more than
10% of the total voting power of all classes of our stock or any parent's or
subsidiary's stock. No option may be transferred by the optionee other than by
will or the laws of descent or distribution, provided, however, that the
administrator may in its discretion provide for the transferability of
nonstatutory stock options. The administrator determines when options become
exercisable. Options granted under the 1998 stock option plan become
exercisable at a rate not less than 20% per year. To the extent an optionee
would have the right in any calendar year to exercise for the first time one or
more incentive stock options for shares having an aggregate fair market value
in excess of $100,000 as of the date the options were granted, the excess
options will be treated as nonstatutory stock options.

   In the event of a change of control of SonicWALL, Inc., outstanding options
will be assumed or substituted by the successor corporation. If the successor
corporation does not agree to this assumption or substitution, the options will
terminate upon the closing of the transaction.

   The board of directors may amend, modify or terminate the 1998 stock option
plan if any amendments, modification or termination does not impair existing
rights of plan participants. Additionally, shareholder approval is required for
an amendment to the extent required by applicable law, regulations or rules.

   Options outstanding under the 1994 stock option plan are subject to
substantially the same terms as options under the 1998 stock option plan.

   As of June 30, 1999:

    .  a total of 5,958,324 shares have been authorized for issuance under
       the 1994 and 1998 stock option plans;

    .  options to purchase an aggregate of 1,760,000 shares of common stock
       were outstanding under the 1994 stock option plan and 1998 stock
       option plan at a weighed average exercise price of $0.48;

                                       49
<PAGE>

    .  2,639,676 shares had been issued upon exercise of outstanding
       options, net of repurchases, under the 1994 and 1998 stock option
       plans; and

    .  1,558,648 shares remained available for future grant under the 1994
       and 1998 stock option plans.

 1999 Employee Stock Purchase Plan

   Our 1999 employee stock purchase plan was adopted by the board of directors
and shareholders in August 1999. The 1999 employee stock purchase plan becomes
effective on the effective date of this offering. A total of 250,000 shares of
common stock has been reserved for issuance under the 1999 employee stock
purchase plan.

   The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, provides our employees with an
opportunity to purchase our common stock through accumulated payroll
deductions. The 1999 employee stock purchase plan will be administered by the
board of directors or by a committee appointed by the board of directors. The
1999 employee stock purchase plan permits an eligible employee to purchase
common stock through payroll deductions of up to 15% of that employee's
compensation. Employees, including officers and employee directors, of
SonicWALL, Inc., or of any majority-owned subsidiary designated by the board of
directors, are eligible to participate in the 1999 employee stock purchase plan
if they are employed by the Company or any designated subsidiary for at least
20 hours per week and more than five months per year. Unless the board of
directors or its committee determines otherwise, the 1999 employee stock
purchase plan will be implemented by a series of overlapping offering periods
generally of 24 months' duration with new offering periods commencing on
February 1 and August 1 of each year. Each offering period will be divided into
four consecutive purchase periods of approximately six months' duration. The
first offering period is expected to commence on the date of this offering and
end on July 31, 2001; the initial purchase period is expected to end six months
after the offering date. The price at which common stock will be purchased
under the 1999 employee stock purchase plan is equal to 85% of the fair market
value of the common stock on the first day of the applicable offering period or
the last day of the applicable purchase period, whichever is lower. Employees
may end their participation in an offering period at any time, and
participation automatically ends on termination of employment.

   Under the 1999 employee stock purchase plan, no employee may be granted an
option if immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or that of our subsidiaries. In
addition, no employee may be granted an option under the 1999 employee stock
purchase plan if the option would permit the employee to purchase stock under
all of our employee stock purchase plans in an amount that exceeds $25,000 of
fair market value for each calendar year in which the option is outstanding at
any time. In addition, no employee may purchase more than 2,000 shares of
common stock under the 1999 employee stock purchase plan in any one purchase
period. If the fair market value of the common stock on a purchase date other
than the final purchase date of an offering period is less than the fair market
value at the beginning of the offering period, each participant in the 1999
employee stock purchase plan will automatically be withdrawn from the offering
period as of the purchase date and re-enrolled in a new 24-month offering
period on the first business day following the purchase date.

   The 1999 employee stock purchase plan provides that, in the event of a
change of control of SonicWALL, Inc. each right to purchase stock under the
1999 employee stock purchase plan will be assumed or an equivalent right
substituted by the successor corporation. However, our board of directors will
shorten any ongoing offering period so that employees' rights to purchase stock
under the 1999 employee stock purchase plan are exercised prior to the
transaction if the successor corporation refuses to assume each purchase right
or to substitute an equivalent right.

   The 1999 employee stock purchase plan will terminate in August 2009 unless
terminated earlier in accordance with its provisions. The board of directors
has the power to amend or terminate the 1999 employee

                                       50
<PAGE>

stock purchase plan if its action does not adversely affect any outstanding
rights to purchase stock thereunder. However, our board of directors may amend
or terminate the 1999 employee stock purchase plan or an offering period even
if it would adversely affect options in order to avoid our incurring adverse
accounting charges.

 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.

                                       51
<PAGE>

                              CERTAIN TRANSACTIONS

   Since January 1, 1996, SonicWALL, Inc. has not been a party to any
transaction or series of similar transactions in which the amount involved
exceeds $60,000 and in which any director, executive officer, or holder of more
than 5% of our common stock had or will have a direct or indirect material
interest other than

    .  normal compensation arrangements which are described under
       "Management--Executive Compensation" above; and

    .  the transactions described below.

Transactions with Executive Officers, Directors and Significant Shareholders

(1) On August 10, 1998, we issued an aggregate of 5,426,186 shares of common
    stock to Sreekanth Ravi, Sudhakar Ravi, Bruce Wonnacott and Ravi Anne, each
    a general partner of AckFin, a California general partnership, in
    consideration of the purchase of all of the general partner interests of
    AckFin and $150,000 cash. Sreekanth Ravi and Sudhakar Ravi are executive
    officers and directors of the Company. Ravi Anne and Bruce Wonnacott each
    hold more than 5% of the outstanding shares of common stock of SonicWALL,
    Inc.

(2) On December 23, 1998, we extended two loans in the aggregate amount of
    $96,069.60 to Sreekanth Ravi, Chief Executive Officer, President and a
    director of SonicWALL, Inc. to pay the exercise price of options to
    purchase 1,067,440 shares of our common stock. Each loan had an interest
    rate of 8% per year, payable over four years and was secured by the shares
    of common stock purchased upon the exercise of Mr. Ravi's stock options.
    These loans were repaid in full in August 1999.

(3) On December 23, 1998, we extended two loans in the aggregate amount of
    $96,069.60 to Sudhakar Ravi, Vice President Engineering and a director of
    SonicWALL, Inc. to pay the exercise price of options to purchase 1,067,440
    shares of our common stock. Each loan had an interest rate of 8% per year,
    payable over four years and was secured by the shares of common stock
    purchased upon the exercise of Mr. Ravi's stock options. These loans were
    repaid in full in August 1999.

(4) On February 19, 1999, we issued an aggregate of 1,438,377 shares of our
    redeemable Series A convertible preferred stock at a purchase price of
    $3.48 per share to several investors, including 14,384 shares issued to
    Robert Williams, a director of the Company, and 1,150,700 shares to Bay
    Partners SBIC II, L.P. Mr. Williams is a partner of Bay Management Company
    1997, the general partner of Bay Partners SBIC II, L.P. The purchasers of
    redeemable Series A convertible preferred stock are entitled to
    registration rights in respect of the common stock issued or issuable upon
    conversion of the redeemable Series A convertible preferred stock.

(5) On May 26, 1999, we extended a loan in the amount of $300,000 to Michael
    Sheridan, Vice President Finance and Chief Financial Officer of SonicWALL,
    Inc. to pay the exercise price of options to purchase 300,000 shares of our
    common stock. Mr. Sheridan has purchased the optioned shares, and the
    Company has the right to repurchase the optioned shares for the purchase
    price paid, which right lapses over four years. The loan has an interest
    rate of 8% per year and is payable over four years. The loan is payable in
    full if Mr. Sheridan is no longer an employee, officer, director or
    consultant of the Company. As of June 30, 1999, aggregate principal and
    interest of approximately $302,000 was outstanding.

(6) On August 6, 1999 Sreekanth Ravi, Chairman of the Board, President and
    Chief Executive Officer and a director, and Sudhakar Ravi, Vice President
    of Engineering and a director, sold an aggregate of 1,832,364 shares of
    common stock to Bay Sonic Investors, LLC at a purchase price of $6.52 per
    share. Two shareholders also sold an aggregate of 400,000 shares of common
    stock to Bay Sonic Investors, LLC at a purchase price of $6.52 per share on
    the same date. Robert Williams, a director of the Company, is a

                                       52
<PAGE>

   managing member of Bay Sonic Investors, LLC. In addition, Sreekanth Ravi
   sold 38,354 shares of common stock to David Shrigley, a director of the
   Company, at a purchase price of $6.52 per share and 30,682 shares of common
   stock to John McNulty at a purchase price of $6.52 per share. The purchasers
   of common stock in these transactions are entitled to registration rights in
   respect of the common stock purchased.

Indemnification Agreements

   We have entered into indemnification agreements with some of our officers
and directors. See "Management--Director and Officer Indemnification and
Liability."

Registration Rights Agreements

   Some of our shareholders are entitled to have their shares registered by us
for resale. See "Description of Capital Stock--Registration Rights."

                                       53
<PAGE>

                       PRINCIPAL AND SELLING SHAREHOLDERS

Principal Shareholders

   The following table provides information regarding the actual beneficial
ownership of our outstanding common stock as of June 30, 1999, assuming the
conversion of all outstanding shares of our redeemable Series A convertible
preferred stock 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
       fiscal 1998; and

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

   Percentage of beneficial ownership is based on 20,091,344 shares of common
stock outstanding as of June 30, 1999, together with options that are
exercisable within 60 days of June 30, 1999 for each shareholder. 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. The percentages for beneficial ownership after offering
assume that the underwriters do not exercise their over-allotment option.
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.

<TABLE>
<CAPTION>
                                                                Percentage of
                                            Number of Shares  Shares of Common
                                            of Common Stock   Stock Outstanding
                                           Beneficially Owned -----------------
                                             as of June 30,    Before   After
Name and Address                                  1999        Offering Offering
----------------                           ------------------ -------- --------
<S>                                        <C>                <C>      <C>
Sreekanth Ravi(1)........................       6,143,986       30.6%       %
Sudhakar Ravi(2).........................       6,143,986       30.6%       %
Steven R. Perricone(3)...................         210,800        1.0%       %
Michael J. Sheridan......................         300,000        1.5%       %
Bay Partners SBIC II, L.P.(4)............       2,301,400       11.5%       %
Ravindra Anne............................       1,356,546        6.8%       %
Bruce Wonnacott..........................       1,356,546        6.8%       %
Jerrold F. Petruzzelli(5)................         100,000          *%       %
David Shrigley(6)........................          50,000          *%       %
Robert M. Williams(7)....................          28,768          *%       %
All directors and executive officers as a
 group (7 persons)(8)....................      15,278,940       76.0%       %
</TABLE>
----------
 * Less than 1%.

(1) Includes 600,000 shares transferred to a family trust subsequent to June
    30, 1999.

(2) Includes 600,000 shares transferred to a family trust subsequent to June
    30, 1999.

(3) Includes 210,800 shares of common stock issuable upon exercise of
    immediately exercisable options.

(4) Represents 2,301,400 shares held by Bay Partners SBIC II, L.P. Robert
    Williams, a director of SonicWALL, Inc. is a partner of Bay Management
    Company 1997, the general partner of Bay Partners SBIC II, L.P. He shares
    voting and investing power with respect to the shares held by this entity,
    and disclaims beneficial ownership of shares in which he has no pecuniary
    interest. The address for Bay Partners SBIC II, L.P. is 10600 N. De Anza
    Boulevard, Suite 100, Cupertino, California 95014.

                                       54
<PAGE>

(5) Includes 5,000 shares held on behalf of a minor child in an irrevocable
    trust of which Mr. Petruzzelli is the sole trustee.

(6) The address for Mr. Shrigley is 471 Santa Rosa Drive, Los Gatos, California
    95032.

(7) See note (4) above. The address for Mr. Williams is 10600 N. De Anza
    Boulevard, Suite 100, Cupertino, California 95014.

(8) Includes 210,800 shares of common stock issuable upon exercise of
    immediately exercisable options.

   The preceding table excludes sales on August 6, 1999 by Sreekanth Ravi and
Sudhakar Ravi of an aggregate of 1,832,364 shares of common stock to Bay Sonic
Investors, LLC. Ravindra Anne and Bruce Wonnacott also sold an aggregate of
400,000 shares of common stock to Bay Sonic Investors, LLC on the same date. In
addition, Sreekanth Ravi sold 38,354 shares of common stock to David Shrigley
and 30,682 shares of common stock to John McNulty on the same date.

Selling Shareholders

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

<TABLE>
<CAPTION>
                                                  Percentage of
                                                    Shares of
        Beneficial                   Beneficial    Common Stock
        Ownership                    Ownership     Outstanding
         Prior to      Number of       After          After
      Over-allotment    Shares     Over-allotment Over-allotment
Name     Exercise    Being Offered    Exercise       Exercise
----  -------------- ------------- -------------- --------------
<S>   <C>            <C>           <C>            <C>

</TABLE>

                                       55
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   We are authorized to issue up to two hundred million shares of common stock
and ten million shares of preferred stock. You should carefully read our
articles of incorporation, which are included as an exhibit to the registration
statement of which this prospectus is a part.

Common Stock

   As of June 30, 1999, assuming conversion of all outstanding shares of
redeemable Series A convertible preferred stock, there were 19,600,594 shares
of common stock outstanding, held of record by approximately 27 shareholders.
Following this offering, there will be           shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of shareholders. 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 SonicWALL, Inc. 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

   At the closing of this offering, all outstanding shares of redeemable Series
A convertible preferred stock will be converted into 2,876,754 shares of common
stock. Under our articles of incorporation, the board of directors will then
have the authority, without further action by the shareholders, to issue up to
8,561,623 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 shareholder 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 decrease the amount of earnings and assets
available for distribution to common stock holders and could delay or prevent a
change of control of SonicWALL, Inc. 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. The board of directors does not
currently intend to seek shareholder approval prior to any issuance of
preferred stock, unless required to do so by law. We have no current plans to
issue any preferred stock.

Anti-takeover Provisions

   Upon completion of this offering, some provisions of our charter documents
may have the effect of delaying, deterring or preventing changes in control or
management of SonicWALL, Inc., including changes a shareholder might consider
to be favorable. This could have an adverse affect on the market price of our
common stock. These provisions include:

    .  authorizing the board to issue additional preferred stock;

    .  prohibiting cumulative voting in the election of directors;

    .  limiting the persons who may call special meetings of shareholders;

    .  prohibiting shareholder actions by written consent; and

    .  establishing advance notice requirements for nominations for
       election to the board of directors or for proposing matters that can
       be acted on by shareholders at shareholder meetings.


                                       56
<PAGE>

 Preferred Stock

   Our charter documents grant the board of directors broad power to establish
the rights and preferences of the authorized but unissued preferred stock.
Preferred stock could be issued with terms that delay, deter or prevent a
change of control or management.

 No Cumulative Voting for Directors

   Our charter documents prohibit cumulative voting for directors. This may
limit or eliminate the power of minority shareholders to influence the
composition of our board of directors.

 No Shareholder Action by Written Consent

   Our charter documents provide that an action requiring or permitted to be
taken at any annual or special meeting of shareholders may only be taken at a
duly called annual or special meeting of our shareholders. This provision
prevents shareholders from initiating or effecting any such action by written
consent.

 Notice Requirements

   Our charter documents establish advance notice procedures with regard to all
shareholder proposals to be brought before meetings of our shareholders,
including relating to the nomination of candidates for election as directors,
the removal of directors and amendments to our articles of incorporation or
bylaws. These procedures provide that notice of these proposals must be given
in writing, no later than 60 days prior to the meeting to our Secretary and
must contain certain information specified in our charter documents.

   Our stock option plans and stock purchase plan generally provide for
assumption of our benefit plans or substitution of equivalent options of a
successor corporation or, alternatively, at the discretion of the board of
directors, exercise of some or all of the options, including those for non-
vested shares, or acceleration of vesting of shares issued pursuant to stock
grants, upon a change of control or similar event.

   These charter provisions may have the effect of delaying, deterring or
preventing a change of control of SonicWALL, Inc.

Registration Rights

   Under the terms of a registration rights agreement, subject to certain
exceptions, if we propose to register any of our shares of common stock under
the Act, either for our own account or the account of any shareholder, in any
public offering, upon the completion of this offering, certain investors
holding an aggregate of 5,178,154 shares of our common stock will be entitled
to notice of such registration and will be entitled to include those
registrable securities in a registration under the Act.

   In addition, upon completion of this offering, certain investors holding an
aggregate of 2,876,754 shares of our common stock will be entitled to
additional rights under this registration rights agreement as follows: the
holder or holders of an aggregate of at least 50% of the then outstanding
registrable securities shall have the right to require us to file a
registration statement on a form, other than Form S-3 under the Act, in order
to register the registrable securities then held by such holder or holders,
provided that:

    .  at least six months has passed since our initial public offering of
       shares of common stock under a registration statement;

    .  the anticipated aggregate offering price to the public is at least
       $2,000,000; and

    .  we shall not be required to file more than two such registration
       statements.

                                       57
<PAGE>

   Further, a holder or holders of at least 20% of the then outstanding
registrable securities may require us to use our best efforts to file
additional registration statements on Form S-3, provided that:

    .  the anticipated aggregate offering price to the public is at least
       $500,000; and

    .  we shall not be required to file more than one such registration
       statement in any twelve-month period.

   The right to include any of the above described registrable securities in
any registration is subject to certain limitations and conditions, including
the underwriters' right to limit the number of shares being registered by all
holders. We are required to indemnify holders of registrable securities and the
underwriters, if any, for these holders under certain circumstances. In
general, we are required to bear the expenses of registrations, except for the
selling shareholders' pro rata portion of the underwriting discounts and
commissions.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is Bank Boston, N.A.

Nasdaq National Market Listing

   We expect our common stock to be approved for quotation on the Nasdaq
National Market under the symbol SNWL, subject to official notice of issuance.

                                       58
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price.

   After this offering,            shares of common stock will be outstanding,
assuming the conversion on a 2 for 1 basis of all outstanding shares of our
redeemable Series A convertible preferred stock and the issuance of an
aggregate of           shares of common stock. The number of shares outstanding
after this offering is based on the number of shares outstanding as of June 30,
1999, and assumes no exercise of outstanding options. The           shares sold
in this offering will be freely tradable without restriction under the Act. The
remaining            shares of common stock outstanding upon completion of the
offering are restricted securities in that they may be sold in the public
market only if registered or if they qualify for an exemption from registration
under the Act or Rules 144, 144(k) or 701 of the Act. In addition, all
outstanding shares are subject to lock-up agreements either directly with
SonicWALL, Inc. or as described below.

   All of the officers and directors, who hold an aggregate of
shares of common stock, and shareholders of SonicWALL, Inc. holding an
aggregate of           shares of common stock have entered into lock-up
agreements generally providing that they will not offer, sell, contract to
sell, grant any option to purchase, pledge or otherwise dispose of, or, in any
manner, transfer all or a portion of the economic consequences associated with
the ownership of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock beneficially owned by them
during the 180 day period following the date of this prospectus without the
prior written consent of Bear, Stearns & Co. Inc. Transfers may be made
earlier:

    .  as a bona fide gift or gifts, provided the donee or donees agree in
       writing to be bound by this restriction;

    .  as a transfer to members of the undersigned's immediate family or to
       trusts for the benefit of members of the undersigned's immediate
       family, provided that the transferees agree in writing to be bound
       by the terms of this restriction;

    .  as a distribution to partners, shareholders or beneficiaries of the
       transferor, provided that the distributees agree in writing to be
       bound by the terms of this restriction;

    .  with respect to dispositions of common stock acquired on the open
       market;

    .  with respect to sales or purchases of common stock acquired on the
       open market; or

    .  with the prior written consent of Bear, Stearns & Co. Inc.

   Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, Bear, Stearns & Co. Inc. will consider, among other factors, the
shareholder's reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the time.
Following the expiration of the 180 day lock-up period, additional shares of
common stock will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701.

   In general, under Rule 144 as currently in effect, an affiliate of
SonicWALL, Inc. or a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of SonicWALL, Inc. common stock or
the average weekly trading volume of SonicWALL, Inc. common stock on the Nasdaq
National Market during the four calendar weeks preceding such sale. Sales under
Rule 144 are also

                                       59
<PAGE>

subject to certain manner of sale provisions, notice requirements and the
availability of current public information about SonicWALL, Inc. Any person, or
persons whose shares are aggregated, who is not deemed to have been an
affiliate of SonicWALL, Inc. at any time during the 90 days preceding a sale,
and who has beneficially owned shares for at least two years including any
period of ownership of preceding non-affiliated holders, would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.

   After the effective date of this offering, we intend to file a registration
statement on Form S-8 to register up to approximately            shares of
common stock reserved for issuance under our stock option plans and our
employee stock purchase plan. That registration statement will become effective
automatically upon filing. After the filing of a registration statement on Form
S-8, shares issued under our stock option plans and our employee stock purchase
plan 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
2,876,754 shares of outstanding common stock will have rights to require us to
register their shares for future sale. These holders and holders of
approximately 2,301,400 shares of common stock have the right to participate in
any registration we undertake on our own (except a registration of shares in
connection with an employee benefit plan or merger).

                                       60
<PAGE>

                                  UNDERWRITING

   The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed with SonicWALL, Inc., subject to the
terms and conditions of the Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
prospectus is a part), to purchase from SonicWALL, Inc. the aggregate number of
shares of common stock set forth opposite their names below:

<TABLE>
<CAPTION>
                                                                          Number
                                                                            of
      Underwriter                                                         Shares
      -----------                                                         ------
   <S>                                                                    <C>
   Bear, Stearns & Co. Inc. .............................................
   Hambrecht & Quist LLC.................................................
   Thomas Weisel Partners LLC............................................
     Total...............................................................
</TABLE>

   The nature of the respective obligations of the underwriters is such that
all of the shares of common stock (other than shares of common stock covered by
the over-allotment option described below) must be purchased if any are
purchased. Those obligations are subject, however, to various conditions,
including the approval of certain matters by counsel. We and certain selling
shareholders have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Act, and, where such
indemnification is unavailable, to contribute to payments that the underwriters
may be required to make in respect of such liabilities.

   We have been advised that the underwriters propose to offer the shares of
common stock directly to the public initially at the public offering price set
forth on the cover page of this prospectus and to certain selected dealers at
such price less a concession not to exceed $     per share, that the
underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $     per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed.

   Certain selling shareholders have granted to the underwriters an option to
purchase in the aggregate up to               additional shares of common stock
to be sold in this offering at the public offering price less the underwriting
discount set forth on the cover page of this prospectus, solely to cover over-
allotments, if any. The option may be exercised in whole or in part at any time
within 30 days after the date of this prospectus. To the extent the option is
exercised, the underwriters will be severally committed, subject to certain
conditions, including the approval of certain matters by counsel, to purchase
the additional shares of common stock in proportion to their respective
purchase commitments as indicated in the preceding table.

   The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by the selling shareholders. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares.

<TABLE>
<CAPTION>
                                                                  No      Full
                                                               Exercise Exercise
                                                               -------- --------
   <S>                                                         <C>      <C>
   Per share..................................................   $        $
   Total......................................................   $        $
</TABLE>

   The offering of the shares is made for delivery, when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

   The underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of common stock offered hereby for sale to
certain directors, officers, other employees, business

                                       61
<PAGE>

affiliates and related persons of SonicWALL, Inc. who have expressed an
interest in purchasing shares. The number of shares available for sale to the
general public will be reduced to the extent any reserved shares are purchased.
Any reserved shares not so purchased will be offered by the underwriters on the
same basis as the other shares offered hereby.

   SonicWALL, Inc. and our executive officers, directors and our current
shareholders, who own in the aggregate     shares of common stock, have agreed
that, subject to certain limited exceptions, without the prior written consent
of Bear, Stearns & Co. Inc., they will not, directly or indirectly, offer,
sell, contract to sell, grant any option to purchase, pledge or otherwise
dispose of, or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
beneficially owned by them during the 180 day period following the date of this
prospectus.

   Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined
through negotiations among SonicWALL, Inc. and the representatives of the
underwriters. Among the factors considered in making such determination were
our financial and operating history and condition, market valuations of other
companies engaged in activities similar to ours, our prospects and prospects
for the industry in which we do business in general, our management, prevailing
equity market conditions and the demand for securities considered comparable to
those of SonicWALL, Inc.

   In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock, than have been sold to them by SonicWALL, Inc. The underwriters
may elect to cover any such short position by purchasing shares of common stock
in the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages resales thereof. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.

   Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
60 filed public offerings of equity securities, of which 33 have been
completed, and has acted as a syndicate member in an additional 32 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.

                                 LEGAL MATTERS

   The validity of the common stock offered in this offering will be passed
upon for us by Manatt, Phelps & Phillips, LLP of Palo Alto, California. Jerrold
F. Petruzzelli, a partner of Manatt, Phelps & Phillips, LLP, is the Secretary
and a director of SonicWALL, Inc. and owns 100,000 shares of SonicWALL, Inc.
common stock. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Latham & Watkins, San Francisco,
California.

                                       62
<PAGE>

                                    EXPERTS

   The consolidated financial statements as of December 31, 1997, 1998 and June
30, 1999 and for each of the three years in the period ended December 31, 1998,
and the six month period ended June 30, 1999 included in this Prospectus and
the financial statement schedules included in the Registration Statement have
been so included in reliance on PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting .

                      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 example, the descriptions in the
prospectus regarding the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. 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 SonicWALL, Inc., that file electronically with the SEC.

                                       63
<PAGE>

                                SONICWALL, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Accountants.......................................... F-2

Consolidated Balance Sheets................................................ F-3

Consolidated Statements of Operations...................................... F-4

Consolidated Statements of Shareholders' Equity (Deficit).................. F-5

Consolidated Statements of Cash Flows...................................... F-6

Notes to Consolidated Financial Statements................................. F-7
</TABLE>


                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
SonicWALL, Inc.

   In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
SonicWALL, Inc. and its subsidiary at December 31, 1997 and 1998 and June 30,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 and the six month period
ended June 30, 1999, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
August 25, 1999

                                      F-2
<PAGE>

                                SONICWALL, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                    Pro Forma
                                          December 31,    June    Shareholders'
                                          -------------    30,       Equity
                                           1997   1998    1999    June 30, 1999
                                          ------ ------  -------  -------------
<S>                                       <C>    <C>     <C>      <C>
                 ASSETS
Current Assets:
  Cash and cash equivalents.............  $  787 $1,051  $ 6,769
  Accounts receivable, net of allowance
   for doubtful accounts of $121, $193,
   and $326.............................     564    677    1,839
  Inventories...........................     351    331      649
  Deferred income taxes.................     277    366    1,743
  Prepaid expenses and other current
   assets...............................     301     31       69
                                          ------ ------  -------
   Total current assets.................   2,280  2,456   11,069
Property and equipment, net.............      55    107      187
Other assets............................      39     21       21
                                          ------ ------  -------
     Total assets.......................  $2,374 $2,584  $11,277
                                          ====== ======  =======
LIABILITIES, REDEEMABLE PREFERRED STOCK
   AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Accounts payable......................  $  663 $  549  $   836
  Accrued payroll and related benefits..     157    145      638
  Other accrued liabilities ............     310    748    1,059
  Deferred revenue......................     684  1,512    2,576
  Income taxes payable..................      95    309      879
                                          ------ ------  -------
   Total current liabilities............   1,909  3,263    5,988
                                          ------ ------  -------
Redeemable Series A convertible
 preferred stock, no par value;
 redemption and liquidation value of
 $5,000, 1,438,377 shares issued and
 outstanding............................     --     --     4,971     $   --
Commitments and contingencies (Note 9)..
Shareholders' Equity (Deficit):
  Preferred stock, no par value;
   10,000,000 shares authorized.........     --     --       --          --
  Common stock, no par value;
   200,000,000 shares authorized;
   8,461,100, 16,272,164 and
   16,723,840 shares issued and
   outstanding..........................      12    290    3,499       8,470
  Deferred stock compensation...........     --      (6)  (1,994)     (1,994)
  Notes receivable from shareholders....     --    (230)    (492)       (492)
  Retained earnings (accumulated
   deficit).............................     453   (733)    (695)       (695)
                                          ------ ------  -------     -------
   Total shareholders' equity
    (deficit)...........................     465   (679)     318     $ 5,289
                                          ------ ------  -------     -------
     Total liabilities, redeemable
      preferred stock and shareholders'
      equity (deficit)..................  $2,374 $2,584  $11,277
                                          ====== ======  =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
<PAGE>

                                SONICWALL, INC.

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

<TABLE>
<CAPTION>
                                       Year Ended           Six Months Ended
                                      December 31,              June 30,
                                  -----------------------  ------------------
                                   1996    1997    1998       1998      1999
                                  ------  ------  -------  ----------- ------
                                                           (unaudited)
<S>                               <C>     <C>     <C>      <C>         <C>
Revenue
  Internet Security.............. $  --   $  250  $ 2,349    $  405    $5,474
  Ethernet.......................  9,356   9,092    5,166     2,901     1,216
                                  ------  ------  -------    ------    ------
    Total revenue................  9,356   9,342    7,515     3,306     6,690
                                  ------  ------  -------    ------    ------

Cost of revenue
  Internet Security..............    --      225    1,035       375     1,475
  Ethernet.......................  5,915   4,617    2,273     1,277       523
                                  ------  ------  -------    ------    ------
    Total cost of revenue........  5,915   4,842    3,308     1,652     1,998
                                  ------  ------  -------    ------    ------
Gross margin.....................  3,441   4,500    4,207     1,654     4,692
                                  ------  ------  -------    ------    ------
Operating expenses
  Research and development.......  1,048   1,983    1,739       847       962
  Sales and marketing............  1,665   2,468    2,907     1,425     1,854
  General and administrative.....    432     644      753       310       694
  Deferred stock compensation....    --      --        42       --        783
                                  ------  ------  -------    ------    ------
    Total operating expenses.....  3,145   5,095    5,441     2,582     4,293
                                  ------  ------  -------    ------    ------
Income (loss) from operations....    296    (595)  (1,234)     (928)      399
Other income (expense), net......     22      29       54        22       132
                                  ------  ------  -------    ------    ------
Income (loss) before income
 taxes...........................    318    (566)  (1,180)     (906)      531
Benefit from (provision for)
 income taxes....................   (350)     99       (6)      --       (493)
                                  ------  ------  -------    ------    ------
Net income (loss)................ $  (32) $ (467) $(1,186)   $ (906)   $   38
                                  ======  ======  =======    ======    ======
Net income (loss) per share
  Basic.......................... $  --   $(0.06) $ (0.11)   $(0.11)   $  --
                                  ======  ======  =======    ======    ======
  Diluted........................ $  --   $(0.06) $ (0.11)   $(0.11)   $  --
                                  ======  ======  =======    ======    ======
Shares used in computing net
 income (loss) per share
  Basic..........................  8,460   8,461   11,251     8,461    16,322
                                  ======  ======  =======    ======    ======
  Diluted........................  8,460   8,461   11,251     8,461    19,320
                                  ======  ======  =======    ======    ======
Pro forma net income per share
  Basic..........................                                      $  --
                                                                       ======
  Diluted........................                                      $  --
                                                                       ======
Shares used in computing pro
 forma net income per share
  Basic..........................                                      18,420
                                                                       ======
  Diluted........................                                      19,320
                                                                       ======
</TABLE>

                                      F-4
<PAGE>

                                SONICWALL, INC.

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                 Notes                    Retained       Total
                            Common Stock       Receivable    Deferred     Earnings   Shareholders'
                          ------------------      From        Stock     (Accumulated    Equity
                            Shares    Amount  Shareholders Compensation   Deficit)     (Deficit)
                          ----------  ------  ------------ ------------ ------------ -------------
<S>                       <C>         <C>     <C>          <C>          <C>          <C>
Balance at December 31,
 1995...................   9,386,004  $   81     $ (70)      $   --       $   952       $   963
Repurchase of common
 stock..................    (934,880)    (70)       70           --           --            --
Issuance of common
 stock..................       9,976       1       --            --           --              1
Net loss................         --      --        --            --           (32)          (32)
                          ----------  ------     -----       -------      -------       -------
Balance at December 31,
 1996...................   8,461,100      12       --            --           920           932
Net loss................         --      --        --            --          (467)         (467)
                          ----------  ------     -----       -------      -------       -------
Balance at December 31,
 1997...................   8,461,100      12       --            --           453           465
Issuance of common
 stock..................   7,811,064     230      (230)          --           --            --
Deferred stock
 compensation...........         --       48       --            (48)         --            --
Amortization of deferred
 stock compensation.....         --      --        --             42          --             42
Net loss................         --      --        --            --        (1,186)       (1,186)
                          ----------  ------     -----       -------      -------       -------
Balance at December 31,
 1998...................  16,272,164     290      (230)           (6)        (733)         (679)
Issuance of common
 stock..................     451,676     438      (300)          --           --            138
Payments of notes
 receivable from
 shareholders...........         --      --         38           --           --             38
Deferred stock
 compensation...........         --    2,771       --         (2,771)         --            --
Amortization of deferred
 stock compensation.....         --      --        --            783          --            783
Net income..............         --      --        --            --            38            38
                          ----------  ------     -----       -------      -------       -------
Balance at June 30,
 1999...................  16,723,840  $3,499     $(492)      $(1,994)     $  (695)      $   318
                          ==========  ======     =====       =======      =======       =======
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
<PAGE>

                                SONICWALL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                        Year Ended           Six Months Ended
                                       December 31,              June 30,
                                   -----------------------  -------------------
                                    1996    1997    1998       1998      1999
                                   ------  ------  -------  ----------- -------
                                                            (unaudited)
<S>                                <C>     <C>     <C>      <C>         <C>
Cash flows from operating
 activities:
  Net income (loss)..............  $ (32)  $ (467) $(1,186)    $(906)   $    38
  Adjustments to reconcile net
   income (loss) to net cash
   provided by (used in)
   operating activities:
   Depreciation..................      78      63       55         9         22
   Provision for allowance for
    doubtful accounts............     --       52      122        21        133
   Amortization of deferred stock
    compensation.................     --      --        42       --         783
   Changes in operating assets
    and liabilities:
     Accounts receivable.........     488    (252)    (235)      (29)    (1,295)
     Inventories.................    (206)  1,031       20        27       (318)
     Prepaid expenses and other
      current assets.............     (31)   (235)     270        85        (38)
     Deferred income taxes.......     (73)     38      (89)      --      (1,377)
     Other assets................     --      (19)      18        19        --
     Accounts payable............    (407)   (150)    (114)      (91)       287
     Accrued payroll and related
      benefits...................     --      107      (12)      (97)       493
     Other accrued liabilities...      69     (43)     438       638        311
     Deferred revenue............   1,046    (362)     828       558      1,064
     Income taxes payable........      43    (158)     214        (2)       570
                                   ------  ------  -------     -----    -------
Net cash provided by (used in)
 operating activities............     975    (395)     371       232        673
                                   ------  ------  -------     -----    -------
Cash flows from investing
 activities:
  Purchase of property and
   equipment.....................     (10)    (11)    (107)      (25)      (102)
                                   ------  ------  -------     -----    -------
Cash flows from financing
 activities:
  Proceeds from exercise of stock
   options.......................       1     --       --        --         138
  Proceeds from issuance of
   redeemable Series A
   convertible preferred stock...     --      --       --        --       4,971
  Payments of notes receivable
   from shareholders.............     (25)    157      --        --          38
  Payments under line of credit
   agreement.....................     (50)    --       --        --         --
                                   ------  ------  -------     -----    -------
Net cash provided by (used in)
 financing activities............     (74)    157      --        --       5,147
                                   ------  ------  -------     -----    -------
Net increase (decrease) in cash
 and cash equivalents............     891    (249)     264       207      5,718
Cash and cash equivalents at
 beginning of period.............     145   1,036      787       787      1,051
                                   ------  ------  -------     -----    -------
Cash and cash equivalents at end
 of period.......................  $1,036  $  787  $ 1,051     $ 994    $ 6,769
                                   ======  ======  =======     =====    =======
Supplemental disclosure of cash
 flow information:
  Cash paid for income taxes.....  $  380  $  151  $     1     $ --     $ 1,300
                                   ======  ======  =======     =====    =======
Supplemental disclosure of
 noncash investing and financing
 activities:
  Issuance of notes receivable
   upon the exercise of stock
   options.......................  $  --   $  --   $   230     $ --     $   300
                                   ======  ======  =======     =====    =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
<PAGE>

                                SONICWALL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

   SonicWALL, Inc. (the "Company") was incorporated in California in February
1991. SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise, or
SME, branch office, telecommuter and education markets. The Company's SonicWALL
solution is a high-performance, solid state appliance that provides robust,
reliable, easy-to-use and affordable Internet security. The Company's products
enable our customers to securely utilize Internet applications and services as
an integral part of their business.

  The following is a summary of the Company's significant accounting policies:

 Consolidation

   The consolidated financial statements include those of the Company and its
subsidiary. All significant intercompany accounts and transactions are
eliminated in consolidation.

 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.

 Unaudited interim results

   The accompanying statements of operations and of cash flows for the six
months ended June 30, 1998 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of these periods.
The data disclosed in the notes to the financial statements for this period is
unaudited.

 Cash and cash equivalents

   The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

 Fair value

   The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to their relatively short
maturities. The Company does not hold or issue financial instruments for
trading purposes.

 Concentration of credit risk, foreign operations and significant customers

   Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its temporary cash investments in
money market accounts and mutual funds with high credit quality financial
institutions. The Company's accounts receivable are derived from revenue earned
from customers located in the U.S. and certain foreign countries and regions,
including Europe, Canada, Japan and Australia. Sales to foreign customers for
the year ended December 31, 1996, 1997, 1998 and the six months ended June 30,
1999, all of which were

                                      F-7
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

denominated in U.S. dollars, accounted for 40%, 36%, 32% and 35% of total
revenue, respectively. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts receivable based upon
the expected collectibility of accounts receivable.

   During the year ended December 31, 1998, one customer accounted for 34% of
the Company's revenue and at December 31, 1998, this one customer accounted for
39% of total gross receivables. During the six months ended June 30, 1999, two
customers accounted for 41% of the Company's revenue and at June 30, 1999, and
two customers accounted for 70% of total gross receivables.

   The Company is dependent on third party contract manufacturers and some of
the key components in the Company's product come from single or limited sources
of supply.

 Inventories

   Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.

 Property and equipment

   Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over their estimated useful lives, which range from
three to seven years. Depreciation expense for the years ended December 31,
1996, 1997 and 1998 was $78,000, $63,000 and $55,000, respectively.
Depreciation expense for the six months ended June 30, 1999 was $22,000.

 Long-lived assets

   The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment from
the carrying value of long-lived assets, if any, based on the fair value of
such assets.

 Stock-based compensation

   The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25 ,
compensation costs is determined based on the difference, if any, on the grant
date between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock. Compensation expense is recognized over the
vesting period.

   The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
96-18.

 Revenue recognition

   Revenue is generally recognized at the time of shipment if collectibility is
probable and no significant obligations remain. Sales to distributors are
subject to agreements allowing certain rights of return, cooperative
advertising, stock balancing rights and price protection. The largest
distributor has the right to return products that have not been sold to end
users for full credit subject to a restocking fee. Revenue from sales to this

                                      F-8
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

distributor is deferred at the time of shipment and is recognized when the
distributor has sold the product to its customers. Certain other distributors
have limited rights of return which allow them to return a percentage of the
prior quarter's purchases by these distributors. Accordingly, reserves for
estimated returns and exchanges are provided at the time of shipment. These
reserves are estimated and adjusted periodically based upon historical rates of
returns and allowances, inventory levels at the distributors and other related
factors. Reserves for credits for price protection are provided at the time
price reductions are approved.

   Revenue from extended warranty programs, premium technical assistance, and
subscriptions to content filtering services is recognized ratably over the term
of the contract or subscription.

   The standard warranty provisions include technical assistance, insignificant
bug fixes and feature updates and repair or replacement guarantees for units
with product defects. The standard warranty period is one year. The estimated
costs associated with the standard warranty provisions are accrued at the time
of revenue recognition.

   The Company has co-operative advertising agreements with certain of its
distributors. These agreements allow the distributors to be reimbursed by the
Company for approved promotional activities. The amounts available for
reimbursement are related to a percentage of the distributor's eligible
purchases from the Company. The Company accrues for co-operative advertising as
the related revenue is recognized.

 Income taxes

   The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses, research and development credit carryforwards and temporary
differences. A valuation allowance is provided against deferred tax assets
unless it is more likely than not that they will be realized.

 Research and development and capitalized software development costs

   Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Technological feasibility is established upon completion of a working
model, which is typically demonstrated by initial beta shipment. Software
development costs incurred subsequent to the time a product's technological
feasibility has been established, through the time the product is available for
general release to customers, are capitalized if material. To date, software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial and accordingly have not been capitalized.

 Comprehensive income

   Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.

                                      F-9
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Computation of net income (loss) per share and pro forma net income (loss) per
 share

   The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding during the period.
Weighted average shares exclude shares subject to repurchase ("restricted
shares"). Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and
common equivalent shares outstanding during the period, if dilutive. Common
equivalent shares are composed of unvested restricted shares and incremental
common shares issuable upon the exercise of stock options and upon the
conversion of Redeemable Series A Convertible Preferred Stock.

   Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's redeemable Series A convertible preferred stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1999, or at date of original issuance, if later.

   The following table sets forth the computation of historical and pro forma
basic and diluted net income (loss) per share for the periods indicated (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                        Year Ended December       Six Months
                                                31,             Ended June 30,
                                       -----------------------  ---------------
Historical                              1996    1997    1998     1998    1999
----------                             ------  ------  -------  ------  -------
<S>                                    <C>     <C>     <C>      <C>     <C>
Numerator:
  Net income (loss)................... $  (32) $ (467) $(1,186) $ (906) $    38
                                       ------  ------  -------  ------  -------
Denominator:
  Weighted average common shares
   outstanding........................  8,460   8,461   11,251   8,461   16,380
  Weighted average unvested common
   shares subject to repurchase.......    --      --       --      --        58
                                       ------  ------  -------  ------  -------
  Denominator for basic calculation...  8,460   8,461   11,251   8,461   16,322
  Common stock equivalents............    --      --       --      --     2,998
                                       ------  ------  -------  ------  -------
  Denominator for diluted
   calculation........................  8,460   8,461   11,251   8,461   19,320
Basic net income (loss) per share..... $  --   $(0.06) $ (0.11) $(0.11) $   --
                                       ======  ======  =======  ======  =======
Diluted net income (loss) per share... $  --   $(0.06) $ (0.11) $(0.11) $   --
                                       ======  ======  =======  ======  =======
<CAPTION>
Pro forma
---------
<S>                                    <C>     <C>     <C>      <C>     <C>
Shares used above                                                        16,322
  Pro forma adjustment to reflect
   weighted effect of assumed
   conversion of redeemable
   convertible preferred stock........                                    2,098
                                                                        -------
  Shares used in computing pro forma
   basic net income per share.........                                   18,420
                                                                        =======
  Pro forma basic net income per
   share..............................                                  $   --
                                                                        =======
Pro forma diluted.....................                                   19,320
                                                                        =======
  Pro forma diluted net income per
   share..............................                                  $   --
                                                                        =======
</TABLE>

                                      F-10
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Outstanding options to purchase 2,396,880, 2,494,880, 1,163,676 and
1,760,000 shares of common stock at an average exercise price of $0.09, $0.10,
$0.13 and $0.48 per share have not been considered in the computation of
diluted net loss per share for the years ended December 31, 1996, 1997 and 1998
and the six months ended June 30, 1999, respectively, as their effect would
have been anti-dilutive.

   The accompanying pro forma shareholders' equity at June 30, 1999 reflects
the conversion of the redeemable Series A convertible preferred stock at June
30, 1999. The conversion of such preferred stock is automatic upon the
completion of an initial public offering price of at least $5.00 per share and
with proceeds of at least $15,000,000.

   In May 1999, the Company issued from the 1998 Plan 300,000 shares upon the
exercise of certain stock options. At June 30, 1999, 293,750 common shares are
subject to repurchase at the option of the Company. These shares vest ratably
over a 48 month period.

Note 2--Balance Sheet Components:

<TABLE>
<CAPTION>
                                                           December
                                                              31,
                                                          ------------  June 30,
                                                          1997   1998     1999
                                                          -----  -----  --------
                                                             (in thousands)
   <S>                                                    <C>    <C>    <C>
   Property and equipment:
     Equipment........................................... $ 299  $ 161   $ 263
     Leasehold improvements..............................     5      5       5
     Software............................................    49     53      53
     Transportation......................................    38     94      94
                                                          -----  -----   -----
                                                            391    313     415
     Less: accumulated depreciation......................  (336)  (206)   (228)
                                                          -----  -----   -----
                                                          $  55  $ 107   $ 187
                                                          =====  =====   =====
   Inventories:
     Raw materials....................................... $  82  $  49   $ 113
     Work-in-process.....................................     2     13      32
     Finished goods......................................   267    269     504
                                                          -----  -----   -----
                                                          $ 351  $ 331   $ 649
                                                          =====  =====   =====
</TABLE>

Note 3--Line of Credit:

   At June 30, 1999, the Company had a line-of-credit agreement with a bank
which allows the Company to borrow up to $1,000,000. Borrowings under the line
of credit bear interest at the bank's reference rate plus 1.75% (which equaled
9.5% at June 30, 1999), and are secured primarily by accounts receivable,
inventories, and property and equipment. The line of credit can be utilized at
a percentage of eligible receivables, as defined in the loan agreement. The
agreement contains certain covenants requiring the Company to maintain certain
levels of profitability, minimum tangible net worth, working capital and other
financial ratios and prohibits the payment of cash or stock dividends on common
stock over the life of the agreement. This line of credit will be in force
until terminated by either party by notice of not less than 30 days prior to
the effective date of such termination. No amounts were outstanding under the
line of credit at June 30, 1999.

Note 4--Stock Option Plan:

   The Company's Stock Option Plans (the "Plans"), as amended, authorize the
Board of Directors to grant incentive stock options and nonstatutory stock
options to employees, directors and consultants to purchase up to

                                      F-11
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

a total of 5,958,324 shares of the Company's common stock. Under the Plans,
incentive stock options are granted at an exercise price that is not to be less
than 100% of the fair market value of the Company's common stock on the date of
grant, as determined by the Company's Board of Directors. Nonqualified stock
options are granted at a price that is not to be less than 85% of the fair
market value of the common stock on the date of grant, as determined by the
Board of Directors.

   Generally, options granted under the Plans are exercisable for a period of
ten years after the date of grant, and vest over four years.

   The following table summarizes option activity under the stock option plans:

<TABLE>
<CAPTION>
                                                    Options Outstanding
                                               -------------------------------
                                                                      Weighted
                                                                      Average
                                   Available                Exercise  Exercise
                                   for Grant     Shares      Price     Price
                                   ----------  ----------  ---------- --------
   <S>                             <C>         <C>         <C>        <C>
   Balance at December 31, 1996...    550,000   2,396,880  $0.08-0.09  $0.09
   Granted........................   (204,000)    204,000  $     0.25  $0.25
   Exercised......................        --          --   $      --   $ --
   Canceled.......................    106,000    (106,000) $     0.08  $0.08
                                   ----------  ----------  ----------  -----
   Balance at December 31, 1997...    452,000   2,494,880  $0.08-0.25  $0.10
   Authorized.....................  2,000,000         --   $      --   $ --
   Granted........................ (1,015,000)  1,015,000  $     0.13  $0.13
   Exercised......................        --   (2,134,880) $     0.09  $0.09
   Canceled.......................    211,324    (211,324) $0.08-0.25  $0.19
                                   ----------  ----------  ----------  -----
   Balance at December 31, 1998...  1,648,324   1,163,676  $0.08-0.25  $0.13
   Authorized.....................    958,324
   Granted........................ (1,058,000)  1,058,000  $0.50-1.50  $1.07
   Exercised......................        --     (451,676) $0.08-1.50  $0.97
   Canceled.......................     10,000     (10,000) $0.13-0.25  $0.19
                                   ----------  ----------  ----------  -----
   Balance at June 30, 1999.......  1,558,648   1,760,000  $0.08-1.50  $0.48
                                   ==========  ==========  ==========  =====
</TABLE>

   The following table summarizes information regarding stock options
outstanding at June 30, 1999:

<TABLE>
<CAPTION>
                                                                    Options
                                      Options Outstanding         Exercisable
                                ------------------------------- ----------------
                                                     Weighted
                                Weighted             Average            Weighted
                                Average             Remaining           Average
                                Exercise           Contractual          Exercise
   Exercise Prices               Price    Shares   Life (Years) Shares   Price
   ---------------              -------- --------- ------------ ------- --------
   <S>                          <C>      <C>       <C>          <C>     <C>
   $0.08.......................  $0.08      82,000     6.08      76,976  $0.08
   $0.13.......................  $0.13     960,000     9.12     272,168  $0.13
   $0.25.......................  $0.25      70,000     7.61      58,304  $0.25
   $0.50-$0.75.................  $0.73     253,000     9.82      18,706  $0.72
   $1.00-$1.50.................  $1.31     395,000     9.98      11,344  $1.22
                                 -----   ---------     ----     -------  -----
                                 $0.48   1,760,000     9.21     437,498  $0.19
                                 =====   =========     ====     =======  =====
</TABLE>

   For financial reporting purposes, the Company has determined that the deemed
fair value on the date of grant of certain employee stock options granted in
1998 and 1999 was in excess of the exercise price of the options. The
difference of $48,000 and $2,771,000 in 1998 and 1999, respectively is
considered deferred stock compensation and is amortized against income over the
vesting period of the options.

                                      F-12
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Pro forma stock compensation

   The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the Company's stock
option plan in the accompanying statements of operations. Had compensation cost
for the Company's stock option plan been determined based on the fair market
value at the grant dates for stock options granted in 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss would have been
changed to the pro forma amounts indicated below, in thousands:

<TABLE>
<CAPTION>
                                               Year Ended December
                                                       31,            Six Months
                                               ---------------------  Ended June
                                               1996   1997    1998     30, 1999
                                               -----  -----  -------  ----------
   <S>                                         <C>    <C>    <C>      <C>
   Net income (loss)--as reported............. $ (32) $(467) $(1,186)    $38
   Net income (loss)--pro forma............... $(189) $(471) $(1,194)    $26
</TABLE>

   The pro forma amounts reflect compensation expense related to 1996, 1997,
1998 and 1999 stock option grants only. In future years, the annual
compensation expense will increase relative to the fair value of the stock
options granted in those future years. The weighted average fair value of the
options granted in 1996, 1997, 1998 and the six months ended June 30, 1999 of
$0.02, $0.07, $0.03 and $0.20, respectively.

   The fair value of each grant is estimated on the date of grant using the
minimum value method with the following assumptions:

<TABLE>
<CAPTION>
                                   1996     1997        1998          1999
                                  -------  -------  ------------  -------------
   <S>                            <C>      <C>      <C>           <C>
   Expected volatility...........       0%       0%            0%             0%
   Risk-free interest rate.......     6.0%     6.0% 4.5% to 5.64% 4.79% to 5.83%
   Expected life................. 5 years  5 years       5 years        4 years
   Dividend yield................       0%       0%            0%             0%
</TABLE>

Note 5--Redeemable Series A Convertible Preferred Stock:

   In February 1999, the Company issued 1,438,377 shares of redeemable Series A
convertible preferred stock (Preferred Stock) at $3.48 per share for net
proceeds of $4,971,000.

   Conversion--Each share of Preferred Stock is convertible at the option of
the holder into two shares of common stock based on a conversion price of
$1.74. This conversion price is subject to adjustment in certain circumstances
including certain issuances of common stock at below the conversion price.
Preferred Stock will automatically convert into common stock in the event of an
underwritten public offering of the Company's common stock with proceeds of at
least $15,000,000, and at a price per share of not less than $5.00.

   Voting--Preferred Stock has voting rights, on an as-if converted basis,
identical to common stock.

   Dividends--Holders of the Preferred Stock are entitled to receive
noncumulative dividends in preference to any dividend on the common stock at
the rate of 8 percent per share per annum, when and if declared by the Board of
Directors.

   Liquidation--In the event of liquidation, the holders of Preferred Stock are
entitled to receive $3.48 per share, plus any dividends declared, but unpaid on
such shares. If assets and funds are insufficient to meet the liquidation
preference of the Preferred Stock, such assets and funds will be distributed
ratably between the

                                      F-13
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

holders of the Preferred Stock. Any surplus assets or funds will then be
distributed ratably between holders of the Preferred Stock on an as-converted
common stock basis and the holders of the common stock together until the
holders of the Preferred Stock have received a total of $12.17 per share.
Thereafter holders of common stock share ratably all remaining assets.

   Redemption--Anytime after February 17, 2004, all outstanding shares of the
Preferred Stock are eligible to be redeemed in full upon a written notice by at
least 67% of the holder's of the outstanding Preferred Stock in two
installments the first 75 days followings the notice of redemption and the
second installment one year after the first redemption. In the event of
redemption, each holder of the Preferred Stock would be entitled to receive
$3.48 per share, plus all unpaid dividends on such shares, which have been
declared.

Note 6--Notes Receivable from Shareholders:

   In December 1998, the Company issued notes receivable in connection with the
exercise of 2,134,880 shares of incentive stock options held by two
shareholders. The full recourse notes totaling $192,000 each, accrue interest
at a rate of 8% per annum. Principal and accrued interest shall be paid one-
fourth on the first anniversary date of the note, and one-fourth every year
thereafter for a total of four years.

   In May 1999, the Company issued a full recourse note for $300,000 in
connection with the exercise of 300,000 shares of incentive stock options by
one shareholder. The note accrues interest at a rate of 8% per annum. Principal
and accrued interest shall be paid one-fourth on the first anniversary date of
the note, and one-fourth every year thereafter for a total of four years.

Note 7--Income Taxes:

   The (benefit from) provision for income taxes consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                     Year Ended       Six Months
                                                    December 31,        Ended
                                                   -----------------   June 30,
                                                   1996  1997   1998     1999
                                                   ----  -----  ----  ----------
   <S>                                             <C>   <C>    <C>   <C>
   Current tax expense (benefit):
     Federal...................................... $336  $(138) $ 94   $ 1,620
     State........................................   87      1     1       251
                                                   ----  -----  ----   -------
                                                    423   (137)   95     1,871
                                                   ----  -----  ----   -------
   Deferred tax expense (benefit):
     Federal......................................  (65)    32   (89)   (1,218)
     State........................................   (8)     6    --      (160)
                                                   ----  -----  ----   -------
                                                    (73)    38   (89)   (1,378)
                                                   ----  -----  ----   -------
                                                   $350  $ (99) $  6   $   493
                                                   ====  =====  ====   =======
</TABLE>

                                      F-14
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Deferred tax assets comprise the following (in thousands):

<TABLE>
<CAPTION>
                                                          December 31,
                                                          ------------  June 30,
                                                          1997   1998     1999
                                                          ------------  --------
   <S>                                                    <C>   <C>     <C>
   Inventory reserves.................................... $  77 $   93   $  105
   Deferred revenue......................................    10    560      882
   Other reserves & accruals.............................   190    278    1,039
                                                          ----- ------   ------
                                                            277    931    2,026
   Valuation allowance...................................   --    (565)    (283)
                                                          ----- ------   ------
                                                          $ 277 $  366   $1,743
                                                          ===== ======   ======
</TABLE>

   In assessing the realizability of deferred tax assets management has
allocated, to the extent the Company does not have carryback rights, a
valuation allowance at December 31, 1997 and 1998. The ultimate realization of
deferred tax assets at June 30, 1999 is dependent upon the generation of future
taxable income during the periods in which temporary differences representing
net future deductible amounts become deductible.

Note 8--Segment Reporting

   The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No.131 requires publicly held
companies to report financial and other information about key revenue segments
of the entity for which such information is available and is utilized by the
chief operating decision maker. The Company conducts its business within one
business segment.

   Revenue by geographic region is presented as follows (in thousands):

<TABLE>
<CAPTION>
                                         Year Ended December   Six Months Ended
                                                 31,               June 30,
                                         -------------------- ------------------
                                          1996   1997   1998     1998      1999
                                         ------ ------ ------ ----------- ------
                                                              (unaudited)
   <S>                                   <C>    <C>    <C>    <C>         <C>
   United States........................ $5,623 $5,986 $5,080   $2,203    $4,354
   Other................................  3,733  3,356  2,435    1,103     2,336
                                         ------ ------ ------   ------    ------
   Total................................ $9,356 $9,342 $7,515   $3,306    $6,690
                                         ====== ====== ======   ======    ======
</TABLE>

   Revenue to any one foreign country did not exceed 10% of total revenue in
1996, 1997 and 1998. Revenue attributed to Japan accounted for 17% of total
revenue for the six months ended June 30, 1999.

Note 9--Commitments and Contingencies:

   The Company leases its facility under an operating lease which expires in
2001. Future minimum rental payments under the lease are $234,000 in 1999,
$243,000 in 2000 and $167,000 in 2001. Rent expense for the years ended
December 31, 1997 and 1998 was $118,000 and $163,000, respectively. Rent
expense for the six months ended June 30, 1999 was $115,000.

   The Company is involved in various threatened legal actions arising in the
ordinary course of business. Management believes that the outcome of these
actions will not have a material adverse effect on the Company's financial
position or results of operations.

                                      F-15
<PAGE>

                                SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 10--Subsequent Events

 Stock split

   Share information for all periods presented has been retroactively adjusted
to reflect a 2 for 1 stock split effected on August 25, 1999.

 1999 Employee Stock Purchase Plan

   The 1999 employee stock purchase plan was adopted by the board of directors
in August 1999. A total of 250,000 shares of common stock have been reserved
for issuance under the plan.

                                      F-16
<PAGE>

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

 You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that con-
tained in this prospectus. We are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are permit-
ted. The information contained in this prospectus is accurate only as of the
date of this prospectus, regardless of the time of delivery of this prospectus
or of any sale of our common stock.

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

                               TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   6
Cautionary Note on Forward-Looking Statements............................  16
Use of Proceeds..........................................................  17
Dividend Policy..........................................................  17
Capitalization...........................................................  18
Dilution.................................................................  19
Selected Consolidated Financial Data.....................................  20
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  22
Business.................................................................  30
Management...............................................................  44
Certain Transactions.....................................................  52
Principal and Selling Shareholders.......................................  54
Description of Capital Stock.............................................  56
Shares Eligible for Future Sale..........................................  59
Underwriting.............................................................  61
Legal Matters............................................................  62
Experts..................................................................  63
Where You Can Find More Information......................................  63
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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

 Until     , 1999 (25 days after the date of this prospectus), all dealers ef-
fecting transactions in the common stock offered hereby, whether or not partic-
ipating in this distribution, may be required to deliver a prospectus. This is
in addition to the obligations of dealers to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

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

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

                                        Shares

                           [LOGO OF SONICWALL, INC.]

                                  Common Stock

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

                                   PROSPECTUS

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

                            Bear, Stearns & Co. Inc.

                               Hambrecht & Quist

                           Thomas Weisel Partners LLC

                                August   , 1999

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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............... $12,788
     NASD filing fee...................................................       *
     Nasdaq National Market listing fee................................       *
     Blue Sky fees and expenses........................................       *
     Printing and engraving expenses...................................       *
     Legal fees and expenses ..........................................       *
     Accounting fees and expenses......................................       *
     Transfer Agent and Registrar fees.................................       *
     Miscellaneous expenses............................................       *
                                                                        -------
       Total........................................................... $     *
                                                                        =======
</TABLE>
    ----------
    *To be filed by amendment.

Item 14. Indemnification of Directors and Officers

   Section 317 of the California General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Act. Article V of the
Registrant's Amended and Restated Articles of Incorporation, to be filed and
effective upon completion of this offering (Exhibit 3.1 hereto), provides for
indemnification of its directors and officers to the maximum extent permitted
by the California General Corporation Law, and Article VI of the Registrant's
Bylaws, to be effective upon completion of this offering (Exhibit 3.2 hereto),
provides for indemnification of its directors, officers, employees and other
agents to the maximum extent permitted by the California General Corporation
Law. In addition, the Registrant has entered into Indemnification Agreements
(Exhibit 10.4 hereto) with its directors and officers containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the California General Corporation Law. The indemnification
agreements may require the Registrant, among other things, to indemnify its
directors and officers against certain liabilities that may arise by reason of
their status or service as directors of officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms. Reference is also made to Section 7 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, which indemnifies
officers and directors of the Registrant against certain liabilities.

Item 15. Recent Sales of Unregistered Securities

   Since August 1, 1996, SonicWALL has issued and sold the following
securities:

     (1) SonicWALL issued and sold 2,640,064 shares of its common stock to
  officers, directors, employees and consultants for an aggregate purchase
  price of $609,643 pursuant to the exercise of options under its 1994 Stock
  Option Plan and 1998 Stock Option Plan.

     (2) On August 10, 1998, SonicWALL, Inc. issued an aggregate of 5,426,186
  shares of its common stock to Ravi Anne, Sreekanth Ravi, Sudhakar Ravi and
  Bruce Wonnacott, each a general partner of AckFin, a California general
  partnership, in consideration of the purchase of all of the general partner
  interests of AckFin and $150,000 cash.

                                     II-1
<PAGE>

     (3) On December 29, 1998, SonicWALL, Inc. issued an aggregate of 250,000
  shares of its common stock for an aggregate purchase price of $37,500 to
  several investors.

     (4) On February 19, 1999, SonicWALL, Inc. issued an aggregate of
  1,438,377 shares of its redeemable Series A convertible preferred stock for
  an aggregate purchase price of $4,999,998.39 to several investors.

   The issuances described in paragraph 1 were deemed exempt from registration
under the Act in reliance upon Rule 701 promulgated under the Act. The
issuances of the securities described in paragraphs 2 through 4 were deemed to
be exempt from registration under the Act in reliance on Section 4(2) of the
Act as transactions by an issuer not involving any public offering. In
addition, the recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with SonicWALL, Inc., to information about SonicWALL, Inc.

   No underwriters were used in connection with these sales and issuances.

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
<CAPTION>
 Number                               Description
 ------                               -----------
 <C>     <S>
 1.1*    Form of Underwriting Agreement.

 3.1     Registrant's Amended and Restated Articles of Incorporation.

 3.2     Registrant's Restated Bylaws.

 4.1*    Registrant's specimen common stock certificate.

 4.2     Investor Rights Agreement dated February 19, 1999 by and between
          Registrant and the investors named therein.

 5.1*    Legal opinion of Manatt, Phelps & Phillips, LLP, counsel for the
          Registrant.

 10.1    Registrant's 1994 Stock Option Plan.

 10.2    Registrant's 1998 Stock Option Plan.

 10.3    Registrant's 1999 Employee Stock Option Plan.

 10.4    Form of Indemnity Agreement entered into by Registrant with each of
          its executive officers and directors.

 10.5    Loan and Security Agreement dated May 26, 1995 between Registrant and
          Comerica Bank.

 10.6++  OEM License Agreement dated January 27, 1999 between Registrant and
          Com21, Incorporated.

 10.7++  OEM Purchase Agreement dated January 5, 1999 between Registrant and
          Ramp Networks.

 10.8++  Distribution Agreement dated February 9, 1999 between Registrant and
          Tech Data Product Management, Inc.

 10.9++  Distribution Agreement dated July 5, 1998 between Registrant and
          Sumitomo Metal Systems Development Co.

 10.10++ Distribution Agreement dated November 11, 1992 between Registrant and
          Ingram Micro, Inc.

 10.11   Agreement of Sublease dated as of October 26, 1998 between Registrant
          and AMP Incorporated.

 23.1    Consent of Independent Accountants.

 23.2*   Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).

 24.1    Power of Attorney (contained on signature page).

 27.1    Financial Data Schedule.

</TABLE>

                                     II-2
<PAGE>

----------
 *To be filed by amendment.
++Confidential treatment has been requested for portions of this exhibit. The
     omitted material has been separately filed with the Securities and
     Exchange Commission.

   (b) Financial Statement Schedules

   Schedule II--Valuation and Qualifying Accounts and Reserves

   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 Act 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. If 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 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 Act, 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 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 Act, 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-3
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 27th day of August, 1999.

                                          SonicWALL, Inc.

                                                   /s/ Sreekanth Ravi
                                          By:__________________________________
                                                      Sreekanth Ravi,
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sreekanth Ravi and Michael J. Sheridan jointly
and severally, his attorneys-in-fact, each with the power of substitution and
each with power to act alone, for him in any and all capacities, to sign any
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereto ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below:

<TABLE>
<CAPTION>
              Signature                           Title                  Date
              ---------                           -----                  ----

 <C>                                  <S>                           <C>
 /s/ Sreekanth Ravi                   President, Chief Executive    August 27, 1999
 ____________________________________  Officer and Director
 Sreekanth Ravi                        (Principal Executive
                                       Officer)

 /s/ Sudhakar Ravi                    Vice President, Engineering   August 27, 1999
 ____________________________________ and Director
 Sudhakar Ravi

 /s/ Robert M. Williams               Director                      August 27, 1999
 ____________________________________
 Robert M. Williams

 /s/ David Shrigley                   Director                      August 27, 1999
 ____________________________________
 David Shrigley

 /s/ Jerrold F. Petruzzelli           Secretary and Director        August 27, 1999
 ____________________________________
 Jerrold F. Petruzzelli

 /s/ Michael J. Sheridan              Vice President, Finance and   August 27, 1999
 ____________________________________  Chief Financial Officer
 Michael J. Sheridan                   (Principal Financial and
                                       Accounting Officer)
</TABLE>

                                      II-4
<PAGE>

                                                                      Schedule I

                       Report of Independent Accountants

   In connection with our audits of the consolidated financial statements of
SonicWall, Inc. as of December 31, 1997, 1998 and June 30, 1999, and for each
of the three years in the period ended December 31, 1998 and the six month
period ended June 30, 1999, which financial statements are included in the
Prospectus, we have also audited the financial statement schedule listed in
Item 16 herein.

   In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.

/s/ PricewaterhouseCoopers LLP

San Jose, California
August 25, 1999
<PAGE>

                                                                     Schedule II

                                SonicWALL, Inc.
                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                   Balance at Charged to             Balance at
                                   Beginning   Cost and   Write-off    End of
                                   of Period   Expenses  of Accounts   Period
                                   ---------- ---------- ----------- ----------
<S>                                <C>        <C>        <C>         <C>
Year ended December 31, 1997
Allowance for doubtful accounts...    $ 69       $ 52       $ --        $121

Year ended December 31, 1998
Allowance for doubtful accounts...     121        122         50         193

Six months ended June 30, 1999
Allowance for doubtful accounts...     193        133         --         326
</TABLE>
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Number                               Description
 ------                               -----------
 <C>     <S>
  1.1*   Form of Underwriting Agreement.

  3.1    Registrant's Amended and Restated Articles of Incorporation.

  3.2    Registrant's Restated Bylaws.

  4.1*   Registrant's specimen common stock certificate.

  4.2    Investor Rights Agreement dated February 19, 1999 by and between
          Registrant and the investors named therein.

  5.1*   Opinion of Manatt, Phelps & Phillips, LLP as to the legality of the
          shares.

 10.1    Registrant's 1994 Stock Option Plan.

 10.2    Registrant's 1998 Stock Option Plan.

 10.3    Registrant's 1999 Employee Stock Option Plan.

 10.4    Form of Indemnity Agreement entered into by Registrant with each of
          its executive officers and directors.

 10.5    Loan and Security Agreement dated May 26, 1995 between Registrant and
          Comerica Bank.

 10.6++  OEM License Agreement dated January 27, 1999 between Registrant and
          Com21, Incorporated.

 10.7++  OEM Purchase Agreement dated January 5, 1999 between Registrant and
          Ramp Networks.

 10.8++  Distribution Agreement dated February 9, 1999 between Registrant and
          Tech Data Product Management, Inc.

 10.9++  Distribution Agreement dated July 5, 1998 between Registrant and
          Sumitomo Metal Systems Development Co.

 10.10++ Distribution Agreement dated November 11, 1992 between Registrant and
          Ingram Micro, Inc.

 10.11   Agreement of Sublease dated as of October 26, 1998 between Registrant
          and AMP Incorporated.

 23.1    Consent of Independent Accountants.

 23.2*   Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).

 24.1    Power of Attorney (contained on signature page).

 27.1    Financial Data Schedule.

</TABLE>



----------
 * To be filed by amendment

++ Confidential treatment has been requested for portions of this exhibit. The
   omitted material has been separately filed with the Securities and Exchange
   Commission.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 307180}]
{"company-data": {"conformed-name": "SONICWALL INC", "cik": "0001093885", "assigned-sic": "", "irs-number": "770270079", "state-of-incorporation": "CA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-85997", "film-number": "99700471"}, "business-address": {"street1": "5400 BETSY ROSS DR", "city": "SANTA CLARA", "state": "CA", "zip": "95054", "phone": "4088449900"}, "mail-address": {"street1": "5400 BETSY ROSS DR", "city": "SANTA CLARA", "state": "CA", "zip": "95054"}}
As filed with the Securities and Exchange Commission on August 27, 1999
                                                     Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                                ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     Under
                          The Securities Act of 1933

                                ---------------
                                SonicWALL, Inc.
            (Exact name of registrant as specified in its charter)
California                     7372                            77-0270079
 (State or other
  jurisdiction        (Primary Standard Industrial             (I.R.S. Employer
of incorporation)      Classification Code Number)            Identification No.)
5400 Betsy Ross Drive Santa Clara, California 95054 (408) 844-9900
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

                                ---------------
                                Sreekanth Ravi
                Chairman, President and Chief Executive Officer
                                SonicWALL, Inc.
      5400 Betsy Ross Drive Santa Clara, California 95054 (408) 844-9900
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

                                ---------------
                                  Copies to:
Jerrold F. Petruzzelli                      Gregory K. Miller
    William T. Quicksilver                        John B. Turner
        David M. Pike                            Latham & Watkins
Manatt, Phelps & Phillips, LLP          505 Montgomery Street, Suite 1900
  3030 Hansen Way, Suite 100             San Francisco, California 94111
 Palo Alto, California 94301                Telephone: (415) 391-0600
  Telephone: (650) 856-1200                 Facsimile: (415) 395-8095
  Facsimile: (650) 856-1344
---------------
   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. [_]

                                ---------------
                       CALCULATION OF REGISTRATION FEES

-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Proposed       Proposed
                                      Amount        Maximum        Maximum      Amount of
     Title of Each Class of            to be     Offering Price   Aggregate    Registration
   Securities to be Registered     Registered(1)  Per Share(2)  Offering Price     Fee
-------------------------------------------------------------------------------------------
Common Stock, no par value......                       $         $46,000,000     $12,788
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(1) Includes     shares which the underwriters have the option to purchase in
    over-allotment, if any.
(2) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(a).

                                ---------------
   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.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell our common stock until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is offering  +
+to sell our common stock, and seeking offers to buy our common stock, only in +
+states where the offer or sale is permitted.                                  +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                  SUBJECT TO COMPLETION, DATED          , 1999

                           [LOGO OF SONICWALL, INC.]

                                Shares of Common Stock

                                $      per share

                                  -----------

This is the initial public offering of SonicWALL, Inc. We are selling
shares of our common stock. In addition, the shareholders listed on page
have granted the underwriters a 30-day option to purchase up to an additional
       shares of common stock to cover any over-allotments. We will not receive
any of the proceeds from the sale of shares by the selling shareholders.

We expect the initial public offering price to be between $    and $    per
share. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol SNWL.

Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 6.

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.

                                  -----------
Per Share Total
                                                                 --------- -----
Public offering price...........................................
Underwriting discounts and commissions..........................
Proceeds, before expenses to us.................................
-----------

The underwriters may purchase up to an additional         shares from certain
selling shareholders at the initial public offering price less the underwriting
discount, solely to cover over-allotments.

The underwriters expect to deliver the shares in San Francisco, California on
or about          , 1999.

                                  -----------

Bear, Stearns & Co. Inc.

                            Hambrecht & Quist

                                                      Thomas Weisel Partners LLC

                 The date of this prospectus is August   , 1999
[SonicWALL, Inc. LOGO]

   GATEFOLD ARTWORK TEXT:

1. With SonicWALL, small to medium size businesses can deploy robust,
   affordable Internet security. SonicWALL DMZ allows organizations to deploy
   public servers, such as Web and E-commerce servers. While access to the DMZ
   is public, servers on the DMZ are protected against Internet based attacks.

2. A SonicWALL may be deployed at each branch office for complete Internet
   security: firewalling, VPN, and content filtering. A VPN can be created
   between each branch office and headquarters by using SonicWALLs at the
   branch office and an enterprise VPN/firewall solution, such as Check Point's
   Firewall-1, at headquarters.

3. With SonicWALL, mobile workers can use VPN to connect securely to the
   office.

4. With SonicWALL, schools & libraries can protect children from objectionable
   Web sites as well as securing the network from Internet hackers.

5. With SonicWALL, telecommuters with Cable Modem or DSL Internet accounts can
   get a secure Internet connection, use VPN to connect securely to the office
   and provide content filtering for children at home.

   GATEFOLD ARTWORK DESCRIPTION OF GRAPHICS:

   Diagram showing the Internet as an oval symbol and lines connecting from the
Internet through depiction of SonicWALL products to graphic for SME (office
building), telecommuter (house), school (school), branch office (office
building), corporate headquarters (office building), and mobile worker (laptop
computer).

   Image of firefighters behind graphic of SME. Image of devil behind graphic
of telecommuter. Image of woman behind graphic of school. Image of man holding
briefcase behind graphic of branch office and graphic of mobile worker.
PROSPECTUS SUMMARY

   You should read this summary together with the more detailed information
regarding our company and the common stock being sold in this offering and our
consolidated financial statements and related notes to financial statements
appearing elsewhere in this prospectus. Because this is only a summary, you
should read the rest of the prospectus before you invest in our common stock.
Read this entire prospectus carefully, especially the risks described under
"Risk Factors."

   Unless otherwise indicated, the information in this prospectus assumes the
automatic conversion of each outstanding share of redeemable Series A
convertible preferred stock into two shares of common stock and no exercise of
the underwriter's option to purchase additional shares.

                                SonicWALL, Inc.

   SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise, or
SME, branch office, telecommuter and education markets. Our SonicWALL solution
is a high-performance, solid state appliance that provides robust, reliable,
easy-to-use and affordable Internet security. Our products enable our customers
to securely utilize Internet applications and services as an integral part of
their business. As of August 15, 1999, we have shipped more than 16,000 of our
Internet security appliances worldwide.

   Businesses and consumers are increasingly accessing the Internet for a wide
variety of uses including communications, information gathering and commerce.
Recently, new high-speed technologies have emerged that can better satisfy the
bandwidth requirements of the SME, branch office, telecommuter and education
markets at a fraction of the cost of traditional solutions. These technologies
include digital subscriber line, or DSL, and cable modems, which provide access
speeds of up to 100 times faster than traditional 28.8 kilobits per second, or
kbps, analog modems. Yankee Group estimates that in the United States DSL
subscribers will increase from 0 to 1.5 million from 1997 to 2001 and cable
modem subscribers will increase from 100,000 to 3.0 million over the same
period. "Always-on" Internet connections, such as DSL and cable, present unique
security issues and increase the risk that proprietary data or other sensitive
information might be compromised.

   Although the need for Internet security solutions is widespread, security
vendors generally have focused on providing solutions for large enterprises
with highly complex needs and extensive information technology, or IT, support
organizations. These solutions have typically involved expensive enterprise
firewall software that runs on a dedicated server or personal computer, or PC,
and require extensive support, constant monitoring, and regular updates to
maintain effectiveness. The expense and complexity of these solutions, which
often require additional products to incorporate virtual private networking, or
VPN, capabilities, Internet Protocol, or IP, address management, content
filtering, and other security features, are impractical for the majority of
SMEs, branch offices, telecommuters, and education users. These users are
increasingly demanding robust, reliable, easy-to-use and affordable Internet
security.

   Our SonicWALL product line provides our customers with a comprehensive
integrated security solution that includes firewall, content filtering and VPN
functionality so users can enjoy affordable, secure Internet communications.
The SonicWALL product family delivers a plug and play appliance solution that
is easy to install and use and minimizes the purchase, installation, and
maintenance costs of Internet security. With suggested retail prices ranging
from $495 to $2,995, versus competitive products which range in price from
approximately $5,000 to more than $15,000, our products enable customers to
reduce purchase costs and avoid hiring costly IT personnel. By using an
embedded single purpose operating system and a solid state design without
moving parts, our SonicWALL products are designed to maximize reliability and
uptime. The SonicWALL product line is scalable for networks ranging in size
from 1 to 1,000 users and is fully compatible with more expensive enterprise
wide security solutions offered by, among others, Check Point Software
Technologies, Ltd. and Cisco Systems, Inc.

                                       3
Our strategy is to become the industry standard Internet security solution
for broadband access users in the SME, branch office, telecommuter and
education markets. The key elements of our strategy include extending our
leadership position in our target markets, strengthening our SonicWALL brand
name, expanding our indirect distribution channels, developing our strategic
original equipment manufacturer, or OEM, relationships, leveraging our
installed base to sell new products and services, and continuing to develop new
products and reduce our manufacturing costs.

   We initially incorporated in California in 1991 as Sonic Systems. In August
1999 we changed our name to SonicWALL, Inc. References to "we," "our," "us" and
"the Company" in this prospectus refer to SonicWALL, Inc. Our executive offices
are located at 5400 Betsy Ross Drive, Santa Clara, California 95054, and our
telephone number is (408) 844-9900. Our Web site is located at
http://www.sonicwall.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 the SonicWALL name and our logo. This prospectus also
includes trademarks, service marks and trade names of other companies, which
remain the property of their owners.

                                  THE OFFERING
Common stock offered by
 SonicWALL, Inc..................              shares

Common stock to be outstanding
 after this offering.............              shares

Use of proceeds.................. General corporate purposes including working
                                  capital. See "Use of Proceeds."

Proposed Nasdaq National Market
 Symbol.......................... SNWL
The number of shares of common stock to be outstanding after this offering
is based upon shares outstanding as of June 30, 1999. This number excludes
           shares of common stock reserved for issuance under our stock plans
and            shares of common stock issuable upon exercise of outstanding
stock options.

                                   ----------

   Except where stated otherwise, the information we present in this prospectus
(1) gives effect to a 2 for 1 split of our common stock effected on August 25,
1999, (2) assumes the conversion of all outstanding shares of our redeemable
Series A convertible preferred stock into 2,876,754 shares of common stock at
the closing of this offering, and (3) assumes no exercise by the underwriters
of their over-allotment option.

                                       4
SUMMARY FINANCIAL DATA
                     (In thousands, except per share data)
Year Ended December       Six Months
                                               31,             Ended June 30,
                                      -----------------------  ---------------
                                       1996    1997    1998     1998    1999
                                      ------  ------  -------  ------  -------
Statement of Operations Data:
Revenue
 Internet Security..................  $  --   $  250  $ 2,349  $  405  $ 5,474
 Ethernet...........................   9,356   9,092    5,166   2,901    1,216
                                      ------  ------  -------  ------  -------
  Total revenue.....................   9,356   9,342    7,515   3,306    6,690
Cost of revenue.....................   5,915   4,842    3,308   1,652    1,998
                                      ------  ------  -------  ------  -------
Gross margin........................   3,441   4,500    4,207   1,654    4,692
                                      ------  ------  -------  ------  -------
Operating expenses..................
 Research and development...........   1,048   1,983    1,739     847      962
 Sales and marketing................   1,665   2,468    2,907   1,425    1,854
 General and administrative.........     432     644      753     310      694
 Deferred stock compensation........     --      --        42     --       783
                                      ------  ------  -------  ------  -------
  Total operating expenses..........   3,145   5,095    5,441   2,582    4,293
Income (loss) from operations.......     296    (595)  (1,234)   (928)     399
Other income (expense), net.........      22      29       54      22      132
                                      ------  ------  -------  ------  -------
Income (loss) before income taxes...     318    (566)  (1,180)   (906)     531
Benefit from (provision for) income
 taxes..............................    (350)     99       (6)    --      (493)
                                      ------  ------  -------  ------  -------
Net income (loss) ..................  $  (32) $ (467) $(1,186) $ (906) $    38
                                      ======  ======  =======  ======  =======
Basic net income (loss) per share...  $  --   $(0.06) $ (0.11) $(0.11) $   --
                                      ======  ======  =======  ======  =======
Diluted net income (loss) per
 share..............................  $  --   $(0.06) $ (0.11) $(0.11) $   --
                                      ======  ======  =======  ======  =======
Shares used in computing basic net
 income (loss) per share............   8,460   8,461   11,251   8,461   16,322
                                      ======  ======  =======  ======  =======
Shares used in computing diluted net
 income (loss) per share............   8,460   8,461   11,251   8,461   19,320
                                      ======  ======  =======  ======  =======
Pro forma basic net income per
 share..............................                                   $   --
                                                                       =======
Pro forma diluted net income per
 share..............................                                   $   --
                                                                       =======
Shares used in computing pro forma
 basic net income per share.........                                    18,420
                                                                       =======
Shares used in computing pro forma
 diluted net income per share.......                                    19,320
                                                                       =======
June 30, 1999
                         -----------------------------
                                            Pro Forma
                         Actual  Pro Forma as Adjusted
                         ------- --------- -----------
Consolidated Balance
 Sheet Data:
Cash and cash
 equivalents............ $ 6,769  $ 6,769
Total assets............  11,277   11,277
Redeemable Series A
 convertible preferred
 stock..................   4,971      --
Total shareholders'
 equity.................     318    5,289
The preceding table summarizes
  . actual balance sheet data;
  . pro forma balance sheet data assuming the conversion of all outstanding
    redeemable Series A convertible preferred stock into shares of common
    stock; and
  . pro forma balance as adjusted sheet data to give effect to (1) the sale
    by SonicWALL, Inc. of              shares of common stock in this
    offering at an assumed initial public offering price of $       per
    share, after deducting underwriting discounts and commissions and
    estimated offering expenses and (2) the conversion of all outstanding
    redeemable Series A convertible preferred stock into 2,876,754 shares of
    common stock.

   See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma basic and diluted net income per share.

                                       5
RISK FACTORS

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

We have just recently entered the emerging market for broadband Internet
security appliances, and we do not know if we will be successful in marketing
our products to our target customers.

   From inception in 1991, we were in the business of providing Ethernet
connectivity products for Apple Macintosh computers. In late 1997, we made a
strategic decision to concentrate our resources in the Internet security market
and introduced our SonicWALL line of products. We expect to stop shipment of
Ethernet products by December 1999.

   We believe that many potential customers in our target markets 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. Therefore, we will not succeed unless we
can educate our target markets about the need for Internet security and
convince potential customers of our ability to provide this security in a cost-
effective and easy-to-use 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.

   Even if we convince our target markets about the importance of and need for
Internet security, we do not know if this will result in the sale of our
products. We currently expect that almost all of our future revenue will be
generated through sales of our SonicWALL family of products, including related
services such as subscription and license fees. Our success depends on market
acceptance of our products and services.

We may be unable to manage our growth, and if we cannot do so, it could have a
material adverse effect on our business.

   Our business has grown rapidly in size and complexity in the last year. At
the end of 1998, we had 26 employees. At June 30, 1999, we had 45 employees, an
increase of approximately 73%. 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. If
our revenue increases, our current systems, management and resources will be
inadequate, and our organization will need to grow rapidly in order to meet the
demands placed on our business. If we cannot manage our growth effectively, our
business prospects will be materially adversely affected.

We incurred losses during the last three years and were marginally profitable
in the six months ended June 30, 1999. We do not know if we will remain
profitable in the future.

   We incurred losses in 1996, 1997 and 1998 and were marginally profitable for
the six months ended June 30, 1999. We do not know if we will remain profitable
in the future.

If we are unable to establish brand awareness, we may not be able to penetrate
our target markets and our sales may not increase.

   We believe that it is important to establish the SonicWall brand as quickly
as possible in order to successfully penetrate our target markets and increase
our revenue. Our failure to establish our brand could result in an inability:

    .  to execute our sales and marketing strategy;

                                       6
.  to maintain current and develop new relationships with key value
       added resellers, or VARs, distributors and systems integrators; and

    .  to expand our domestic and international sales efforts.

We have a limited operating history in the market for Internet security
products which makes our historical financial information of limited value in
evaluating our prospects.

   Because we changed our business focus from Ethernet connectivity products
for Macintosh computers to Internet security products in late 1997, our
historical financial information is of limited value in projecting future
operating results. We believe that comparing different periods of our operating
results is not meaningful and you should not rely on the results for any period
as an indication of our future performance.

   Our operating results could fluctuate on a quarterly or annual basis and
fall below expectations of public market analysts and investors, resulting in a
significant decrease in our stock price.

   We anticipate that our operating results will vary significantly on a
quarterly basis. As a result, we may perform below the expectations of public
market analysts and investors. If our results were to fall below expectations,
the price of our common stock may fall substantially.

   Due to the recent emergence of the market for Internet security appliances,
we cannot predict with certainty our revenue for a given period. We base our
spending levels for product development, sales and marketing, and other
operating expenses largely on our expected future revenue. A large proportion
of our expenses is fixed for a particular quarter or year, and therefore we may
be unable to decrease our spending in time to compensate for any unexpected
quarterly or annual shortfall in revenue. As a result, any shortfall in revenue
could cause our operating results to decline significantly, resulting in a
decrease in our stock price.

   We have limited experience in forecasting customer buying habits on a
quarterly or monthly basis. Although we have not yet experienced fluctuations
in our customers' purchases of our Internet security products on a seasonal
basis, companies in the computer industry frequently experience such
seasonality, and in the future this could happen to us.

We depend on two major customers for over 40% of our revenue, and if they or
others cancel or delay purchase orders, our revenue may decline and the price
of our stock may fall.

   To date, sales to a limited number of distributors and OEMs have accounted
for a significant portion of our revenue. In 1998, sales to Ingram Micro, Inc.
accounted for 34% of our revenue. For the six months ended June 30, 1999, sales
to Ingram Micro and Tech Data Corp. accounted for 32% and 9% of our revenue,
respectively. We cannot assure you that either of these existing customers will
continue to place orders with us, that orders by these existing customers will
continue at the levels of previous periods or that we will be able to obtain
large orders from new customers.

   If any of our major distributors or OEMs stops or delays its purchase of our
products, our revenue and profitability would be adversely affected. We
anticipate that sales of our products to relatively few customers will continue
to account for a significant portion of our revenue.

Our sales are usually done on a purchase order basis and we have no binding
purchase commitments from our distributors, resellers or OEMs, which could
result in a lack of sales.

   We sell our products to end users through distributors, resellers and OEMs.
Our success depends in large part on their performance. These customers:

    .  are not obligated to purchase or market our products and can stop
       doing so at any time;

    .  have no exclusive arrangements with us, and are not obligated to
       renew their agreements with us;

                                       7
.  receive discounts based upon expected volumes of products purchased
       or resold in a given period; and

    .  may, under certain circumstances, return products to us.

Average selling prices of our products may decrease, which may reduce our gross
margins.

   The average selling prices for our products may decline as a result of
competitive pricing pressures, promotional programs and customers who negotiate
price reductions in exchange for longer term purchase commitments. The pricing
of products depends on the specific features and functions of the products,
purchase volumes and the level of sales and service support. We expect
competition to increase in the future, and as we experience pricing pressure,
we anticipate that the average selling prices and gross margins for our
products will decrease over product life cycles. We cannot assure you that we
will be successful in developing and introducing on a timely basis new products
with enhanced features, or that these products, if introduced, will enable us
to maintain our average selling prices and gross margins at current levels.

If any of our major distributors, resellers or OEMs is unable to pay us, it
could have an adverse effect on our business.

   We have a high concentration of accounts receivable with a few customers.
Although we attempt to closely monitor the outstanding receivables which we
have with our major customers, their inability to pay us would have a material
adverse effect on our business. Their failure to pay us would adversely affect
our payments to suppliers and our creditworthiness which would make it more
difficult to conduct business. Any of these circumstances could materially
adversely affect our results of operations or financial condition.

We offer price protection to our major distributors, which could adversely
affect our results of operations.

   We provide our major distributors with price protection rights for
inventories of our products held by them. If we lower our prices for those
products, we may experience significant price adjustments for which we may not
have adequate allowances. New product introductions or price reductions by us
or our competitors could result in significant price adjustments.

If we experience delays in deliveries from suppliers or are unable to purchase
components or technologies from our key suppliers, our revenue could decline
and adversely affect our results of operations.

   Our SonicWALL products incorporate certain components or technologies which
are only available from single or limited sources of supply. We purchase such
products under purchase orders and technology licenses. Specifically, our
products rely upon microprocessors from Motorola, Inc. and Intel Corporation
and incorporate software products from third-party vendors. If we are unable to
purchase such components or maintain licenses from these suppliers, this may
delay or prevent product shipments and result in a loss of sales. We may not be
able to replace any of these supply sources on economically advantageous terms.

We are dependent on the widespread adoption of broadband access services, which
are currently in early stages of development, and if such services are not
widely adopted or we are unable to address the issues associated with the
development of such services, our sales will be adversely affected.

   Sales of our products depend on the increased use and widespread adoption of
broadband access services, such as cable, DSL, Integrated Services Digital
Network, or ISDN, Frame Relay and T-1. Our business, prospects, results of
operations and financial condition would be materially adversely affected if
the use of

                                       8
broadband access services does not increase as anticipated or if our customers'
access to broadband services is limited. Critical issues concerning use of
broadband access services are unresolved and will likely affect the use of
broadband access services. These issues include:

    .  security;

    .  reliability;

    .  bandwidth;

    .  congestion;

    .  cost;

    .  ease of access; and

    .  quality of service.

   Even if these issues are resolved, if the market for products that provide
broadband access to the Internet fails to develop, or develops at a slower pace
than we project, our business, prospects, results of operations and financial
condition would be materially adversely affected.

   The broadband access services market is new and is characterized by rapid
technological change, frequent enhancements to existing products and new
product introductions, changes in customer requirements and evolving industry
standards. We may be unable to respond quickly or effectively to these
developments. The introduction of new products by competitors, market
acceptance of products based on new or alternative technologies, or the
emergence of new industry standards, could render our existing or future
products obsolete, which would materially adversely affect our business,
prospects, results of operations and financial condition.

   The emergence of new industry standards might require us to redesign our
products. If our products fail to comply with widely adopted industry
standards, our customers and potential customers may not purchase our products.
This would have a material adverse effect on our business, prospects, results
of operations and financial condition.

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 highly competitive, and we
expect competition to intensify in the future. There are few substantial
barriers to entry, and additional competition from existing competitors and new
market entrants will likely occur in the future. Current and potential
competitors in our markets include, but are not limited to:

    .  enterprise firewall software vendors such as Check Point Software
       and Axent Technologies, Inc.;

    .  network equipment manufacturers such as Cisco Systems, Lucent
       Technologies, Inc., Nortel Networks Corp., 3COM Corporation and
       Nokia Corp.;

    .  computer or network component manufacturers such as Intel
       Corporation;

    .  operating system software vendors such as Microsoft Corporation,
       Novell, Inc., and Sun Microsystems, Inc.; and

    .  security appliance suppliers such as Watchguard Technologies, Inc.

   Most of our competitors to date have generally targeted large enterprises'
security needs with firewall products that range in price from approximately
$5,000 to more than $15,000. At any time, any of these competitors may adapt
existing products for our target markets. Many of our current or potential
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
other resources than we do. Nothing prevents or hinders these actual or

                                       9
potential competitors from entering our target markets at any time. In
addition, our competitors may bundle products competitive to 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. If these companies were to use their greater financial, technical
and marketing resources in our target markets, it could adversely affect our
business.

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

   To succeed, we must continually change and improve our products in response
to rapid technological developments and changes in operating systems, broadband
Internet access, application and networking software, computer and
communications hardware, programming tools, computer language technology and
other security threats. We may be unable to develop new products and services
or achieve and maintain market acceptance of them once they have come to
market. Product development for Internet security appliances requires
substantial engineering time and testing. Releasing new products and services
prematurely may result in quality problems, and delays may result in loss of
customer confidence and market share. In the past, we have on occasion
experienced delays in the scheduled introduction of new and enhanced products
and services, and we may experience delays in the future. When we do introduce
new or enhanced products and services, we may be unable to manage the
transition from the older products and services to minimize disruption in
customer ordering patterns, avoid excessive inventories of older products and
deliver enough new products and services to meet customer demand.

We may have to defend lawsuits or pay damages in connection with any 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. 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 others 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 computer and software contracts to be
unenforceable in certain circumstances. 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 security breach of our internal systems or those of our customers could harm
our business.

   Because we provide Internet security, we may become a greater target for
attacks by computer hackers. We will not succeed unless the marketplace is
confident that we provide effective Internet security protection. Networks
protected by our products may be vulnerable to electronic break-ins. 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 an actual or perceived breach
of Internet security occurs in our internal systems or those of our end-user
customers, regardless of whether we cause the breach, it could adversely affect
the market perception of our products and services. This could cause us to lose
current and potential customers, resellers, distributors or other business
partners.

We rely on contract manufacturers for all of our product manufacturing and
assembly, and if we cannot obtain such services, we may not be able to ship
products.

   We outsource all of our hardware manufacturing and assembly to third-party
manufacturers and assembly houses. We do not have long-term manufacturing
contracts with these vendors and while these vendors have

                                       10
produced hardware with acceptable quality, quantity and cost in the past, they
may be unable or unwilling to meet our future demands. 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.

   We believe that the net proceeds from this offering, together with our
existing cash balances and our existing line of credit, will be sufficient to
meet our capital requirements for at least the next 12 months. However, if our
future revenue is insufficient to support the expenses of our operations and
the expansion of our business, we may 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. Our funding requirements depend on several factors, 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 funding requirements vary from our current plans, we may require additional
financing sooner than we anticipate. To the extent that the proceeds of this
offering and our existing sources of cash and cash flow from operations, if
any, are insufficient to fund our activities, we may need to raise additional
funds. If we issue additional stock to raise capital, your percentage ownership
in our Company would be reduced. Additional financing may not be available when
needed and, if such financing is available, it may not be available on terms
favorable to us.

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

   Unauthorized parties may misappropriate or infringe our trade secrets,
copyrights, trademarks and similar proprietary rights. We have not received any
patent protection for our technology or products. Even if we obtain such
patents, that does not guarantee that our patent rights are valuable, create a
competitive barrier, or will be free from infringement. We face additional risk
when conducting business in countries that have poorly developed or
inadequately enforced intellectual property laws. 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.

Potential 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.

   We may face infringement claims from third parties in the future. The
computer industry has seen frequent litigation over intellectual property
rights. We expect that infringement claims will be more frequent for Internet
participants as the number of products, services and competitors grows and
functionality of products and services overlaps.

                                       11
Undetected product errors or defects could result in loss of revenue, 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 revenue and
claims against us.

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

   We compete for employees in California's Silicon Valley, one of the most
difficult employer environments in the United States. Our future success will
depend largely on the efforts and abilities of our current senior management
and our ability to attract and retain additional key development, technical,
operations, information systems, customer support and sales and marketing
personnel. We do not have employment contracts with any of our key employees,
who may leave us at any time. Specifically, the services of Sreekanth Ravi,
President and Chief Executive Officer, and Sudhakar Ravi, Vice President of
Engineering, would be difficult to replace. We do not maintain life insurance
for any of our key personnel. See "Management" for detailed information on our
key personnel.

Because of their significant stock ownership, our officers and directors will
be able to exert significant control over our future direction.

   Executive officers, directors, and entities affiliated with them, will, in
the aggregate, beneficially own approximately    % of our outstanding common
stock following the completion of this offering. These shareholders, if acting
together, would be able to significantly influence all matters requiring
shareholder approval, including the election of directors, mergers or other
forms of business combinations. See "Principal and Selling Shareholders."

Governmental regulations affecting Internet security could affect our revenue.

   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 certain 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 decrease 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 United States and international
Internet security market.

   Recently, political attention has resulted in legislative efforts to make
the Internet safe for children at schools and other educational institutions
receiving federal assistance by linking the receipt of federal funds to the
existence of content filtering and security software for such institutions'
Internet connections. Some have questioned the constitutionality or other
legality of such efforts, but we believe that any government controls or
attempts to regulate the Internet could have a material effect on our business.
A government requirement of Internet security for schools receiving federal
funds would encourage purchases of our SonicWALL products; a court ruling that
prohibited such a requirement after the requirement was in place might reduce
sales to these market segments.

                                       12
Our failure or the failure of our key suppliers and customers to be Year 2000
compliant could negatively impact our business.

   The Year 2000 computer issue creates a variety of risks for us. If systems
do not correctly recognize date information when the year changes to 2000, our
business, results of operations and financial condition could be materially
adversely affected. The risks involve:

    .  potential warranty or other claims by our customers;

    .  errors in systems we use to run our business;

    .  errors in systems used by our suppliers;

    .  errors in systems used by our customers; and

    .  potential reduced spending by other companies on broadband Internet
       access products as a result of significant information systems
       spending on Year 2000 remediation.

   Our internal systems include both our information technology and non-
information technology systems. We have conducted an initial audit of our
material internal information technology systems, including both our own
software products and third-party software and hardware technology. We have not
yet initiated an assessment of our non-information technology systems. To the
extent that we are unable to test the technology provided by third-party
vendors, we are seeking assurances from these vendors that their systems are
Year 2000 compliant. We may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in our
internal information technology and non-information technology systems. These
unanticipated problems and costs could have a material adverse effect on our
business, results of operations and financial condition.

   We have contacted our critical suppliers to determine if the suppliers'
operations and the products and services provided to us are Year 2000
compliant. Where practicable, we will attempt to mitigate our risks with
respect to the failure of our suppliers to be Year 2000 compliant by locating
Year 2000 compliant replacement suppliers. However, our failure to mitigate our
Year 2000 risks remains a possibility and could have a material adverse impact
on our business, results of operations and financial condition.

   We have been informed by our contract manufacturers that they are working to
ensure that their manufacturing systems are Year 2000 compliant. However, they
may experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in their internal information
technology and non-information technology systems. These unanticipated problems
and costs could cause manufacturing delays or difficulties for our products.
Additionally, we do not know whether our manufacturers' suppliers are Year 2000
compliant. The failure of a supplier to be Year 2000 compliant could also
adversely affect our manufacturers' operations. Any of these events could
materially adversely affect our business, results of operations and financial
condition.

   We believe that our SonicWALL product line is Year 2000 compliant. However,
despite testing by us and by current and potential customers, and despite
assurances from developers of products incorporated into SonicWALL, our
products may contain undetected errors or defects associated with Year 2000
date functions. We have assured our customers that SonicWALL is Year 2000
compliant. If our products are not Year 2000 compliant, this would result in
numerous customer claims, which could have a material adverse impact on our
business, results of operations and financial condition.

   We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or potential customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, spending on Year 2000 issues
could reduce or eliminate the budgets that our current or potential customers
could have for purchases of our products. As a result, our business, results of
operations and financial condition could be materially adversely affected.

                                       13
To date, our Year 2000 related costs have not been material. We have funded
these costs from available cash without separately accounting for these costs.
Although our future Year 2000 compliance costs are not expected to be
significant, we may experience unanticipated material problems and costs
associated with Year 2000 compliance that could adversely affect our business,
results of operations and financial condition. We are currently developing a
contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. The cost of developing
and implementing a Year 2000 contingency plan may be material.

   If our internal systems, our products or the internal systems at our
manufacturers are not Year 2000 compliant, our business, results of operation
and financial condition would be materially adversely affected.

Our management has broad discretion as to how to use the proceeds from this
offering and the proceeds may not be used appropriately.

   We expect to use the net proceeds of this offering primarily for working
capital and other general corporate purposes. In particular, we intend to
increase our spending on sales and marketing, research and development and
product management. We may also use some of the proceeds to acquire other
businesses, products or technology which would complement our existing
products, expand our market coverage or enhance our technological capabilities.
We have no specific plan as to how we will spend the proceeds of this offering.
If our management uses poor judgment in spending the proceeds, our business
will be adversely affected. We cannot assure you that investment of the
proceeds will yield a favorable return or any return. See "Use of Proceeds."

The price of our common stock may be volatile.

   The trading price of the shares being sold in this offering may fluctuate
widely as a result of a number of factors, most of which are outside our
control. Some of these factors include:

    .  quarter-to-quarter variations in our operating results;

    .  our announcements about the performance of our products and our
       competitors' announcements about performance of their products;

    .  changes in earnings estimates by, or failure to meet the
       expectations of, analysts;

    .  government regulatory action;

    .  increased price competition;

    .  developments or disputes concerning intellectual property rights;
       and

    .  general conditions in the computer industry.

   In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and computer software companies and which have often been unrelated
to the operating performance of these companies.

   We have negotiated the initial offering price of the common stock with our
underwriters. However, the initial offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the
market price of the common stock could fall below the initial offering price.
See "Underwriting."

Charter and bylaw provisions contain certain limitations in the authority of
shareholders to govern our affairs.

   Upon completion of this offering, our board of directors will have the
authority to issue shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by shareholders. The rights of
the holders of common stock will be

                                       14
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock.

   Our charter documents also provide for limitations on the ability of
shareholders to call special meetings and act by written consent and prohibit
cumulative voting for directors. The charter documents also limit the persons
who may call special meetings of the shareholders, prohibit shareholder actions
by written consent and establish advance notice requirements for nominations
for election to the board of directors or for proposing matters that can be
acted on by shareholders at shareholder meetings.

As our currently outstanding stock becomes eligible for sale, the introduction
of this stock into the market may cause our stock price to decline.

   If our shareholders sell substantial amounts of our common stock in the
public market following this offering, including shares issued upon the
exercise of outstanding options, the trading price of our common stock could
fall. Such sales also might make it more difficult for us to raise capital in
the future at a time and price that we deem appropriate. Upon completion of
this offering, we will have outstanding            shares of common stock
(based upon shares outstanding as of June 30, 1999), assuming no exercise of
outstanding options after June 30, 1999. Of these shares, the           shares
sold in this offering will be freely tradable. Other shares will be eligible
for sale in the public market after the date of this prospectus, substantially
all of which are subject to lock up agreements, as follows:
Number of
                    Date of Availability for Sale                     Shares
                    -----------------------------                   ----------
180 days after the date of this prospectus...................... 16,589,194
   At various times after 180 days, when one-year holding periods
    expire.........................................................  2,711,400
After this offering, if certain conditions are met, the holders of
approximately 2,876,754 shares of common stock will be entitled to require us
to register their shares under the Securities Act of 1933, as amended (the
"Act"). These holders and holders of approximately 2,301,400 shares of common
stock have the right to participate in any registration of shares we undertake
on our own (except a registration of shares in connection with an employee
benefit plan or merger). If these shareholders exercise their registration
rights, a large number of our shares may be registered and sold in the public
market. This could adversely affect the trading price for our shares. If we
attempted to raise money through a registration and sale of our stock and these
shareholders forced us to allow them to participate in the registration, our
ability to raise the amount of money we need to execute our business plan could
be adversely affected. See "Description of Capital Stock--Registration Rights."

   Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale."

You will experience substantial dilution in the value of your shares
immediately following this offering.

   The price of the shares is substantially higher than the net tangible book
value per share. If you buy any shares in the offering, you will incur
immediate and substantial dilution in the pro forma net tangible book value of
each share. If others exercise options to purchase our common stock, you will
suffer further dilution. See "Dilution."

                                       15
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

   Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:

    .  implementing our business strategy;

    .  developing and introducing new products;

    .  obtaining and expanding market acceptance of the products we offer;

    .  meeting our requirements with our customers; and

    .  competition in the Internet security market.

   In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. A
description of certain risks that could cause our results to vary appears under
the caption "Risk Factors" and elsewhere in this prospectus. These forward-
looking statements are made as of the date of this prospectus, and we assume no
obligation to update them or to explain the reasons why actual results may
differ. In light of these assumptions, risks and uncertainties, the forward-
looking events discussed in this prospectus might not occur.

                                       16
USE OF PROCEEDS

   Our net proceeds from the sale and issuance of           shares of common
stock will be approximately $     million, at an offering price of $      per
share and after deducting the estimated underwriting discounts and commissions
and the estimated offering expenses payable by the Company.

   We intend to use the proceeds of this offering for working capital and to
fund our operations, including expansion of our sales and marketing operations
and our product offerings. We retain broad discretion as to how the proceeds of
this offering will be allocated among these purposes as well as other purposes
that may arise.

   We may use a portion of the net proceeds to acquire complementary
businesses, products or technologies. From time to time, we evaluate these
potential acquisitions and we anticipate continuing to make such evaluations.
We have no current plans, agreements or commitments with respect to any such
acquisitions. Pending any of these uses, we intend to invest the net proceeds
of this offering in short-term, interest-bearing, investment grade securities.

                                DIVIDEND POLICY

   We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain any future earnings for use
in our business. Our line of credit arrangement prohibits us from paying
dividends without the lender's prior consent.

                                       17
CAPITALIZATION

   The following table shows as of June 30, 1999:

    .  our actual capitalization;

    .  our pro forma capitalization assuming the conversion of all
       outstanding redeemable Series A convertible preferred stock into
       shares of common stock;

    .  our pro forma capitalization as adjusted to reflect the sale by us
       of           shares of common stock at an assumed initial public
       offering price of $        per share, after deducting underwriting
       discounts and commissions and estimated expenses we expect to pay.

  This table should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this prospectus.
June 30, 1999
                                            ----------------------------------------
                                                                         Pro Forma
                                             Actual       Pro Forma     As Adjusted
                                            -----------  -----------   -------------
                                             (In thousands, except share data)
Preferred Stock: 10,000,000 preferred
 shares authorized,
 1,438,377 shares of redeemable Series A
 convertible preferred stock issued and
 outstanding, actual; no shares issued and
 outstanding, pro forma and pro forma as
 adjusted.................................. $     4,971         $ --      $     --
Shareholders' equity:
  Common stock: 200,000,000 shares
   authorized; 16,723,840 shares issued and
   outstanding, actual; 19,600,594 shares
   issued and outstanding, pro forma;
   shares issued and outstanding, pro forma
   as adjusted.............................       3,499         8,470
  Deferred stock compensation..............      (1,994)       (1,994)
  Notes receivable from shareholders.......        (492)         (492)
  Accumulated deficit......................        (695)         (695)
                                            -----------   -----------     ---------
    Total shareholders' equity.............         318         5,289
                                            -----------   -----------     ---------
    Total capitalization................... $     5,289   $     5,289     $
                                            ===========   ===========     =========
The number of shares of common stock issued and outstanding as of June 30,
1999 excludes:

    .  1,558,648 shares available for grant under our stock option plans;

    .  1,760,000 shares of common stock issuable upon exercise of options
       outstanding under our stock option plans, at a weighted average
       exercise price of $0.48 per share, of which options to purchase
       437,498 shares are currently exercisable; and

    .  250,000 shares of common stock available for issuance under our
       employee stock purchase plan.

                                       18
DILUTION

   If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial 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
then outstanding shares of common stock.

   Our pro forma net tangible book value at June 30, 1999, after giving effect
to the conversion of all outstanding redeemable Series A convertible preferred
stock into common stock, was $        , or $     per share of common stock.
After giving effect to the sale of            shares of common stock by us
offered through this prospectus at an assumed initial public offering price of
$          per share, less underwriting discounts and commissions and estimated
expenses we expect to pay, our net tangible book value at June 30, 1999 would
have been $       million, or $     per share. This represents an immediate
increase in the net tangible book value of $       per share to existing
shareholders and an immediate dilution of $       per share to new investors,
or approximately     % of the assumed initial offering price of $      per
share. The following table illustrates this per-share dilution:
Assumed initial public offering price per share................       $
     Net tangible book value per share at June 30, 1999........... $
     Increase due to the conversion of redeemable Series A
      convertible preferred stock.................................
     Pro forma net tangible book value per share at June 30,
      1999........................................................
     Increase per share attributable to the offering .............
                                                                   -----
   Net tangible book value per share after this offering..........
                                                                         -----
   Dilution per share to new investors............................       $
                                                                         =====
The following table shows, at June 30, 1999, the number of shares of common
stock purchased from us, after giving effect to the conversion of all
outstanding redeemable Series A convertible preferred stock into common stock,
the total consideration paid and the average price paid per share by existing
shareholders and by new investors purchasing common stock in this offering.
Shares
                                 Purchased    Total Consideration
                               -------------- -------------------- Average Price
                               Number Percent  Amount    Percent     Per-Share
                               ------ ------- -------------------- -------------
Existing shareholders......                   $                      $
   New Investors..............
     Total....................                $
The number of shares of common stock issued and outstanding as of June 30,
1999 excludes:

    .  1,558,648 shares available for grant under our stock option plans;

    .  1,760,000 shares of common stock issuable upon exercise of options
       outstanding under our stock option plans, at a weighted average
       exercise price of $0.48 per share, of which options to purchase
       437,498 shares are currently exercisable; and

    .  250,000 shares of common stock available for issuance under our
       employee stock purchase plan.

                                       19
SELECTED CONSOLIDATED FINANCIAL DATA
                     (In thousands, except per share data)

   The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this prospectus. The consolidated statements
of operations data for each of the years in the three year period ended
December 31, 1998 and the six months ended June 30, 1999 and the balance sheet
data at December 31, 1997, 1998 and June 30, 1999 are derived from the audited
consolidated financial statements included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended December 31, 1994
and 1995 and the balance sheet data at December 31, 1994, 1995 and 1996 are
derived from audited financial statements which are not included in this
prospectus. The consolidated statement of operations data for the six months
ended June 30, 1998 are derived from unaudited financial statements included
elsewhere in this prospectus which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for fair presentation of our financial position and results of
operations for that period. The historical results are not necessarily
indicative of the operating results to be expected in the future.
Six Months
                                                                       Ended
                               Year Ended December 31,               June 30,
                         ----------------------------------------  --------------
                          1994    1995     1996    1997    1998     1998    1999
                         ------  -------  ------  ------  -------  ------  ------
Statement of Operations
 Data:
Revenue
  Internet security..... $  --   $   --   $  --   $  250  $ 2,349  $  405  $5,474
  Ethernet..............  8,996   10,482   9,356   9,092    5,166   2,901   1,216
                         ------  -------  ------  ------  -------  ------  ------
    Total revenue.......  8,996   10,482   9,356   9,342    7,515   3,306   6,690
Cost of revenue.........  5,971    6,411   5,915   4,842    3,308   1,652   1,998
                         ------  -------  ------  ------  -------  ------  ------
Gross margin............  3,025    4,071   3,441   4,500    4,207   1,654   4,692
                         ------  -------  ------  ------  -------  ------  ------
Operating expenses
  Research and
   development..........  1,077    1,241   1,048   1,983    1,739     847     962
  Sales and marketing...  1,322    1,856   1,665   2,468    2,907   1,425   1,854
  General and
   administrative.......    221      529     432     644      753     310     694
  Deferred stock
   compensation.........    --       --      --      --        42     --      783
                         ------  -------  ------  ------  -------  ------  ------
    Total operating
     expenses...........  2,620    3,626   3,145   5,095    5,441   2,582   4,293
                         ------  -------  ------  ------  -------  ------  ------
Income (loss) from
 operations.............    405      445     296    (595)  (1,234)   (928)    399
Other income (expense),
 net....................     (8)     (30)     22      29       54      22     132
                         ------  -------  ------  ------  -------  ------  ------
Income (loss) before
 income taxes...........    397      415     318    (566)  (1,180)   (906)    531
Benefit from (provision
 for) income taxes......    (99)    (164)   (350)     99       (6)    --     (493)
                         ------  -------  ------  ------  -------  ------  ------
Net income (loss)....... $  298  $   251  $  (32) $ (467) $(1,186) $ (906) $   38
                         ======  =======  ======  ======  =======  ======  ======
Basic net income (loss)
 per share.............. $ 0.03  $  0.03  $  --   $(0.06) $ (0.11) $(0.11) $  --
                         ======  =======  ======  ======  =======  ======  ======
Diluted net income
 (loss) per share....... $ 0.03  $  0.02  $  --   $(0.06) $ (0.11) $(0.11) $  --
                         ======  =======  ======  ======  =======  ======  ======
Shares used in
 calculation of basic
 net income (loss) per
 share..................  9,294    9,626   8,460   8,461   11,251   8,461  16,322
                         ======  =======  ======  ======  =======  ======  ======
Shares used in
 calculation of diluted
 net income (loss) per
 share..................  9,748   11,224   8,460   8,461   11,251   8,461  19,320
                         ======  =======  ======  ======  =======  ======  ======
Pro forma basic net
 income per share.......                                                   $  --
                                                                           ======
Pro forma diluted net
 income per share.......                                                   $  --
                                                                           ======
Shares used in the
 calculation of pro
 forma basic net income
 per share..............                                                   18,420
                                                                           ======
Shares used in the
 calculation of pro
 forma diluted net
 income per share.......                                                   19,320
                                                                           ======
20
December 31,
                                  ----------------------------------  June 30,
                                   1994   1995   1996   1997   1998     1999
                                  ------ ------ ------ ------ ------  --------
Balance Sheet Data:
Cash and cash equivalents........ $  241 $  145 $1,036 $  787 $1,051  $ 6,769
Total assets.....................  3,320  2,810  3,448  2,374  2,584   11,277
Redeemable Series A convertible
 preferred stock.................    --     --     --     --     --     4,971
Total shareholders' equity
 (deficit)....................... $  702 $  964 $  932 $  465 $ (679) $   318
See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of basic and diluted net loss per share and pro
forma basic and diluted net loss per share.

                                       21
MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this prospectus. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend" or "continue," or
the negative of such terms and other comparable terminology. These statements
are only predictions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this prospectus.

Overview

   SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise,
branch office, telecommuter and education markets. Our SonicWALL solution is a
high-performance, solid state appliance that provides robust, reliable, easy-
to-use and affordable Internet security. Our products enable our customers to
securely utilize Internet applications and services as an integral part of
their business. As of August 15, 1999, we have shipped more than 16,000 of our
Internet security appliances worldwide.

   From inception through 1996, our operating activities focused on the
development and marketing of Ethernet connectivity products for Apple Macintosh
computers. In late 1997, we introduced our first Internet security appliance,
the SonicWALL DMZ, and began volume shipments in 1998. We now focus all our
development, marketing and sales efforts on the Internet security appliance
market. While we continue to ship our Ethernet products, we plan to terminate
shipment of those products by December 1999. This has not required any
significant restructuring of our personnel, facilities, manufacturing or
operations. We do not expect any significant charges related to our Ethernet
product inventories or warranty obligations.

   Our SonicWALL product family is sold primarily through our distribution
partners who then resell our products to VARs and selected retail outlets.
These resellers then sell our products to end-users. In 1998 and the six months
ended June 30, 1999, sales to Ingram Micro accounted for 34% and 32% of our
total revenue, respectively. In the six months ended June 30, 1999, sales to
Tech Data accounted for 9% of our total revenue.

   Our revenue consists primarily of product sales and, to a lesser extent,
subscription fees from content filtering services and extended warranty
contract fees. We generally recognize revenue when we ship products to our
customers. Certain agreements with our distribution partners provide for rights
of return, stock rotation and co-op advertising rights. We provide an allowance
for sales returns and reserves for warranty and co-op advertising costs at the
time of revenue recognition. Ingram Micro has an unlimited right to return or
rotate its stock on-hand, and therefore we recognize revenue for product sales
to Ingram Micro when it has sold the product to its customers. Subscription
fees and extended warranty fees are deferred and amortized over the period of
the related contracts. Subscription and extended warranty fees to date have not
been material.

   To date, a significant portion of our revenue has been dependent on large
purchase orders from a limited number of distribution partners. These purchase
orders typically have short lead times and are subject to delay or cancellation
without penalty. We anticipate that our operating results for a given period
will continue to depend on a small number of customers. If we experience a
decline in revenue from any of our significant distribution partners in a given
quarter, our revenue for that quarter, or following quarters, will be adversely
affected. This could adversely affect our business, prospects, results of
operations and financial condition. Furthermore, if any of our significant
customers experience financial difficulties, our sales to these customers may
be reduced and we may have difficulty in collecting accounts receivable from
these customers. Any delay in large customer orders or customer financial
difficulties could have a material adverse effect on our business, prospects,
results of operations and financial condition.

                                       22
We currently use contract manufacturers to manufacture our products. We also
rely on single or limited source suppliers to provide key components of our
products. A significant portion of our cost of revenue is related to these
manufacturing and component suppliers. These relationships are subject to a
variety of risks.

   In 1998, we recorded total deferred stock compensation of approximately
$48,000 in connection with stock and stock options granted during 1998 at
prices subsequently deemed to be below fair market value on the date of grant.
Options granted are typically subject to a four year vesting period. Restricted
stock acquired through the exercise of unvested stock options is subject to our
right to repurchase the unvested stock at the price paid, which right lapses
over a four year period. We are amortizing the deferred stock compensation over
the vesting periods of the applicable options and the repurchase periods for
the restricted stock. In 1999, we have recorded approximately $2.8 million in
additional deferred stock compensation for stock options granted in the six
months ended June 30, 1999 at prices subsequently deemed to be below fair
market value on the date of grant. We amortized approximately $0.8 million of
deferred stock compensation for the six months ended June 30, 1999.

Results of Operations

   The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:
Year Ended             Six Months
                                       December 31,          Ended June 30,
                                     ---------------------   -----------------
                                     1996    1997    1998     1998      1999
                                     -----   -----   -----   -------   -------
Revenue
 Internet Security.................    -- %    2.7%   31.3%     12.3%     81.8%
 Ethernet..........................  100.0    97.3    68.7      87.7      18.2
                                     -----   -----   -----   -------   -------
  Total revenue....................  100.0   100.0   100.0     100.0     100.0

Cost of revenue....................   63.2    51.8    44.0      50.0      29.9
                                     -----   -----   -----   -------   -------

Gross margin.......................   36.8    48.2    56.0      50.0      70.1
                                     -----   -----   -----   -------   -------

Operating expenses
 Research and development..........   11.2    21.3    23.1      25.6      14.4
 Sales and marketing...............   17.8    26.4    38.7      43.1      27.7
 General and administrative........    4.6     6.9    10.0       9.4      10.3
 Deferred stock compensation.......    --      --      0.6       --       11.7
                                     -----   -----   -----   -------   -------
  Total operating expenses.........   33.6    54.6    72.4      78.1      64.1
                                     -----   -----   -----   -------   -------

Income (loss) from operations          3.2    (6.4)  (16.4)    (28.1)      6.0

Other income (expense), net........    0.2     0.3     0.7       0.7       2.0
                                     -----   -----   -----   -------   -------

Income (loss) before income taxes..    3.4    (6.1)  (15.7)    (27.4)      8.0

Benefit from (provision for) income
 taxes.............................   (3.7)    1.1    (0.1)    --         (7.4)
                                     -----   -----   -----   -------   -------
Net income (loss)..................   (0.3)%  (5.0)% (15.8)%   (27.4)%     0.6%
                                     =====   =====   =====   =======   =======
Six Months Ended June 30, 1999 and 1998

   Internet security revenue. We shipped our first Internet security appliance
product, the SonicWALL DMZ, near the end of 1997, and in the first six months
of 1998 we were in the early stages of our sales and marketing efforts for this
product. Accordingly, Internet security revenue in the six months ended June
30,

                                       23
1998 was minimal. Revenue from sales of our security appliance products
increased to $5.5 million in the six months ended June 30, 1999 from $0.4
million in the six months ended June 30, 1998. This revenue growth was due
primarily to the introduction of our second security appliance product, the
SonicWALL, in August 1998, and the introduction of our SonicWALL Pro product in
May 1999.

   Ethernet revenue. Revenue from our Ethernet products declined to $1.2
million in the six months ended June 30, 1999 from $2.9 million in the six
months ended June 30, 1998. This decrease was directly related to our 1997
decision to focus our development, sales and marketing efforts on our Internet
security appliance products. We expect revenue from our Ethernet products to
continue to decline through the remainder of 1999. We expect to stop shipment
of Ethernet products by December 1999.

   Cost of revenue; gross margin. Cost of revenue includes all costs associated
with the production of our products, including cost of materials, manufacturing
and assembly costs paid to contract manufacturers and related overhead costs
associated with our manufacturing operations personnel. Additionally, all
warranty costs and any inventory provisions or write-downs are expensed as cost
of revenue. Cost of revenue increased to $2.0 million in the six months ended
June 30, 1999 from $1.7 million in the six months ended June 30, 1998,
primarily as a result of increased product sales. Gross margin increased to
$4.7 million, or 70% of total revenue, in the six months ended June 30, 1999
from $1.7 million, or 50% of total revenue, in the six months ended June 30,
1998. The increase in gross margin relates primarily to the increase in sales
of higher gross margin security appliance products, and a decrease in sales of
lower gross margin Ethernet products. In addition, as the volume of units
shipped has increased, our cost of revenues has declined as a percentage of
revenue as a result of lower component costs due to higher purchase volumes,
and lower manufacturing and overhead costs per unit related to economies of
scale. Our gross margins are affected by fluctuations in manufacturing volumes,
component costs and the mix of products sold. In addition, an increase in total
sales to OEMs compared to total sales to our distribution partners will result
in a decrease in gross margins. We must manage each of these factors
effectively for our gross margins to remain at current levels.

   Research and development. Research and development expenses primarily
consist of personnel costs related to engineering and technical support,
contract consultants, outside testing services and equipment and supplies
associated with enhancing existing products and developing new products.
Research and development expenses increased to $1.0 million in the six months
ended June 30, 1999 from $0.8 million in the six months ended June 30, 1998.
Research and development spending increased in the six months ended June 30,
1999 by approximately $0.5 million related to the hiring of additional
personnel and increased overhead and consulting costs. This increase was offset
by a decrease of approximately $0.3 million in compensation paid to a founder
in the six months ended June 30, 1999.

   Sales and marketing. Sales and marketing expenses primarily consist of
personnel costs, including commissions, costs associated with the development
of our business and corporate identification, and costs related to customer
support, travel, trade shows, promotional and advertising costs. Sales and
marketing expenses increased to $1.9 million in the six months ended June 30,
1999 from $1.4 million in the six months ended June 30, 1998. This increase in
absolute dollars primarily relates to increased hiring of sales and marketing
personnel, increased travel and attendance at trade shows, increases in
customer support personnel and expanded sales and marketing efforts in
international markets. These increases were partially offset by a decrease in
compensation paid to a founder of $0.3 million in the six months ended June 30,
1999. We intend to increase sales and marketing expenses as we add personnel to
support our domestic and international sales and marketing efforts.

   General and administrative. General and administrative expenses primarily
consist of personnel costs for administrative officers and support personnel,
legal, accounting and consulting fees, and facility expenses. Our general and
administrative expenses increased to $0.7 million for the six months ended June
30, 1999 from $0.3 million in the six months ended June 30, 1998. This increase
was primarily due to increases in staffing and related personnel costs to
support our growth, as well as increased professional services costs.

                                       24
Deferred stock compensation. Amortization of deferred stock compensation was
$783,000 in the six months ended June 30, 1999. This amortization relates to
deferred compensation of $2.8 million, related to stock options granted in the
six months ended June 30, 1999. We are amortizing this amount over the vesting
periods of the applicable options. There was no amortization of deferred stock
compensation in the six months ended June 30, 1998.

   Other income (expense), net. Other income (expense), net consists primarily
of interest income on the Company's cash and cash equivalents, and increased to
$0.1 million for the six months ended June 30, 1999 from $22,000 in the six
months ended June 30, 1998. This increase was related primarily to higher
interest earnings on cash that increased in amount from $1.1 million to $6.8
million in the comparable period.

   Provision for income taxes. The provision for income taxes in the six months
ended June 30, 1999 was $0.5 million. There was no provision for income taxes
in the comparable 1998 period. In both periods, the provision for income taxes
is based on an estimated effective rate for each of the respective calendar
years. The effective tax rate in the six months ended June 30, 1999 was 37%
before the effect of amortization of deferred compensation, a permanent, non-
deductible book/tax difference. This effective rate reflects statutory federal
and state tax rates net of the estimated realization of deferred tax assets.
The Company incurred a loss in 1998 so there was no provision for income taxes
in the six months ended June 30, 1998.

Years Ended December 31, 1998, 1997 and 1996

   Internet security revenue. Internet security revenue increased to $2.3
million in 1998 from $0.3 million in 1997 and related primarily to a full year
of shipments of our expanded SonicWALL product offerings in 1998. There was no
Internet security revenue in 1996.

   Ethernet revenue. Ethernet revenue declined to $5.2 million in 1998 from
$9.1 million in 1997, which declined from $9.4 million in 1996. These declines
in Ethernet revenue related to our 1997 decision to focus development, sales
and marketing efforts on our Internet security appliance products. Our
development, marketing and sales efforts are now entirely focused on the
Internet security appliance market, and while we continue to ship our Ethernet
products, we plan to terminate shipment of these products by December 1999.

   Gross margin. In 1998, gross margin was $4.2 million, or 56% of revenue,
compared to $4.5 million, or 48% of revenue, in 1997. The percentage increase
in gross margin from 1997 to 1998 relates primarily to the increase in sales of
higher margin Internet security appliance products. In 1996, gross margin was
$3.4 million, or 37% of revenue. The increase in gross margin percentage from
1996 to 1997 is primarily attributable to the cost reduction associated with
the commencement of turnkey, offshore manufacturing of certain Ethernet
products in January 1997.

   Research and development. Research and development expenses decreased to
$1.7 million in 1998 from $2.0 million in 1997, and increased from $1.0 million
in 1996. This decrease from 1997 to 1998 relates primarily to a reduction in
compensation paid to a founder. The research and development expense increase
in 1997 over 1996 of $0.9 million was primarily related to increased personnel
and consulting costs associated partly with the development of the security
appliance products which commenced in 1997.

   Sales and marketing. Sales and marketing expenses increased to $2.9 million
in 1998 from $2.5 million in 1997 and from $1.7 million in 1996. These
increases were primarily due to the hiring of additional sales and marketing
personnel, as well as increases in travel, trade shows, promotional and
advertising costs.

   General and administrative. General and administrative expenses increased to
$0.8 million in 1998 from $0.6 million in 1997, and increased from $0.4 million
in 1996. These increases were due mainly to the addition of administrative
personnel, professional services fees and facility expenses to support the
growth of our operations.

                                       25
Deferred stock compensation. During 1998, we recorded deferred compensation
of $48,000 in connection with stock option grants of which $42,000 was
amortized in the year ended December 31, 1998. We are amortizing this amount
over the vesting periods of the applicable options.

Quarterly Results of Operations

   The following tables set forth our unaudited quarterly results of
operations, in dollars and as a percentage of total revenue, for the six
quarters ended June 30, 1999. You should read the following tables in
conjunction with the financial statements and related notes contained elsewhere
in this prospectus. We have prepared this unaudited information on the same
basis as our audited financial statements. These tables include all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.
Three Months Ended
                         ----------------------------------------------------------------
                         March 31, June 30, September 30, December 31, March 31, June 30,
                           1998      1998       1998          1998       1999      1999
                         --------- -------- ------------- ------------ --------- --------
                                                  (in thousands)
Revenue
  Internet Security.....  $  157    $  248     $  519        $1,425     $2,251    $3,223
  Ethernet..............   1,546     1,355      1,555           710        813       403
                          ------    ------     ------        ------     ------    ------
    Total revenue.......   1,703     1,603      2,074         2,135      3,064     3,626
                          ------    ------     ------        ------     ------    ------
Cost of revenue.........     833       819        833           823        943     1,055
                          ------    ------     ------        ------     ------    ------
Gross margin............     870       784      1,241         1,312      2,121     2,571
Operating expenses
  Research and
   development..........     398       449        432           460        448       514
  Sales and marketing...     674       752        694           787        811     1,043
  General and
   administrative.......     184       125        232           212        332       362
  Deferred stock
   compensation.........     --        --         --             42         15       768
                          ------    ------     ------        ------     ------    ------
    Total operating
     expenses...........   1,256     1,326      1,358         1,501      1,606     2,687
                          ------    ------     ------        ------     ------    ------
Income (loss) from
 operations.............    (386)     (542)      (117)         (189)       515      (116)
Other income (expense),
 net....................       9        13         14            18         41        91
                          ------    ------     ------        ------     ------    ------
Income (loss) before
 income taxes...........    (377)     (529)      (103)         (171)       556       (25)
Provision for income
 taxes..................     --        --         --              6        214       279
                          ------    ------     ------        ------     ------    ------
Net income (loss).......  $ (377)   $ (529)    $ (103)       $ (177)    $  342    $ (304)
                          ======    ======     ======        ======     ======    ======
26
As a Percentage of Revenue
                         -----------------------------------------------------------------
                         March 31, June 30,  September 30, December 31, March 31, June 30,
                           1998      1998        1998          1998       1999      1999
                         --------- --------  ------------- ------------ --------- --------
Revenue
  Internet Security.....     9.2 %   15.5 %       25.0 %       66.7 %      73.5%    88.9 %
  Ethernet..............    90.8     84.5         75.0         33.3        26.5     11.1
                           -----    -----        -----        -----       -----    -----
    Total revenue.......   100.0    100.0        100.0        100.0       100.0    100.0
                           -----    -----        -----        -----       -----    -----
Cost of revenue.........    48.9     51.1         40.2         38.5        30.8     29.1
                           -----    -----        -----        -----       -----    -----
Gross margin............    51.1     48.9         59.8         61.5        69.2     70.9
Operating expenses
  Research and
   development..........    23.4     28.0         20.8         21.5        14.6     14.1
  Sales and marketing...    39.6     46.9         33.5         36.9        26.5     28.8
  General and
   administrative.......    10.8      7.8         11.2          9.9        10.8     10.0
  Deferred stock
   compensation.........     --       --           --           2.0         0.5     21.2
                           -----    -----        -----        -----       -----    -----
    Total operating
     expenses...........    73.8     82.7         65.5         70.3        52.4     74.1
Income (loss) from
 operations.............   (22.7)   (33.8)        (5.7)        (8.8)       16.8     (3.2)
Other income (expense),
 net....................     0.5      0.8          0.7          0.8         1.3      2.5
                           -----    -----        -----        -----       -----    -----
Income (loss) before
 income taxes...........   (22.2)   (33.0)        (5.0)        (8.0)       18.1     (0.7)
Provision for income
 taxes..................     --       --           --           0.3         7.0      7.7
                           -----    -----        -----        -----       -----    -----
Net income (loss).......   (22.2)%  (33.0)%       (5.0)%       (8.3)%      11.1%    (8.4)%
                           =====    =====        =====        =====       =====    =====
Internet security revenue. Internet security revenue has increased in each
of the six quarters ended June 30, 1999, due to increasing market acceptance of
our security appliance solution and the expansion of our product line to
include the SonicWALL in August 1998 and SonicWALL Pro in May 1999.

   Ethernet revenue. Ethernet revenue remained relatively flat through the
first three quarters of 1998, and decreased significantly in the fourth quarter
of 1998 and the first two quarters of 1999. The overall decline in Ethernet
revenue relates primarily to our decision to focus our development, sales and
marketing resources exclusively on the security appliance product family. We
expect to stop shipment of Ethernet products by December 1999.

   Gross margin. Our gross margin has generally increased each quarter since
the quarter ended March 31, 1998. These increases have been due to the
introduction of our new security appliance products, which have higher average
selling prices and higher gross margins, the reduction of production costs on a
per unit basis as manufacturing volumes have increased, the reduction in
materials costs due to increased purchase volumes, and improved absorption of
manufacturing infrastructure costs.

   Operating expenses. Our operating expenses have increased in each of the six
quarters ended June 30, 1999 to $2.7 million in the quarter ended June 30, 1999
from $1.3 million in the quarter ended March 31, 1998. These increases related
primarily to development of new products, increased marketing of new products,
and increased investments in our internal infrastructure to support our growth.

Liquidity and Capital Resources

   Since our inception, we have financed our operations through cash flows from
operations, private sales of securities and, to a lesser extent, bank
borrowings. During the six months ended June 30, 1999, we generated $0.7
million in cash from operating activities. This increase resulted from a
significant increase in Internet security revenue, offset in part by a $1.3
million increase in accounts receivable and a $0.3 million increase in
inventories. We expect that accounts receivable and inventory will continue to
increase if our revenue continues to rise and that we will continue to increase
our investment in capital assets to expand our operations. During

                                       27
1998, we generated $0.4 million in cash from operating activities, compared to
a $0.4 million decrease from operating activities in 1997. Investing activities
related to purchases of property and equipment used cash of $0.1 million in
1998 and $0.1 million in the six months ended June 30, 1999. In 1996 and 1997
purchases of property and equipment were immaterial.

   In February 1999, the Company completed a private placement of approximately
$5.0 million of redeemable Series A convertible preferred stock. The Company
conducted no significant financing activities in 1997 or 1998.

   Our principal source of liquidity as of June 30, 1999 consisted of $6.8
million in cash and cash equivalents. As of June 30, 1999 we have a credit
facility that provides for borrowings up to the lesser of $1.0 million or 80%
of eligible accounts receivable, as defined in the credit facility. Our line of
credit bears interest at the bank's reference rate plus 1.75% and borrowings
are secured by accounts receivable, inventories, property and equipment. The
credit facility may be terminated by the lender or us on thirty days prior
notice. As of June 30, 1999, there were no borrowings outstanding under this
credit facility.

   We believe that the market risk arising from our holdings of financial
instruments is not material.

   We believe the net proceeds of this offering, together with our existing
cash balances and available line of credit, will be sufficient to meet our cash
requirements at least through the next twelve months. However, we may be
required, or could elect, to seek additional funding prior to that time. Our
future capital requirements will depend on many factors, including our rate of
revenue growth, the timing and extent of spending to support product
development efforts and expansion of sales and marketing, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of our products. We cannot assure you that additional equity or debt
financing, if required, will be available on acceptable terms or at all.

Year 2000 Readiness Disclosure

 Internal Operations

   Historically, computer programs used two digits rather than four to
designate specific years. Computer programs that use two digits to designate a
specific year may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
This is known as the Year 2000 problem.

   We have relationships with, and are to varying degrees dependent upon, a
large number of third parties that provide information, goods and services to
us or who manufacture and ship our products. Our business, results of
operations and financial condition could be materially adversely affected if
any of the third parties with whom we have relationships were to experience
significant Year 2000 related problems. In addition, our business, results of
operations and financial condition could be materially adversely affected if
any of our key customers encounter significant Year 2000 related problems that
cause them to delay or cancel substantial purchase orders or product
deliveries.

   We have been informed by Flash Electronics, Inc. and All Quality Services,
Inc., or AQS, our contract manufacturers, that their manufacturing systems are
Year 2000 compliant or they are working to ensure compliance. However, they may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in their internal information
technology and non-information technology systems. These unanticipated problems
and costs could have a material adverse effect on their business, results of
operations and financial condition. The failure of a supplier to Flash
Electronics or AQS to be Year 2000 compliant could adversely affect either
firm's operations, which in turn could materially adversely affect our
business, results of operations and financial condition.

                                       28
Our products are ultimately used with a number of different hardware and
software products, and to the extent any third-party products are not Year 2000
compliant, the interoperability of our products could be adversely affected.
Given the large number of third-party components used in conjunction with our
products and our limited resources, we do not expect to review third-party
products for Year 2000 compliance.

   We have conducted an initial audit of our critical internal financial,
informational and operational systems to identify and evaluate those areas that
may be affected as a result of the Year 2000 problem. To date, we have not
incurred material expense associated with our efforts to become Year 2000
compliant and do not anticipate that any future costs associated with our Year
2000 remediation efforts will exceed $100,000. In addition, we have not
deferred any material information technology projects as a result of our Year
2000 problem activities.

   Although we plan to complete modifications or upgrades of our systems prior
to the year 2000, we may not be able to develop and implement a plan that
adequately addresses the Year 2000 problem in a timely manner. If we are not
able to address the Year 2000 problem adequately, we may be unable to conduct
our business. This would have a material adverse effect on our results of
operations and financial condition.

 Products

   We have tested and continue to test all our SonicWALL product offerings for
Year 2000 problems. To date, we know of no such problems which have not been
corrected. We do not currently expect any significant Year 2000 problems to
arise with our products. We have generally represented to our channel partners
and our end users that our products are Year 2000 compliant. If that turns out
to be untrue, these parties, and others, may make claims against us which may
result in litigation, product returns, or falling sales.

   The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. Our ability to achieve Year 2000
compliance and the level of incremental costs associated with compliance could
be adversely affected by, among other things, availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unidentified problems, identified in the ongoing
compliance review.

Disclosures About Market Risk

   Our exposure to market risk for changes in interest rates relates primarily
to our cash and cash equivalents. We do not use derivative financial
instruments in our investment portfolio. As stated in our investment policy, we
are averse to principal loss and ensure the safety and preservation of our
invested funds by limiting default and market risk. We mitigate default risk by
investing in only investment-grade instruments.

   We invoice all of our foreign customers from the United States in U.S.
dollars and all revenue is collected in U.S. dollars. In addition, we do not
have any cash balances denominated in foreign currencies. As a result, we do
not have significant market risks associated with foreign currencies or related
to sales and collections.

                                       29
BUSINESS

Overview

   SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the SME, branch office, telecommuter
and education markets. Our SonicWALL solution is a high-performance, solid
state appliance that provides robust, reliable, easy-to-use and affordable
Internet security. Our products enable our customers to securely utilize
Internet applications and services as an integral part of their business. As of
August 15, 1999, we have shipped more than 16,000 of our Internet security
appliances worldwide.

   Our SonicWALL product line provides our customers with a comprehensive
integrated security solution that includes firewall, content filtering, and VPN
functionality so users can enjoy affordable, secure Internet communications.
The SonicWALL product family delivers a plug and play appliance solution that
is easy to install and use and minimizes the purchase, installation, and
maintenance costs of Internet security. With suggested retail prices ranging
from $495 to $2,995, versus competitive products which range in price from
approximately $5,000 to more than $15,000, our products enable customers to
reduce purchase costs and avoid hiring costly IT personnel. By using an
embedded single purpose operating system and a solid state design without
moving parts, our SonicWALL products are designed to maximize reliability and
uptime. The SonicWALL product line is scalable for networks ranging in size
from 1 to 1,000 users and is fully compatible with more expensive enterprise
wide security solutions offered by, among others, Check Point Software and
Cisco Systems.

Industry Background

Growth of Internet Usage By Small to Medium Enterprise, Branch Office,
Telecommuter, and Education Markets

   Businesses and consumers are increasingly accessing the Internet for a wide
variety of uses including communications, information gathering and commerce.
Because it is an affordable means of achieving global reach and brand
awareness, the Internet is a particularly attractive vehicle for small and
medium size businesses as they endeavor to access and share information with a
large number of geographically dispersed customers, employees and business
partners. For example, of the 87.4 million devices estimated by IDC to have
Internet access in 1998, approximately 60% were used by small businesses and
home offices. IDC estimates that the proportion of small businesses, those with
less than 100 people, accessing the Internet in the United States will increase
from approximately 50% in 1998 to approximately 65% by 2001, to a total of 4.7
million businesses.

   Today's large business enterprise is characterized by many branch offices,
mobile workers, and telecommuters, all of whom connect electronically to the
corporate office and each other. Because of the confidential nature of business
data, these connections must be secure. Virtual private networks provide secure
Internet connections between the business enterprise and dispersed employees
and business partners. Communicating using VPNs offers significant cost savings
over alternative solutions such as private leased line or frame relay networks.
In fact, TeleChoice estimates that VPNs can cut telecommunication costs by as
much as 90% over private leased line networks, and for this reason, VPN use is
expected to grow rapidly. Infonetics Research projects worldwide expenditures
on VPNs will grow by 100% per year through 2001 when they are expected to reach
$11.9 billion.

   The Internet also has become a vital tool of information access and
communication for schools and libraries. According to the National Center for
Education Statistics, there were over 96,000 K-12 public schools and libraries
in the United States in 1998, of which 89% of schools and 35% of libraries were
connected to the Internet. The growth in Internet connectivity in this market,
combined with the proliferation of objectionable Web sites, has created a need
for Internet security products that include content filtering capabilities.

 Increasing Demand for Broadband Access Technologies

   Many SMEs and branch offices have addressed the need for Internet access by
installing a single computer with a dial-up connection that is shared
throughout the office, or by installing a dedicated network data

                                       30
connection at a significantly greater expense, such as a T-1 line. Recently,
new high-speed technologies have emerged that can better satisfy the bandwidth
requirements of SMEs at a fraction of the cost of traditional solutions. These
technologies include DSL and cable modems, which provide access speeds of up to
100 times faster than traditional 28.8 kbps analog modems. In addition, new
generations of Internet-based applications, such as business to business e-
commerce, sales force automation and enterprise resource planning, or ERP,
continue to emerge that require higher bandwidth than is available through
dial-up solutions. As DSL and cable services have become more affordable and
widely available, SMEs, branch offices, and telecommuters are increasingly
deploying these technologies as their Internet access solution. Yankee Group
estimates that in the United States DSL subscribers will increase from 0 to 1.5
million from 1997 to 2001, and cable modem subscribers will increase from
100,000 to 3.0 million over the same period.

 Importance of Internet Security

   Secure access to the Internet is a growing concern for most Internet users.
"Always-on" Internet connections, such as DSL and cable, present unique
security issues for SMEs, branch offices, and telecommuters and increase the
risk that computer hackers, disgruntled employees, contractors or competitors
might successfully access proprietary data or other sensitive information. In
addition, as more Web-enabled, mission critical business applications are
developed and offered by vendors such as Oracle Corp., PeopleSoft Inc., Siebel
Systems Inc., and SAP AG, the amount of sensitive data transmitted over the
Internet has increased and led organizations to look for high performance,
robust solutions to address these security needs.

   Many Internet users also seek solutions that enable control over access to
undesirable content, either to avoid potential legal liability or to eliminate
distracting activity by employees or other users. In addition, public attention
has recently focused on the advantages of using filtering software to screen
offensive material for children accessing the Internet at libraries, schools,
and other public institutions.

   The market for Internet security products includes a variety of applications
to address these issues, such as firewall, content filtering, Internet
Protocol, address management and VPN. According to IDC, the market for Internet
security products increased over 45% in 1998 to $3.2 billion and is expected to
grow at a compounded annual growth rate of 21% to $8.3 billion by 2003.
Firewall products represent the fastest growing segment, with an expected
compounded annual growth rate of 27% over the same period.

 Lack of a Cost Effective, High Performance Security Solution for the Broadband
 Access Market

   Although the need for Internet security solutions is widespread, security
vendors generally have focused on providing solutions for large enterprises
with highly complex needs and extensive information technology support
organizations. These solutions have typically involved expensive enterprise
firewall software that runs on a dedicated server or personal computer and
requires extensive support, constant monitoring and regular updates by IT
personnel to maintain its effectiveness. The expense and complexity of these
solutions, which often require additional products to incorporate VPN
capabilities, IP address management or content filtering, are impractical for
the majority of SMEs due to their more limited resources. While there are low
cost security products currently on the market, we believe these products
generally provide limited functionality, are difficult to install and
configure, and provide relatively low performance.

The SonicWALL Solution

   SonicWALL is a leading provider of Internet security solutions designed for
broadband access customers in the SME, branch office, telecommuter and
education markets. Our SonicWALL solution is a high performance, solid state
appliance that provides robust, reliable, easy-to-use and affordable Internet
security. SonicWALL products enable our customers to securely utilize Internet
applications and services as an integral part of their business. As of August
15, 1999, we have shipped more than 16,000 of our Internet security appliances
worldwide. The SonicWALL solution provides our customers with the following key
benefits:

    .  High Performance, Robust Security. The SonicWALL product family
       provides a comprehensive integrated security solution that includes
       firewall, content filtering and VPN

                                       31
functionality. Our firewall security protects private networks
       against Internet-based theft, destruction, or modification of data,
       and automatically notifies customers if their network is under
       attack. SonicWALL has been awarded the internationally recognized
       International Computer Security Association, or ICSA, Firewall
       Certification, the same certification awarded to significantly more
       expensive products sold by Check Point Software and Cisco Systems.
       Our VPN capabilities enable affordable, secure communications among
       remote offices, mobile employees and business partners over the
       Internet. Our content filtering enables businesses, schools and
       libraries to restrict access to objectionable or inappropriate Web
       sites.

    .  Ease of Installation and Use. The SonicWALL product family delivers
       a plug-and-play appliance solution that is designed for easy
       installation and use. Installation involves simply connecting
       SonicWALL between the private network and the broadband Internet
       access device. SonicWALL is easily configured and managed through a
       Web browser-based interface. No reconfiguration of any PC
       application is required. Our solution is pre-configured to interface
       with all major Internet access technologies, including cable, DSL,
       ISDN, Frame Relay, and T-1. In addition, SonicWALL's AutoUpdate
       capability automatically notifies all registered customers via e-
       mail when bug fixes or new features and products that have been
       purchased are available for download from our Web site.

    .  Low Total Cost of Ownership. The SonicWALL product design minimizes
       the purchase, installation and maintenance costs of Internet
       security. The suggested retail prices of our products range from
       $495 to $2,995, versus competitive products which range in price
       from approximately $5,000 to more than $15,000. Our affordable,
       easy-to-manage Internet security appliances also enable customers to
       avoid the expense of hiring costly information technology personnel
       who may otherwise be required to implement and maintain an effective
       Internet security solution.

    .  Reliability. The SonicWALL product design maximizes reliability and
       uptime. Our product uses an embedded single purpose operating system
       and a solid state design which contains no moving parts. Most
       competitors' products consist of software installed on general
       purpose host computers which use the Windows NT or UNIX operating
       systems. General purpose operating systems such as these are
       designed to run multiple applications, creating an environment in
       which random system crashes are commonplace. Moreover, since general
       purpose computers contain many moving parts, such as hard disk
       drives, floppy drives, fans and switching power supplies, they are
       more prone to hardware failures over time. These software and
       hardware failures can compromise Internet security.

    .  Scalability and Compatibility. The SonicWALL product family is
       designed to provide comprehensive Internet security for networks
       ranging in size from 1 to 1,000 users. Our products consist of three
       separate models designed to serve the specific security needs of our
       target markets. Our products vary with respect to the number of
       supported users, the number of ports and feature options such as VPN
       or content filtering. In addition to serving the security needs of
       the SME market, SonicWALL products are a fully compatible, perimeter
       security solution for large, distributed enterprises and their
       branch offices and telecommuters. Our products are designed to
       interoperate with enterprise security products offered by, among
       others, Check Point Software and Cisco Systems.

Strategy

   Our goal is to extend our leadership position and become the industry
standard Internet security solution for broadband access users in our target
markets--the SME, branch office, telecommuter, and education markets. Key
elements of our strategy include:

    .  Extend Our Leadership Position in Target Markets. We believe that we
       have established a market leadership position as a provider of
       Internet security solutions designed for our target

                                       32
markets by offering robust, reliable, easy-to-use products at
       attractive prices. We intend to continue to focus our product
       development efforts, distribution strategies, and marketing programs
       to satisfy the growing needs of these markets. We believe that
       security solutions currently offered by most vendors are relatively
       expensive, technically complex, and generally unable to satisfy
       these target markets.

    .  Strengthen the SonicWALL Brand. We believe that strong brand
       recognition in our target markets is important to our long term
       success. We intend to continue to strengthen our SonicWALL brand
       name through industry trade shows, our Web site, advertising, direct
       mailings to both our VARs and our end users, and public relations.
       Our reputation as a reliable, high performance, easy-to-use and
       affordable Internet security solution contributes to our resellers'
       sales efforts.

    .  Expand Our Indirect Channel. Our target markets are generally served
       by a two-tier distribution channel. We have successfully penetrated
       these markets with over 800 VARs, systems integrators, and
       distributors, who sell our products in over thirty countries,
       including large distributors such as Ingram Micro and Tech Data. We
       intend to build and expand our base of indirect channel
       relationships through additional marketing programs, hiring
       additional marketing staff, and increased advertising.

    .  Develop Strategic OEM Relationships. We intend to leverage the brand
       awareness and worldwide channels of major networking and
       telecommunications equipment suppliers to further penetrate our
       target markets. We presently have OEM agreements with two companies
       shipping our products: Ramp Networks, a manufacturer of shared
       Internet access devices for small offices, and COM21, a supplier of
       cable modems. We are pursuing relationships with other broadband
       access equipment providers with the intent of further penetrating
       our target markets.

    .  Leverage Our Installed Base. We intend to develop new subscription
       services and add on products to generate additional revenue from our
       installed base. We have dedicated marketing personnel and programs
       that focus on selling products and services to this existing base of
       customers. We have actively sought registration of our customers
       through our AutoUpdate feature and we have experienced a
       registration rate of nearly 50% to date. This has enabled us to
       pursue cost effective, targeted marketing campaigns to our installed
       base. Each SonicWALL model is configured to allow end-users to
       easily and conveniently download new features and products that have
       been purchased, either through our resellers or our Web site. Such
       sales could include additional functionality such as VPN or
       additional recurring revenue opportunities such as content filtering
       services.

    .  Continue to Develop New Products and Reduce Manufacturing Costs. We
       intend to use our product design and development expertise to expand
       our product offerings and reduce our manufacturing costs. New
       products and services may include offerings such as bandwidth
       management, e-mail spam filtering and virus scanning. We are working
       to achieve a higher level of Application Specific Integrated
       Circuit, or ASIC, design and integration to reduce product costs and
       increase product performance. We believe that these new product
       offerings and associated cost reductions will strengthen our market
       position and assist us in penetrating new markets.

                                       33
Products and Services

   The SonicWALL product family provides cost effective and high performance
Internet security solutions for the small and medium size enterprise, branch
office, telecommuter, and education markets. We design our products to address
the specific needs of customers within each of these market segments. Our
products vary with respect to the number of supported users, the number of
ports, product features, processor speed and scalability. All of our products
provide firewall security and are capable of delivering features such as
content filtering and VPN in a single, integrated security appliance that is
managed through an intuitive and easy-to-use Web browser-based interface.

[DESCRIPTION OF GRAPHICS:
  Diagram showing WebServer, E-Commerce Server and three PC's connected to a
  SonicWALL DMZ or PRO security appliance on the left side, which is
  connected to a modem router in the middle of the graphic which is connected
  to an oval on the right side of the graphic with the words "THE INTERNET"
  in the center of the oval.]

   SonicWALL. SonicWALL has two 10Base-T Ethernet ports and is designed to
provide security for smaller networks using broadband connections to the
Internet such as cable and DSL. SonicWALL provides protection against
unauthorized access to the private network, filters out objectionable Web
sites, and manages the complexity of IP addressing. It also has a VPN option to
give telecommuters and small remote offices affordable and secure connectivity
to the main office. SonicWALL supports 10, 50 or unlimited user connections
depending on the model purchased.

   SonicWALL DMZ. SonicWALL DMZ is designed to meet the Internet security needs
of small and medium size networks in business and education. In addition to the
features provided by SonicWALL, SonicWALL DMZ provides a third port, a DMZ, or
De-Militarized Zone, that enables the use of public Web and e-commerce servers
by supporting different security options to be defined for two different
network zones. Public servers on the DMZ port are accessible from the Internet
and the private network, but are protected from Internet-based attacks.
SonicWALL DMZ supports unlimited users.

   SonicWALL PRO. SonicWALL PRO has three 10/100Base-T Fast Ethernet ports and
is designed to meet the Internet security needs of medium and large size
businesses and branch offices. SonicWALL PRO supports all of the features found
in other SonicWALL models, and offers a more powerful and scalable platform for
larger networks requiring Fast Ethernet connectivity, high performance VPN and
future expansion options. SonicWALL PRO supports unlimited users.

                                       34
The following table provides a summary of SonicWALL models:
SonicWALL Model             SonicWALL        SonicWALL DMZ      SonicWALL PRO
----------------------------------------------------------------------------------------
Target Markets                 . Telecommuter     . Small to medium  . Medium to large
                                                      size business      size business
                                 . Small to medium  . Education        . Branch offices
                                   size business
----------------------------------------------------------------------------------------

  Virtual Private Networking          Optional           Optional           Standard
----------------------------------------------------------------------------------------

  Number of Users                10, 50, Unlimited      Unlimited          Unlimited
----------------------------------------------------------------------------------------

  LAN and WAN Ports                      X                  X                  X
----------------------------------------------------------------------------------------

  DMZ Port for Public Servers                               X                  X
----------------------------------------------------------------------------------------

  Expandable Memory and PCI                                                    X
   Expansion Slot
----------------------------------------------------------------------------------------

  Type of Ports                       10Base-T           10Base-T         10/100Base-T
                                     (Ethernet)         (Ethernet)       (Fast Ethernet)
----------------------------------------------------------------------------------------

  Microprocessor                      Motorola           Motorola            Intel
                                   33MHz MC 68360     33MHz MC 68360    233MHz StrongARM
----------------------------------------------------------------------------------------

  List Price                       $495 - $1,495          $1,795             $2,995
End users may also purchase various product upgrades and subscriptions, such
as updated content filter lists, VPN, number of user upgrades, and extended
warranties and premium support contracts.
Upgrade or Subscription                  Description                   List Price
----------------------------------------------------------------------------------------
VPN Upgrade                   Activates optional virtual private
                                networking feature for SonicWALL and
                                SonicWALL DMZ models                        $495 - $695
----------------------------------------------------------------------------------------

  Number of User Upgrade        Adds support for additional users for
                                user-limited models (SonicWALL/10 and
                                SonicWALL/50)                              $650 - $1,300
----------------------------------------------------------------------------------------

  Content Filter Subscription   Annual subscription to a continuously
                                updated list of Internet sites             $175 - $695 /
                                containing objectionable content               year
----------------------------------------------------------------------------------------

  Extended Warranty and         Annual extended warranty on SonicWALL
  Premium Support               hardware and premium technical support     $80 - $675 /
                                contract                                       year
35
[DESCRIPTION OF GRAPHICS:
  Diagram showing the Internet as an oval symbol and lines connecting from
  the Internet through depiction of SonicWALL products to graphic for SME
  (office building), telecommuter (house), school or library (school), branch
  office (office building), corporate headquarters (office building), and
  mobile worker (laptop computer).]

   The SonicWALL product family shares a common set of Internet security
features that have been tailored to meet the needs of our target markets:

   Firewall Security. Our firewall security protects private networks against
Internet-based theft, destruction, or modification of data, and automatically
notifies customers if their networks are under attack. SonicWALL has been
awarded the internationally recognized ICSA Firewall Certification, the same
certification awarded to significantly more expensive products sold by Check
Point Software and Cisco Systems. In addition, SonicWALL is pre-configured to
automatically detect and thwart Denial of Service attacks such as Ping of
Death, SYN Flood, LAND Attack, and IP Spoofing.

   Virtual Private Networking. Our VPN capabilities enable affordable and
secure communications over the Internet between branch offices, telecommuters,
mobile workers and business partners. SonicWALL VPN uses industry-standard data
encryption algorithms and interoperates with other VPN products such as Check
Point Software's Firewall-1.

   Content Filtering. Our content filtering feature enables businesses,
families, schools and libraries to control access to objectionable or
inappropriate Web sites. SonicWALL can filter Internet content by URL or
keyword. We offer a content filter subscription service that provides a list of
objectionable Web sites that is automatically updated on a weekly basis.

   IP Address Management. SonicWALL includes Network Address Translation, or
NAT, which allows a customer to connect multiple users on their private network
to the Internet using a single public IP address. SonicWALL also includes
Dynamic Host Configuration Protocol, or DHCP, Client and Server capabilities.
DHCP Client allows SonicWALL to automatically acquire its IP address settings
from the Internet Service Provider, or ISP. DHCP Server allows computers on the
private network to automatically acquire IP address settings from SonicWALL,
simplifying client PC configuration.

                                       36
AutoUpdate. Our AutoUpdate feature automatically notifies all registered
customers via e-mail when bug fixes or new products that have been purchased
are available for download from our Web site. With AutoUpdate, we give our
customers an easy-to-use method to address rapidly evolving Internet security
issues.

   Logging and Reporting. SonicWALL maintains an event log of potential
security concerns which can be viewed with a Web browser or automatically sent
to any e-mail address on a periodic basis. SonicWALL notifies the administrator
of high-priority security issues, such as an attack on a server, by immediately
sending an alert message to a priority e-mail account such as an e-mail pager.
SonicWALL also provides pre-defined reports that show different views of
Internet usage, such as the most commonly accessed Web sites.

   Web Browser-Based Management. SonicWALL is easily and securely configured
and managed through a Web browser-based interface. The SonicWALL interface
effectively insulates the user from the underlying complexity of Internet
security, while providing enough flexibility to meet the diverse needs of our
customers.

Case Studies

   SonicWALL customers range from home users with Internet cable or DSL access
to global companies with numerous branch offices and telecommuters. The
following case studies illustrate how our customers are using our products and
services.

 Small to Medium Size Enterprise

   The Charlotte Hornets professional basketball franchise depends on the
Internet for league communications, marketing and public relations. The
Hornets' office uses an always-on broadband Internet connection that requires
Internet security to protect confidential franchise and league information. A
SonicWALL DMZ is used to provide firewall protection for all computers on the
private network. Four Web sites and other servers are hosted on the DMZ port,
where they are accessible from the Internet, but protected from Internet
attacks.

 Branch Office

   Pixar, an Academy Award-winning computer animation studio with technical,
creative and production capabilities, develops well-known computer-animated
feature films. In addition to its headquarters in Richmond, California, Pixar
has six branch offices with always-on broadband Internet connections that
require firewall security to protect the computers on their private networks
and VPN connectivity to allow secure communications with headquarters. A
SonicWALL at each branch office provides Pixar with firewall security. With the
SonicWALL VPN upgrade at each branch office and Check Point Software's
Firewall-1 at headquarters, Pixar has created a secure distributed network that
allows employees in different offices to collaborate on projects and to
disseminate confidential information securely over the Internet throughout the
enterprise.

 Telecommuter

   Mr. Marshall subscribes to Excite@Home's high speed Internet cable access
service in Fremont, California. Recently, Mr. Marshall's employer installed a
SonicWALL PRO at the office to allow telecommuters to use VPN for secure access
to sensitive resources on the company's private network, such as file servers
and databases. Mr. Marshall installed a SonicWALL/10 with the VPN upgrade at
home to create a VPN connection to his company's private network, allowing him
to securely collaborate on projects and distribute private information with
other employees over the Internet.

 Education

   The Santa Clara County California Library system offers free Internet access
to all members of the community from any of its computer terminals located
throughout nine community libraries. Responding to

                                       37
community concerns, the Library's governing body mandated the use of content
filtering to restrict access to sexually explicit Internet sites in the
children's rooms of all Library branches. Following a six-week study during
which multiple security and filtering products were analyzed, the Library
installed a SonicWALL DMZ with our content filtering subscription service to
restrict access to objectionable Web sites. SonicWALL DMZ is configured to
allow adult patrons to decide between filtered or unfiltered access while the
computers in the children's rooms are always filtered. In addition to content
filtering, SonicWALL DMZ provides firewall security for all of the Library's
computers.

Sales and Marketing

   Our sales and marketing efforts focus on successfully penetrating the SME,
branch office, telecommuter, and education markets. Our marketing programs
promote SonicWALL brand awareness and reputation as a reliable, high
performance, easy-to-use, and affordable Internet security appliance. We try to
strengthen our brand through a variety of marketing programs which include on-
going public relations, our Web site, advertising, direct mail, industry and
regional trade shows and channel partner seminar participation. We intend to
rapidly expand our indirect channel relationships through additional marketing
programs, additional marketing staff, and increased advertising.

   We believe that SonicWALL products are ideally suited for the indirect
channel. We primarily market and sell our products through a two-tiered
distribution structure consisting of distributors and value added resellers,
both in the United States and over 30 countries. Resellers include systems
integrators, ISPs, dealers, mail order catalogs, and on-line catalogs. This
network of over 800 VARs then sells our products to end-users in our target
markets. Our distribution agreements are non-exclusive. We also sell directly
to select partners in the United States that commit to certain volume and
training requirements.

   We divide our sales organization regionally into three areas: the United
States and Canada; the Pacific Rim and Latin America; and Europe, the Middle
East, and Africa. Regional sales representatives manage our relationships with
our network of distributors, value added resellers and select direct partners,
help our value added reseller network sell and support key customer accounts,
and act as a liaison between our value added reseller network and our marketing
organization. The regional sales representative's primary responsibility is to
help the indirect channel succeed and grow within the territory. We also have
an inside tele-sales group that supports the indirect channel, and a dedicated
business development organization whose responsibilities include identifying,
promoting, and managing strategic partnerships with ISPs and industry leaders,
OEM relationships, and inbound technology license arrangements.

   Domestic Channel. In the United States, our master distributors are Ingram
Micro and Tech Data. Ingram Micro accounted for 34% of our revenue in 1998 and
32% in the six months ended June 30, 1999. Tech Data began distributing our
products in February 1999, and in the six months ended June 30, 1999, accounted
for approximately 9% of total revenue.

   We have designed three general programs for domestic value added resellers.
These offer various benefits and product discounts depending on the level of
purchases that the reseller commits to or achieves. The basic program is the
Sonic Reseller level which offers access to privileged information and sales
and marketing materials. Next we offer a Sonic Silver level, which extends
those benefits by adding access to an expanded set of sales and marketing
tools, as well as priority technical support. The top level is Sonic Gold,
where additional benefits such as sales leads and market development funds are
available. Sonic Reseller, Silver, and Gold Partners all source our products
through a master distributor. We also have a Sonic Platinum Partner program for
selected key strategic partners which includes Gold Partner benefits plus
access to additional discounted demonstration units and market development
funds. We work directly with these Platinum Partners.

   International Channel. We believe there is a strong international market for
our products. International sales represented 32% of our revenue in 1998 and
approximately 35% of revenue in the six months ended June 30, 1999.

                                       38
We direct all of our international VARs to the master distributor in each
territory. We support master distributor channel programs and marketing efforts
by offering customizable marketing materials, sales tools, leads, co-operative
marketing funds, joint advertising, discounted demonstration units, and
training. We also participate in regional press tours, trade shows, and
seminars. Our largest international distributor is Sumitomo Software
Development in Japan. Additional key international distributors include ME
Networks in Switzerland, Connect AS in Norway, Tekdata Distribution in England,
and Network Innovation in Sweden.

   OEM Channel. We enter into select OEM relationships in order to leverage the
channels of well established companies that sell into our target markets. We
believe these partnerships expand our overall market while having a minor
impact on our own channel sales. We currently sell our products or services
through OEM partnerships with Com21, a leading provider of cable modems, and
Ramp Networks, a leading provider of networking equipment to small businesses.

Customer Service and Technical Support

   We offer our customers a comprehensive range of support programs through a
customer service and technical support organization which provides product
maintenance and technical support services on a worldwide basis. Our technical
support staff is located in Santa Clara, California. In addition to standard
support, we offer premium support services which an end user customer located
in the United States can purchase from us or our channel partners.

   Standard Support. Included during the warranty period, standard support is a
unique Web-based technical support mechanism whereby distributors, channel
partners, and end users can use our extensive on-line technical support
resource database. If the resource database does not answer a question, the
user can immediately enter a query or "trouble ticket" on-line and our customer
service organization will then generate a response via phone, fax, or e-mail.

   Premium Support. Available for purchase only in the continental United
States, our annual subscription-based Premium Support program offers extended
benefits to the Standard Support offering. Premium Support benefits include:

    .expedited response time;

    .access to a dedicated toll-free support telephone number;

    .overnight replacement of defective units; and

    .free shipping for units which we authorize for return.

   Our products include a standard one-year warranty, which can be extended at
additional cost. The warranty provides access to our standard technical support
services along with repair or replacement guarantees for units with product
defects.

                                       39
Customers

   As of August 15, 1999, we have shipped over 16,000 Internet Security
Appliances to our global reseller channel, which resells our products to a wide
variety of end users. The following is a partial list of select SonicWALL
distributors, resellers and end users:
End Users                                Distributors
 . Albany County School District          .Ingram Micro (US)
 . American Express                       .Tech Data (US)
 . Bank of Nova Scotia                    .Connect AS (Norway)
 . Centurion/Bank of Ireland              .ME Networks (Switzerland)
 . Charlotte Hornets                      .Network Innovation (Sweden)
 . City of Santa Cruz                     .Sumitomo Software Development (Japan)
 . Comision Federal de Electricidad       .Tekdata Distribution (UK)
 . Commercial Bank of San Francisco
 . Compaq Computer Corporation            Resellers
 . Duke University                        .Broadband Access Networking Group
 . General Magic                          .CompUSA
 . Johns Hopkins University               .GE Network Services
 . Los Angeles Lakers                     .Graybar
 . Lucent Technologies                    .IKON
 . Pixar                                  .Inacom
 . PricewaterhouseCoopers LLP             .Nippon Telephone & Telegraph (Japan)
 . Santa Clara County California Library  .PSINet
 . Sun Microsystems                       .Solunet
 . Wells Fargo                            .SwissCom (Switzerland)
 . Yankee Group                           .Verio
Technology

   We have designed our SonicWALL product family using a unique combination of
proprietary hardware and software that delivers comprehensive Internet security
with exceptional ease-of-use and industry-leading price/performance.

   The SonicWALL product family currently has two base hardware configurations:

    .  SonicWALL and SonicWALL DMZ. These SonicWALL products use the 33MHz
       Motorola 68360 microprocessor. Both products have two 10 megabit per
       second (Mbps) Ethernet ports. A LAN port connects the SonicWALL to
       the user's internal, private network. A Wide Area Network, or WAN,
       port connects to the external, public network. The SonicWALL DMZ has
       a third 10 Mbps Ethernet port (DMZ) which connects to public servers
       that are separated from both the public and private networks but
       still protected from security breaches.

    .  SonicWALL PRO. The SonicWALL PRO product uses Intel's 233MHz
       StrongARM 110 microprocessor, and has three 10/100 Mbps Fast
       Ethernet ports. These three ports function just like the SonicWALL
       DMZ. For feature expansion, the SonicWALL PRO has an internal
       Peripheral Component Interconnect, or PCI, interface, upgradeable
       RAM, and flash memory.

   The SonicWALL product family consists of the following core modules:

    .  Firewall. The core technology is the stateful packet inspection
       firewall software. Stateful packet inspection is generally accepted
       as the most advanced and secure method of implementing an Internet
       firewall. It examines all layers of the packet (from the physical
       layer

                                       40
up to application layer) and determines whether to accept or reject
       the requested communication based on state information derived from
       previous communications and the applications in use. Stateful packet
       inspection dynamically adjusts based on the changing state of the
       communication running across the firewall and is invisible to users
       on the protected network. It therefore requires no client PC
       configuration. Our SonicWALL firewall protects against a known set of
       security threats.

    .  Content Filter. The SonicWALL Internet content filter blocks
       objectionable content using a list of forbidden URLs and keywords. We
       license Microsystems Software's CyberNOT list of URLs and adapt it
       for our products. Each SonicWALL can automatically download an
       updated URL list weekly to keep pace with the dynamic nature of
       Internet content.

    .  IP Address Management. We have developed tools to hide the complexity
       of IP addressing. NAT allows networks to share a small number of
       valid public IP addresses with an equal or larger number of client
       computers on the LAN. This is a common challenge in new broadband-
       connected networks. Our DHCP Server and Client tools allow both the
       firewall and the client computers behind it to obtain their
       respective IP addresses dynamically from a server and thereby
       eliminate the need for manual configuration.

    .  Virtual Private Networking. We developed VPN support for the
       SonicWALL family to provide a means for our customers to use the
       Internet for secure communication between LANs, and from remote
       clients to LANs. SonicWALL VPN complies with the Internet Protocol
       Security (IPSec) standard and supports three data encryption methods:
       56 bit Data Encryption Standard (DES); 168 bit Data Encryption
       Standard (Triple-DES); and 56 bit ARCFour (ARC4). By building our VPN
       technology on industry standards--IPSec, DES and Triple-DES--we have
       been able to establish VPN interoperability with other leading VPN
       solutions such as Check Point Software's FW-1.

    .  Web Browser-Based Management Interface. Our products have an
       intuitive and easy-to-use Web-based management interface for rapid
       installation, configuration and maintenance, without the need for a
       dedicated information technology staff to install and maintain the
       solution. This interface can be easily accessed from any Web browser
       on the internal, private network. This interface can also be accessed
       remotely in a secure manner using the VPN feature described above.

Research and Development

   We believe that our future competitive position will depend in large part
on our ability to develop new and enhanced Internet security solutions and our
ability to meet the rapidly changing needs of our target customers who have
broadband access to the Internet. We focus our research and development on
evolving Internet security needs. In addition, we have also made substantial
investments in hardware and ASIC technologies which are critical to drive
product cost reductions and higher performance solutions. Current activities
include:

    .  virtual private networking improvements such as public key
       infrastructure support and strong authentication;

    .  other security and filtering improvements such as intrusion
       detection, virus scanning and e-mail spam filtering; and

    .  new management capabilities such as bandwidth management and a new
       distributed management framework.

   All of our research and development activities are conducted at our
principal facility in Santa Clara, California.

                                      41
Competition

   The market for Internet security products is highly competitive, and we
expect competition to intensify in the future. There are few substantial
barriers to entry, and additional competition from existing competitors and new
market entrants will occur in the future. Current and potential competitors in
our markets include, but are not limited to:

    .  enterprise firewall software vendors such as Check Point Software
       and Axent Technologies;

    .  network equipment manufacturers such as Cisco Systems, Lucent
       Technologies, Nortel Networks, 3COM and Nokia;

    .  computer or network component manufacturers such as Intel
       Corporation;

    .  operating system software vendors such as Microsoft Corporation,
       Novell and Sun Microsystems; and

    .  security appliance suppliers such as Watchguard Technologies.

   Most of our competitors to date have generally targeted large enterprises'
security needs with firewall products that are typically very complex and
expensive ranging in price from approximately $5,000 to more than $15,000, and
requiring active management by IT personnel. At any time, any of these
competitors may adapt existing products for our target markets. Many of our
current or potential competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical, marketing and other resources than we do. Nothing prevents or
hinders these actual or potential competitors from entering our target markets
at any time. In addition, our competitors may bundle products competitive to
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. If these companies were to use their
greater financial, technical and marketing resources in our target markets, it
could adversely affect our business.

Proprietary Rights

   We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. 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. Although
we are currently investigating patent protection for certain proprietary
technology, we have not yet received any patent protection for our technology
or products. Even if we obtain such patents, that does not guarantee that our
patent rights are valuable, create a competitive barrier, or will be free from
infringement. We face additional risk when conducting business in countries
that have poorly developed or inadequately enforced intellectual property laws.
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.

U.S. Government Export Regulation Compliance

   Our products are subject to federal export restrictions on encryption
strength. Recent federal legislation, however, has increased exportable
encryption strength and allows the export of any-strength encryption to
designated business sectors overseas, including U.S. subsidiaries, banks,
financial institutions, insurance companies and health and medical end users.
In addition, we have obtained a federal export license that allows us to export
encryption technology to commercial entities in approved countries. With these
expanded export rights, we may export strong encryption to a wide range of
foreign end-users, subject to limitations and record-keeping requirements. To
comply with these constraints, we obtain from our distributors and resellers
detailed information about each foreign end-user customer that will obtain
strong encryption.

                                       42
Manufacturing

   We outsource our manufacturing to two contract manufacturers, Flash
Electronics and AQS. The manufacturing processes and procedures for both of
these manufacturers are ISO 9002 certified. Outsourcing our manufacturing
enables us to reduce fixed overhead and personnel costs and to provide
flexibility in meeting market demand.

   We design and develop all the key components of our products, including
printed circuit boards and software. In addition, we determine the components
that are incorporated in our products and select the appropriate suppliers of
these components. Product testing and burn-in is performed by our contract
manufacturers using tests that we specify.

Employees

   As of June 30, 1999, we had 45 employees. Of these, 23 were employed in
sales and marketing, 5 in finance and administration, 10 in research and
development and 7 in 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 Santa Clara, California. We occupy approximately 8,700
square feet in this facility, under a lease that expires in August 2001.

Legal Proceedings

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

                                       43
MANAGEMENT

Executive Officers, Directors and Key Employees

   The following table lists the executive officers, directors and key
employees of SonicWALL as of June 30, 1999.
Name                      Age                           Position
----                      ---                           --------
Sreekanth Ravi(1).......   33 Chairman of the Board, President and Chief Executive Officer

Sudhakar Ravi(1)........   34 Vice President, Engineering and Director

Michael J. Sheridan(1)..   34 Vice President, Finance and Chief Financial Officer

Steven R. Perricone.....   38 Vice President, Sales

Richard Pearce..........   38 Vice President, Business Development

Fara Zarrabi............   58 Vice President, Operations

Jerrold F.
 Petruzzelli(2).........   46 Secretary and Director

David A. Shrigley(3)....   51 Director

Robert M.
 Williams(2)(3).........   44 Director
----------
(1)Executive officer
(2)Member of audit committee
(3)Member of compensation committee

   We have no employment agreements with our executive officers or key
employees.

   Sreekanth Ravi has served as our Chairman of the Board, President and Chief
Executive Officer since co-founding SonicWALL, Inc. in February 1991. Prior to
SonicWALL, Inc., Mr. Ravi was the founder and chief executive officer of
Generation Systems, a manufacturer of high performance video products, which he
later sold to a publicly held computer products company in 1990. Mr. Ravi
received a bachelor of science degree in electrical engineering from the
University of Illinois, Champaign-Urbana. Sreekanth Ravi and Sudhakar Ravi are
brothers.

   Sudhakar Ravi has served as our Vice President, Engineering and director
since co-founding SonicWALL, Inc. in February 1991. Prior to SonicWALL, Inc.,
Mr. Ravi was involved in semiconductor research at Stanford University. Mr.
Ravi received a bachelor of science degree from the University of Illinois,
Champaign-Urbana and a masters of science degree in computer science from
Stanford University. Sudhakar Ravi and Sreekanth Ravi are brothers.

   Michael J. Sheridan has served as our Chief Financial Officer since joining
SonicWALL, Inc. in May 1999. Mr. Sheridan joined SonicWALL, Inc. from Genesys
Telecommunications Laboratories, Inc., an enterprise software company in the
call center automation industry, where he served as Vice President of Finance
from January 1998 to May 1999, and served as Corporate Controller from November
1996 to December 1997. From August 1995 to November 1996, Mr. Sheridan was the
Corporate Controller for Network Appliance, Inc., a network file server
manufacturer. From 1986 to 1995, Mr. Sheridan was an audit professional with
Arthur Andersen, where he was involved primarily in high technology clients.
Mr. Sheridan received a bachelor's degree in commerce from Santa Clara
University and is a Certified Public Accountant.

   Steven R. Perricone has served as our Vice President, Sales since joining
SonicWALL, Inc. in April 1998. Mr. Perricone joined SonicWALL, Inc. from
Structured Internetworks, an IP bandwidth management company, where he served
as Vice President of Worldwide Sales and Support from July 1997 to April 1998.
From July 1994 to June 1997, Mr. Perricone was Vice President of Worldwide
Sales at Network TeleSystems, a provider of TCP/IP client and server technology
for Internet access. Prior to Network TeleSystems, Mr. Perricone held various
sales management positions at Emulex and Xylogics (now part of Nortel Networks
Corp.). Mr. Perricone received a bachelor's degree in business from California
State University.

                                       44
Richard Pearce, Ph.D. has served as our Vice President, Business Development
since joining SonicWALL, Inc. in June 1999. Dr. Pearce joined SonicWALL, Inc.
from WinNet MCS, Inc., a high-bandwidth wireless communications company where
he served as Vice President of Marketing from December 1998 to June 1999. Prior
to joining WinNet, Dr. Pearce was Director of Business Development for Bay
Networks (a Nortel Networks Corp. company) from August 1996 to November 1998,
responsible for defining and managing programs to add IP technology to Nortel's
product lines. He was also responsible for identifying and developing market
opportunities enabled by the innovative mixing of Nortel products and
technologies. Prior to Bay Networks' acquisition by Nortel, Dr. Pearce was
responsible for developing emerging market opportunities for Bay Networks. Dr.
Pearce received a bachelor of science degree in applied physics & electronics
and a Ph.D. in data networking from Durham University in the United Kingdom.

   Fara Zarrabi has served as our Vice President, Operations since joining
SonicWALL, Inc. in July 1999. Mr. Zarrabi joined SonicWALL, Inc. from Genesys
Telecommunications Laboratories, Inc., where he was Director of Operations from
February 1997 to June 1999. Prior to Genesys Telecommunications, Mr. Zarrabi
was the Director of Operations at Network Appliance, Inc., from February 1996
to February 1997. From May 1994 to February 1996, Mr. Zarrabi was Director of
Manufacturing Operations at Radius, Inc., a manufacturer of computer graphics
and video hardware. Mr. Zarrabi received a bachelor's degree in electronic
engineering from the University of California, Berkeley.

   Jerrold F. Petruzzelli has served as our Secretary and a director since
October 1993. Mr. Petruzzelli has been a partner of Manatt, Phelps & Phillips,
LLP, legal counsel to SonicWALL, Inc., since June 1999 and previously was a
partner of Holtzmann Wise & Shepard, legal counsel to the Company, from January
1990 to July 1995, and a partner of Wise & Shepard LLP, legal counsel to the
Company, from July 1995 to June 1999, at which time Wise & Shepard LLP merged
with Manatt, Phelps & Phillips, LLP. Mr. Petruzzelli received a bachelor of
arts degree from Yale University and a J.D. degree from the University of
Chicago.

   David S. Shrigley has been a director since July 1999. From November 1996 to
April 1999, Mr. Shrigley was Executive Vice President, Sales and Services of
Nortel Networks Corp., a network telecommunications company. From December 1978
to November 1996, Mr. Shrigley was an employee of Intel Corporation, a
semiconductor manufacturing company, where he was last employed as Vice
President, Corporate Marketing. Mr. Shrigley received a bachelor of science
degree in business administration from Franklin University.

   Robert M. Williams has been a director since May 1999. Since January 1998,
Mr. Williams has been a general partner of Bay Partners, a venture capital
firm. From May 1993 to December 1997, Mr. Williams was Vice President,
Marketing and Business Development of NetManage, Inc., a networking software
product development and sales company. Before then, Mr. Williams held various
marketing positions at several companies, including Verity, Inc., an Internet
text engine developer, and Ingres Corp., a developer of relational database
management software. Mr. Williams received a bachelor of arts degree from
Dartmouth College and a MBA from the Stanford Graduate School of Business.

Committees of the Board of Directors

   The compensation committee of our board of directors consists of Messrs.
Shrigley and Williams. 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. Petruzzelli and Williams. The audit
committee:

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

                                       45
.  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 August, 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 SonicWALL, Inc. are eligible to participate in
our stock option plans.

Director and Officer Indemnification and Liability

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

    .  acts or omissions that involve intentional misconduct or a knowing
       and culpable violation of law;

    .  acts or omissions that a director believes to be contrary to the
       best interest of the corporation or its shareholders or that involve
       the absence of good faith on the part of the director;

    .  any transaction from which a director derived an improper personal
       benefit;

    .  acts or omissions that show a reckless disregard for the director's
       duty to the corporation or its shareholders in circumstances in
       which the director was aware, or should have been aware, in the
       ordinary course of performing a director's duties, of a risk of
       serious injury to the corporation or its shareholders;

    .  acts or omissions that constitute an unexcused pattern of
       inattention that amounts to an abdication of the director's duty to
       the corporation or its shareholders;

    .  unlawful payments of dividends or unlawful stock repurchases or
       redemptions, unlawful distribution of assets to shareholders or
       unlawful loans or guarantees to directors, officers and others; or

    .  any transaction between a director and the Company.

   Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by California law, including circumstances in which
indemnification is otherwise discretionary under California law. We have
entered into indemnification agreements with our directors and officers
containing provisions that are in some respects broader than the specific
indemnification provisions contained in the California Corporations Code. The
indemnification agreements may require us:

    .  to indemnify our directors and officers against liabilities that may
       arise by reason of their status or service as directors or officers,
       other than liabilities arising from willful misconduct of a culpable
       nature;

    .  to advance their expenses incurred as a result of any proceeding
       against them as to which they could be indemnified; and

    .  to obtain directors' and officers' insurance if available on
       reasonable terms.

   At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation

                                       46
or proceeding that might result in a claim for indemnification. We believe that
our charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.

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

Compensation Committee Interlocks and Insider Participation

   Our board of directors' compensation committee currently consists of Messrs.
Shrigley and Williams. None of these individuals has at any time been an
employee or officer of SonicWALL, Inc. Until the compensation committee was
formed in August 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.

Executive Compensation

   The following table provides information concerning the compensation
received for services rendered to SonicWALL, Inc. in all capacities during the
year ended December 31, 1998, by our chief executive officer and each of the
other most highly compensated executive officers or key employees of SonicWALL,
Inc. whose compensation exceeded $100,000 in fiscal 1998.

                           Summary Compensation Table
Long-Term
                                                                                   Compensation
                                                                                      Awards
                                                                                 ----------------
                               Annual Compensation
                               --------------------                  Securities
Name and Principal                                    Other Annual   Underlying     All Other
Position                  Year Salary ($) Bonus ($) Compensation ($) Options (#) Compensation ($)
------------------        ---- ---------- --------- ---------------- ----------- ----------------
Sreekanth Ravi........... 1998  $240,000  $732,345        N/A            N/A        $13,846(1)
  President and Chief
  Executive Officer
Sudhakar Ravi............ 1998  $240,000  $816,871        N/A            N/A        $13,846(1)
  Vice President,
  Engineering
Steven R. Perricone...... 1998  $ 78,231  $ 23,389        N/A          600,000      $ 1,538(1)
  Vice President, Sales
Michael J. Sheridan(2)... 1998    N/A        N/A          N/A            N/A           N/A
  Vice President, Finance
  and Chief Financial
  Officer
----------
(1) Cash payment in lieu of vacation days
(2) Hired in May 1999

                                       47
The following table provides information regarding stock options we granted
in fiscal 1998 to our chief executive officer and the other executive officers
or key employees whose compensation exceeded $100,000 in fiscal 1998. The table
includes the potential realizable value over the five-year 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
Individual Grants
                         ------------------------
                                                                      Potential Realizable
                                                                        Value at Assumed
                                                                        Annual Rates of
                         Number of   Percent of                           Stock Price
                         Securities Total Options                       Appreciation for
                         Underlying  Granted to   Exercise                Option Term
                          Options   Employees in   Price   Expiration --------------------
 Name                    Granted(#)  Fiscal Year   ($/Sh)     Date      5%($)     10%($)
 ----                    ---------- ------------- -------- ---------- -------------------- ---
Sreekanth Ravi..........    N/A          N/A        N/A       N/A        N/A        N/A
Sudhakar Ravi...........    N/A          N/A        N/A       N/A        N/A        N/A
Steven R. Perricone.....  600,000         59%      $0.125   7/23/08   $         $
Michael J. Sheridan.....    N/A          N/A        N/A       N/A        N/A        N/A
Options vest and become exercisable over four years, provided the employee
remains employed at the Company. In 1998, we granted options to purchase up to
an aggregate of 1,015,000 shares to employees, directors and consultants. We
granted all options under our stock option plans 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 options exercised during
1998 and unexercised options held as of December 31, 1998 by our chief
executive officer and the other executive officers or key employees whose
compensation exceeded $100,000 in fiscal 1998. The value of realized and the
value of unexercised in-the-money options is calculated on the basis of an
assumed initial public offering price of $      per share as the fair market
value at December 31, 1998.

                Aggregate Option Exercises FY-End Option Values
Number of
                         Number of            Securities Underlying     Value of Unexercised
                          Shares             Unexercised Options at    In-the-Money Options at
                         Acquired              Fiscal Year End (#)       Fiscal Year-End($)
                            on      Value   ------------------------- -------------------------
          Name           Exercise  Realized Exercisable Unexercisable Exercisable Unexercisable
          ----           --------- -------- ----------- ------------- ----------- -------------
Sreekanth Ravi.......... 1,067,440                  0            0       $            $
Sudhakar Ravi........... 1,067,440                  0            0
Steven R. Perricone.....         0            111,600      488,400
Michael J. Sheridan.....       N/A                N/A          N/A         N/A          N/A
Employee Benefit Plans

 1998 and 1994 Stock Option Plans

   The 1998 stock option plan provides for the grant of incentive stock
options, as defined in Section 422 of the Internal Revenue Code, to employees
and the grant of nonstatutory stock options to employees, non-employee
directors and consultants. The purposes of the 1998 stock option plan are:

    .  to attract and retain the best available personnel;

                                       48
.  to provide additional incentives to our employees and consultants;
       and

    .  to promote the success of our business.

   The 1998 stock option plan was adopted by our board of directors in July
1998, approved by our stockholders in July 1998, and amended by the
shareholders to increase the number of shares available for grant thereunder in
February 1999. Unless terminated earlier by the board of directors, the 1998
stock option plan will terminate in July 2008. The 1998 stock option plan was
amended by our board of directors in August 1999 to include some of the
provisions provided below. These amendments were approved by our shareholders
in August 1999. The number of shares reserved for issuance under the 1998 stock
option plan will be subject to an automatic annual increase in the first day of
2000 through 2008 equal to the lesser of:

    .  2,000,000 shares;

    .  4% of our outstanding common stock on the last day of the
       immediately preceding fiscal year; or

    .  a number of shares determined by the administrator.

   The compensation committee currently administers the 1998 stock option plan.
The administrator of the 1998 stock option plan determines numbers of shares
subject to options, vesting schedules and exercise prices for options granted
under the 1998 stock option plan.

   The exercise price of incentive stock options must be at least equal to 100%
of the fair market value of our common stock on the date of grant, and at least
equal to 110% of the fair market value in the case of incentive stock options
granted to an employee who holds, at the time the option is granted, more than
10% of the total voting power of all classes of our stock or any parent's or
subsidiary's stock. Nonstatutory stock options will have an exercise price of
at least 85% of the fair market value of our stock. Payment of the exercise
price may be made in cash or other form of consideration approved by the
administrator. The administrator determines the term of options, which may not
exceed ten years, or five years in the case of an incentive stock option
granted to an employee who holds, at the time the option is granted, more than
10% of the total voting power of all classes of our stock or any parent's or
subsidiary's stock. No option may be transferred by the optionee other than by
will or the laws of descent or distribution, provided, however, that the
administrator may in its discretion provide for the transferability of
nonstatutory stock options. The administrator determines when options become
exercisable. Options granted under the 1998 stock option plan become
exercisable at a rate not less than 20% per year. To the extent an optionee
would have the right in any calendar year to exercise for the first time one or
more incentive stock options for shares having an aggregate fair market value
in excess of $100,000 as of the date the options were granted, the excess
options will be treated as nonstatutory stock options.

   In the event of a change of control of SonicWALL, Inc., outstanding options
will be assumed or substituted by the successor corporation. If the successor
corporation does not agree to this assumption or substitution, the options will
terminate upon the closing of the transaction.

   The board of directors may amend, modify or terminate the 1998 stock option
plan if any amendments, modification or termination does not impair existing
rights of plan participants. Additionally, shareholder approval is required for
an amendment to the extent required by applicable law, regulations or rules.

   Options outstanding under the 1994 stock option plan are subject to
substantially the same terms as options under the 1998 stock option plan.

   As of June 30, 1999:

    .  a total of 5,958,324 shares have been authorized for issuance under
       the 1994 and 1998 stock option plans;

    .  options to purchase an aggregate of 1,760,000 shares of common stock
       were outstanding under the 1994 stock option plan and 1998 stock
       option plan at a weighed average exercise price of $0.48;

                                       49
.  2,639,676 shares had been issued upon exercise of outstanding
       options, net of repurchases, under the 1994 and 1998 stock option
       plans; and

    .  1,558,648 shares remained available for future grant under the 1994
       and 1998 stock option plans.

 1999 Employee Stock Purchase Plan

   Our 1999 employee stock purchase plan was adopted by the board of directors
and shareholders in August 1999. The 1999 employee stock purchase plan becomes
effective on the effective date of this offering. A total of 250,000 shares of
common stock has been reserved for issuance under the 1999 employee stock
purchase plan.

   The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, provides our employees with an
opportunity to purchase our common stock through accumulated payroll
deductions. The 1999 employee stock purchase plan will be administered by the
board of directors or by a committee appointed by the board of directors. The
1999 employee stock purchase plan permits an eligible employee to purchase
common stock through payroll deductions of up to 15% of that employee's
compensation. Employees, including officers and employee directors, of
SonicWALL, Inc., or of any majority-owned subsidiary designated by the board of
directors, are eligible to participate in the 1999 employee stock purchase plan
if they are employed by the Company or any designated subsidiary for at least
20 hours per week and more than five months per year. Unless the board of
directors or its committee determines otherwise, the 1999 employee stock
purchase plan will be implemented by a series of overlapping offering periods
generally of 24 months' duration with new offering periods commencing on
February 1 and August 1 of each year. Each offering period will be divided into
four consecutive purchase periods of approximately six months' duration. The
first offering period is expected to commence on the date of this offering and
end on July 31, 2001; the initial purchase period is expected to end six months
after the offering date. The price at which common stock will be purchased
under the 1999 employee stock purchase plan is equal to 85% of the fair market
value of the common stock on the first day of the applicable offering period or
the last day of the applicable purchase period, whichever is lower. Employees
may end their participation in an offering period at any time, and
participation automatically ends on termination of employment.

   Under the 1999 employee stock purchase plan, no employee may be granted an
option if immediately after the grant the employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or that of our subsidiaries. In
addition, no employee may be granted an option under the 1999 employee stock
purchase plan if the option would permit the employee to purchase stock under
all of our employee stock purchase plans in an amount that exceeds $25,000 of
fair market value for each calendar year in which the option is outstanding at
any time. In addition, no employee may purchase more than 2,000 shares of
common stock under the 1999 employee stock purchase plan in any one purchase
period. If the fair market value of the common stock on a purchase date other
than the final purchase date of an offering period is less than the fair market
value at the beginning of the offering period, each participant in the 1999
employee stock purchase plan will automatically be withdrawn from the offering
period as of the purchase date and re-enrolled in a new 24-month offering
period on the first business day following the purchase date.

   The 1999 employee stock purchase plan provides that, in the event of a
change of control of SonicWALL, Inc. each right to purchase stock under the
1999 employee stock purchase plan will be assumed or an equivalent right
substituted by the successor corporation. However, our board of directors will
shorten any ongoing offering period so that employees' rights to purchase stock
under the 1999 employee stock purchase plan are exercised prior to the
transaction if the successor corporation refuses to assume each purchase right
or to substitute an equivalent right.

   The 1999 employee stock purchase plan will terminate in August 2009 unless
terminated earlier in accordance with its provisions. The board of directors
has the power to amend or terminate the 1999 employee

                                       50
stock purchase plan if its action does not adversely affect any outstanding
rights to purchase stock thereunder. However, our board of directors may amend
or terminate the 1999 employee stock purchase plan or an offering period even
if it would adversely affect options in order to avoid our incurring adverse
accounting charges.

 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.

                                       51
CERTAIN TRANSACTIONS

   Since January 1, 1996, SonicWALL, Inc. has not been a party to any
transaction or series of similar transactions in which the amount involved
exceeds $60,000 and in which any director, executive officer, or holder of more
than 5% of our common stock had or will have a direct or indirect material
interest other than

    .  normal compensation arrangements which are described under
       "Management--Executive Compensation" above; and

    .  the transactions described below.

Transactions with Executive Officers, Directors and Significant Shareholders

(1) On August 10, 1998, we issued an aggregate of 5,426,186 shares of common
    stock to Sreekanth Ravi, Sudhakar Ravi, Bruce Wonnacott and Ravi Anne, each
    a general partner of AckFin, a California general partnership, in
    consideration of the purchase of all of the general partner interests of
    AckFin and $150,000 cash. Sreekanth Ravi and Sudhakar Ravi are executive
    officers and directors of the Company. Ravi Anne and Bruce Wonnacott each
    hold more than 5% of the outstanding shares of common stock of SonicWALL,
    Inc.

(2) On December 23, 1998, we extended two loans in the aggregate amount of
    $96,069.60 to Sreekanth Ravi, Chief Executive Officer, President and a
    director of SonicWALL, Inc. to pay the exercise price of options to
    purchase 1,067,440 shares of our common stock. Each loan had an interest
    rate of 8% per year, payable over four years and was secured by the shares
    of common stock purchased upon the exercise of Mr. Ravi's stock options.
    These loans were repaid in full in August 1999.

(3) On December 23, 1998, we extended two loans in the aggregate amount of
    $96,069.60 to Sudhakar Ravi, Vice President Engineering and a director of
    SonicWALL, Inc. to pay the exercise price of options to purchase 1,067,440
    shares of our common stock. Each loan had an interest rate of 8% per year,
    payable over four years and was secured by the shares of common stock
    purchased upon the exercise of Mr. Ravi's stock options. These loans were
    repaid in full in August 1999.

(4) On February 19, 1999, we issued an aggregate of 1,438,377 shares of our
    redeemable Series A convertible preferred stock at a purchase price of
    $3.48 per share to several investors, including 14,384 shares issued to
    Robert Williams, a director of the Company, and 1,150,700 shares to Bay
    Partners SBIC II, L.P. Mr. Williams is a partner of Bay Management Company
    1997, the general partner of Bay Partners SBIC II, L.P. The purchasers of
    redeemable Series A convertible preferred stock are entitled to
    registration rights in respect of the common stock issued or issuable upon
    conversion of the redeemable Series A convertible preferred stock.

(5) On May 26, 1999, we extended a loan in the amount of $300,000 to Michael
    Sheridan, Vice President Finance and Chief Financial Officer of SonicWALL,
    Inc. to pay the exercise price of options to purchase 300,000 shares of our
    common stock. Mr. Sheridan has purchased the optioned shares, and the
    Company has the right to repurchase the optioned shares for the purchase
    price paid, which right lapses over four years. The loan has an interest
    rate of 8% per year and is payable over four years. The loan is payable in
    full if Mr. Sheridan is no longer an employee, officer, director or
    consultant of the Company. As of June 30, 1999, aggregate principal and
    interest of approximately $302,000 was outstanding.

(6) On August 6, 1999 Sreekanth Ravi, Chairman of the Board, President and
    Chief Executive Officer and a director, and Sudhakar Ravi, Vice President
    of Engineering and a director, sold an aggregate of 1,832,364 shares of
    common stock to Bay Sonic Investors, LLC at a purchase price of $6.52 per
    share. Two shareholders also sold an aggregate of 400,000 shares of common
    stock to Bay Sonic Investors, LLC at a purchase price of $6.52 per share on
    the same date. Robert Williams, a director of the Company, is a

                                       52
managing member of Bay Sonic Investors, LLC. In addition, Sreekanth Ravi
   sold 38,354 shares of common stock to David Shrigley, a director of the
   Company, at a purchase price of $6.52 per share and 30,682 shares of common
   stock to John McNulty at a purchase price of $6.52 per share. The purchasers
   of common stock in these transactions are entitled to registration rights in
   respect of the common stock purchased.

Indemnification Agreements

   We have entered into indemnification agreements with some of our officers
and directors. See "Management--Director and Officer Indemnification and
Liability."

Registration Rights Agreements

   Some of our shareholders are entitled to have their shares registered by us
for resale. See "Description of Capital Stock--Registration Rights."

                                       53
PRINCIPAL AND SELLING SHAREHOLDERS

Principal Shareholders

   The following table provides information regarding the actual beneficial
ownership of our outstanding common stock as of June 30, 1999, assuming the
conversion of all outstanding shares of our redeemable Series A convertible
preferred stock 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
       fiscal 1998; and

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

   Percentage of beneficial ownership is based on 20,091,344 shares of common
stock outstanding as of June 30, 1999, together with options that are
exercisable within 60 days of June 30, 1999 for each shareholder. 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. The percentages for beneficial ownership after offering
assume that the underwriters do not exercise their over-allotment option.
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.
Percentage of
                                            Number of Shares  Shares of Common
                                            of Common Stock   Stock Outstanding
                                           Beneficially Owned -----------------
                                             as of June 30,    Before   After
Name and Address                                  1999        Offering Offering
----------------                           ------------------ -------- --------
Sreekanth Ravi(1)........................       6,143,986       30.6%       %
Sudhakar Ravi(2).........................       6,143,986       30.6%       %
Steven R. Perricone(3)...................         210,800        1.0%       %
Michael J. Sheridan......................         300,000        1.5%       %
Bay Partners SBIC II, L.P.(4)............       2,301,400       11.5%       %
Ravindra Anne............................       1,356,546        6.8%       %
Bruce Wonnacott..........................       1,356,546        6.8%       %
Jerrold F. Petruzzelli(5)................         100,000          *%       %
David Shrigley(6)........................          50,000          *%       %
Robert M. Williams(7)....................          28,768          *%       %
All directors and executive officers as a
 group (7 persons)(8)....................      15,278,940       76.0%       %
----------
 * Less than 1%.

(1) Includes 600,000 shares transferred to a family trust subsequent to June
    30, 1999.

(2) Includes 600,000 shares transferred to a family trust subsequent to June
    30, 1999.

(3) Includes 210,800 shares of common stock issuable upon exercise of
    immediately exercisable options.

(4) Represents 2,301,400 shares held by Bay Partners SBIC II, L.P. Robert
    Williams, a director of SonicWALL, Inc. is a partner of Bay Management
    Company 1997, the general partner of Bay Partners SBIC II, L.P. He shares
    voting and investing power with respect to the shares held by this entity,
    and disclaims beneficial ownership of shares in which he has no pecuniary
    interest. The address for Bay Partners SBIC II, L.P. is 10600 N. De Anza
    Boulevard, Suite 100, Cupertino, California 95014.

                                       54
(5) Includes 5,000 shares held on behalf of a minor child in an irrevocable
    trust of which Mr. Petruzzelli is the sole trustee.

(6) The address for Mr. Shrigley is 471 Santa Rosa Drive, Los Gatos, California
    95032.

(7) See note (4) above. The address for Mr. Williams is 10600 N. De Anza
    Boulevard, Suite 100, Cupertino, California 95014.

(8) Includes 210,800 shares of common stock issuable upon exercise of
    immediately exercisable options.

   The preceding table excludes sales on August 6, 1999 by Sreekanth Ravi and
Sudhakar Ravi of an aggregate of 1,832,364 shares of common stock to Bay Sonic
Investors, LLC. Ravindra Anne and Bruce Wonnacott also sold an aggregate of
400,000 shares of common stock to Bay Sonic Investors, LLC on the same date. In
addition, Sreekanth Ravi sold 38,354 shares of common stock to David Shrigley
and 30,682 shares of common stock to John McNulty on the same date.

Selling Shareholders

   If the underwriters exercise their over-allotment option in full, the
following directors, officers and shareholders will sell the number of shares
indicated below:
Percentage of
                                                    Shares of
        Beneficial                   Beneficial    Common Stock
        Ownership                    Ownership     Outstanding
         Prior to      Number of       After          After
      Over-allotment    Shares     Over-allotment Over-allotment
Name     Exercise    Being Offered    Exercise       Exercise
----  -------------- ------------- -------------- --------------
55
DESCRIPTION OF CAPITAL STOCK

   We are authorized to issue up to two hundred million shares of common stock
and ten million shares of preferred stock. You should carefully read our
articles of incorporation, which are included as an exhibit to the registration
statement of which this prospectus is a part.

Common Stock

   As of June 30, 1999, assuming conversion of all outstanding shares of
redeemable Series A convertible preferred stock, there were 19,600,594 shares
of common stock outstanding, held of record by approximately 27 shareholders.
Following this offering, there will be           shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of shareholders. 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 SonicWALL, Inc. 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

   At the closing of this offering, all outstanding shares of redeemable Series
A convertible preferred stock will be converted into 2,876,754 shares of common
stock. Under our articles of incorporation, the board of directors will then
have the authority, without further action by the shareholders, to issue up to
8,561,623 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 shareholder 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 decrease the amount of earnings and assets
available for distribution to common stock holders and could delay or prevent a
change of control of SonicWALL, Inc. 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. The board of directors does not
currently intend to seek shareholder approval prior to any issuance of
preferred stock, unless required to do so by law. We have no current plans to
issue any preferred stock.

Anti-takeover Provisions

   Upon completion of this offering, some provisions of our charter documents
may have the effect of delaying, deterring or preventing changes in control or
management of SonicWALL, Inc., including changes a shareholder might consider
to be favorable. This could have an adverse affect on the market price of our
common stock. These provisions include:

    .  authorizing the board to issue additional preferred stock;

    .  prohibiting cumulative voting in the election of directors;

    .  limiting the persons who may call special meetings of shareholders;

    .  prohibiting shareholder actions by written consent; and

    .  establishing advance notice requirements for nominations for
       election to the board of directors or for proposing matters that can
       be acted on by shareholders at shareholder meetings.

                                       56
Preferred Stock

   Our charter documents grant the board of directors broad power to establish
the rights and preferences of the authorized but unissued preferred stock.
Preferred stock could be issued with terms that delay, deter or prevent a
change of control or management.

 No Cumulative Voting for Directors

   Our charter documents prohibit cumulative voting for directors. This may
limit or eliminate the power of minority shareholders to influence the
composition of our board of directors.

 No Shareholder Action by Written Consent

   Our charter documents provide that an action requiring or permitted to be
taken at any annual or special meeting of shareholders may only be taken at a
duly called annual or special meeting of our shareholders. This provision
prevents shareholders from initiating or effecting any such action by written
consent.

 Notice Requirements

   Our charter documents establish advance notice procedures with regard to all
shareholder proposals to be brought before meetings of our shareholders,
including relating to the nomination of candidates for election as directors,
the removal of directors and amendments to our articles of incorporation or
bylaws. These procedures provide that notice of these proposals must be given
in writing, no later than 60 days prior to the meeting to our Secretary and
must contain certain information specified in our charter documents.

   Our stock option plans and stock purchase plan generally provide for
assumption of our benefit plans or substitution of equivalent options of a
successor corporation or, alternatively, at the discretion of the board of
directors, exercise of some or all of the options, including those for non-
vested shares, or acceleration of vesting of shares issued pursuant to stock
grants, upon a change of control or similar event.

   These charter provisions may have the effect of delaying, deterring or
preventing a change of control of SonicWALL, Inc.

Registration Rights

   Under the terms of a registration rights agreement, subject to certain
exceptions, if we propose to register any of our shares of common stock under
the Act, either for our own account or the account of any shareholder, in any
public offering, upon the completion of this offering, certain investors
holding an aggregate of 5,178,154 shares of our common stock will be entitled
to notice of such registration and will be entitled to include those
registrable securities in a registration under the Act.

   In addition, upon completion of this offering, certain investors holding an
aggregate of 2,876,754 shares of our common stock will be entitled to
additional rights under this registration rights agreement as follows: the
holder or holders of an aggregate of at least 50% of the then outstanding
registrable securities shall have the right to require us to file a
registration statement on a form, other than Form S-3 under the Act, in order
to register the registrable securities then held by such holder or holders,
provided that:

    .  at least six months has passed since our initial public offering of
       shares of common stock under a registration statement;

    .  the anticipated aggregate offering price to the public is at least
       $2,000,000; and

    .  we shall not be required to file more than two such registration
       statements.

                                       57
Further, a holder or holders of at least 20% of the then outstanding
registrable securities may require us to use our best efforts to file
additional registration statements on Form S-3, provided that:

    .  the anticipated aggregate offering price to the public is at least
       $500,000; and

    .  we shall not be required to file more than one such registration
       statement in any twelve-month period.

   The right to include any of the above described registrable securities in
any registration is subject to certain limitations and conditions, including
the underwriters' right to limit the number of shares being registered by all
holders. We are required to indemnify holders of registrable securities and the
underwriters, if any, for these holders under certain circumstances. In
general, we are required to bear the expenses of registrations, except for the
selling shareholders' pro rata portion of the underwriting discounts and
commissions.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is Bank Boston, N.A.

Nasdaq National Market Listing

   We expect our common stock to be approved for quotation on the Nasdaq
National Market under the symbol SNWL, subject to official notice of issuance.

                                       58
SHARES ELIGIBLE FOR FUTURE SALE

   Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price.

   After this offering,            shares of common stock will be outstanding,
assuming the conversion on a 2 for 1 basis of all outstanding shares of our
redeemable Series A convertible preferred stock and the issuance of an
aggregate of           shares of common stock. The number of shares outstanding
after this offering is based on the number of shares outstanding as of June 30,
1999, and assumes no exercise of outstanding options. The           shares sold
in this offering will be freely tradable without restriction under the Act. The
remaining            shares of common stock outstanding upon completion of the
offering are restricted securities in that they may be sold in the public
market only if registered or if they qualify for an exemption from registration
under the Act or Rules 144, 144(k) or 701 of the Act. In addition, all
outstanding shares are subject to lock-up agreements either directly with
SonicWALL, Inc. or as described below.

   All of the officers and directors, who hold an aggregate of
shares of common stock, and shareholders of SonicWALL, Inc. holding an
aggregate of           shares of common stock have entered into lock-up
agreements generally providing that they will not offer, sell, contract to
sell, grant any option to purchase, pledge or otherwise dispose of, or, in any
manner, transfer all or a portion of the economic consequences associated with
the ownership of any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock beneficially owned by them
during the 180 day period following the date of this prospectus without the
prior written consent of Bear, Stearns & Co. Inc. Transfers may be made
earlier:

    .  as a bona fide gift or gifts, provided the donee or donees agree in
       writing to be bound by this restriction;

    .  as a transfer to members of the undersigned's immediate family or to
       trusts for the benefit of members of the undersigned's immediate
       family, provided that the transferees agree in writing to be bound
       by the terms of this restriction;

    .  as a distribution to partners, shareholders or beneficiaries of the
       transferor, provided that the distributees agree in writing to be
       bound by the terms of this restriction;

    .  with respect to dispositions of common stock acquired on the open
       market;

    .  with respect to sales or purchases of common stock acquired on the
       open market; or

    .  with the prior written consent of Bear, Stearns & Co. Inc.

   Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. When determining whether or not to release shares from the lock-up
agreements, Bear, Stearns & Co. Inc. will consider, among other factors, the
shareholder's reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the time.
Following the expiration of the 180 day lock-up period, additional shares of
common stock will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701.

   In general, under Rule 144 as currently in effect, an affiliate of
SonicWALL, Inc. or a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of SonicWALL, Inc. common stock or
the average weekly trading volume of SonicWALL, Inc. common stock on the Nasdaq
National Market during the four calendar weeks preceding such sale. Sales under
Rule 144 are also

                                       59
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about SonicWALL, Inc. Any person, or
persons whose shares are aggregated, who is not deemed to have been an
affiliate of SonicWALL, Inc. at any time during the 90 days preceding a sale,
and who has beneficially owned shares for at least two years including any
period of ownership of preceding non-affiliated holders, would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.

   After the effective date of this offering, we intend to file a registration
statement on Form S-8 to register up to approximately            shares of
common stock reserved for issuance under our stock option plans and our
employee stock purchase plan. That registration statement will become effective
automatically upon filing. After the filing of a registration statement on Form
S-8, shares issued under our stock option plans and our employee stock purchase
plan 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
2,876,754 shares of outstanding common stock will have rights to require us to
register their shares for future sale. These holders and holders of
approximately 2,301,400 shares of common stock have the right to participate in
any registration we undertake on our own (except a registration of shares in
connection with an employee benefit plan or merger).

                                       60
UNDERWRITING

   The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed with SonicWALL, Inc., subject to the
terms and conditions of the Underwriting Agreement (the form of which has been
filed as an exhibit to the Registration Statement on Form S-1 of which this
prospectus is a part), to purchase from SonicWALL, Inc. the aggregate number of
shares of common stock set forth opposite their names below:
Number
                                                                            of
      Underwriter                                                         Shares
      -----------                                                         ------
Bear, Stearns & Co. Inc. .............................................
   Hambrecht & Quist LLC.................................................
   Thomas Weisel Partners LLC............................................
     Total...............................................................
The nature of the respective obligations of the underwriters is such that
all of the shares of common stock (other than shares of common stock covered by
the over-allotment option described below) must be purchased if any are
purchased. Those obligations are subject, however, to various conditions,
including the approval of certain matters by counsel. We and certain selling
shareholders have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Act, and, where such
indemnification is unavailable, to contribute to payments that the underwriters
may be required to make in respect of such liabilities.

   We have been advised that the underwriters propose to offer the shares of
common stock directly to the public initially at the public offering price set
forth on the cover page of this prospectus and to certain selected dealers at
such price less a concession not to exceed $     per share, that the
underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $     per share and that after the
commencement of this offering, the public offering price and the concessions
may be changed.

   Certain selling shareholders have granted to the underwriters an option to
purchase in the aggregate up to               additional shares of common stock
to be sold in this offering at the public offering price less the underwriting
discount set forth on the cover page of this prospectus, solely to cover over-
allotments, if any. The option may be exercised in whole or in part at any time
within 30 days after the date of this prospectus. To the extent the option is
exercised, the underwriters will be severally committed, subject to certain
conditions, including the approval of certain matters by counsel, to purchase
the additional shares of common stock in proportion to their respective
purchase commitments as indicated in the preceding table.

   The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by the selling shareholders. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters option to purchase additional shares.
No      Full
                                                               Exercise Exercise
                                                               -------- --------
Per share..................................................   $        $
   Total......................................................   $        $
The offering of the shares is made for delivery, when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

   The underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of common stock offered hereby for sale to
certain directors, officers, other employees, business

                                       61
affiliates and related persons of SonicWALL, Inc. who have expressed an
interest in purchasing shares. The number of shares available for sale to the
general public will be reduced to the extent any reserved shares are purchased.
Any reserved shares not so purchased will be offered by the underwriters on the
same basis as the other shares offered hereby.

   SonicWALL, Inc. and our executive officers, directors and our current
shareholders, who own in the aggregate     shares of common stock, have agreed
that, subject to certain limited exceptions, without the prior written consent
of Bear, Stearns & Co. Inc., they will not, directly or indirectly, offer,
sell, contract to sell, grant any option to purchase, pledge or otherwise
dispose of, or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
beneficially owned by them during the 180 day period following the date of this
prospectus.

   Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined
through negotiations among SonicWALL, Inc. and the representatives of the
underwriters. Among the factors considered in making such determination were
our financial and operating history and condition, market valuations of other
companies engaged in activities similar to ours, our prospects and prospects
for the industry in which we do business in general, our management, prevailing
equity market conditions and the demand for securities considered comparable to
those of SonicWALL, Inc.

   In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock, than have been sold to them by SonicWALL, Inc. The underwriters
may elect to cover any such short position by purchasing shares of common stock
in the open market or by exercising the over-allotment option granted to the
underwriters. In addition, the underwriters may stabilize or maintain the price
of the common stock by bidding for or purchasing shares of common stock in the
open market and may impose penalty bids, under which selling concessions
allowed to syndicate members or other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages resales thereof. No
representation is made as to the magnitude or effect of any such stabilization
or other transactions. Such transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.

   Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
60 filed public offerings of equity securities, of which 33 have been
completed, and has acted as a syndicate member in an additional 32 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.

                                 LEGAL MATTERS

   The validity of the common stock offered in this offering will be passed
upon for us by Manatt, Phelps & Phillips, LLP of Palo Alto, California. Jerrold
F. Petruzzelli, a partner of Manatt, Phelps & Phillips, LLP, is the Secretary
and a director of SonicWALL, Inc. and owns 100,000 shares of SonicWALL, Inc.
common stock. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Latham & Watkins, San Francisco,
California.

                                       62
EXPERTS

   The consolidated financial statements as of December 31, 1997, 1998 and June
30, 1999 and for each of the three years in the period ended December 31, 1998,
and the six month period ended June 30, 1999 included in this Prospectus and
the financial statement schedules included in the Registration Statement have
been so included in reliance on PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting .

                      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 example, the descriptions in the
prospectus regarding the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. 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 SonicWALL, Inc., that file electronically with the SEC.

                                       63
SONICWALL, INC.

                         INDEX TO FINANCIAL STATEMENTS
Page
                                                                            ----
Report of Independent Accountants.......................................... F-2

Consolidated Balance Sheets................................................ F-3

Consolidated Statements of Operations...................................... F-4

Consolidated Statements of Shareholders' Equity (Deficit).................. F-5

Consolidated Statements of Cash Flows...................................... F-6

Notes to Consolidated Financial Statements................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
SonicWALL, Inc.

   In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
SonicWALL, Inc. and its subsidiary at December 31, 1997 and 1998 and June 30,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 and the six month period
ended June 30, 1999, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
August 25, 1999

                                      F-2
SONICWALL, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
Pro Forma
                                          December 31,    June    Shareholders'
                                          -------------    30,       Equity
                                           1997   1998    1999    June 30, 1999
                                          ------ ------  -------  -------------
ASSETS
Current Assets:
  Cash and cash equivalents.............  $  787 $1,051  $ 6,769
  Accounts receivable, net of allowance
   for doubtful accounts of $121, $193,
   and $326.............................     564    677    1,839
  Inventories...........................     351    331      649
  Deferred income taxes.................     277    366    1,743
  Prepaid expenses and other current
   assets...............................     301     31       69
                                          ------ ------  -------
   Total current assets.................   2,280  2,456   11,069
Property and equipment, net.............      55    107      187
Other assets............................      39     21       21
                                          ------ ------  -------
     Total assets.......................  $2,374 $2,584  $11,277
                                          ====== ======  =======
LIABILITIES, REDEEMABLE PREFERRED STOCK
   AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Accounts payable......................  $  663 $  549  $   836
  Accrued payroll and related benefits..     157    145      638
  Other accrued liabilities ............     310    748    1,059
  Deferred revenue......................     684  1,512    2,576
  Income taxes payable..................      95    309      879
                                          ------ ------  -------
   Total current liabilities............   1,909  3,263    5,988
                                          ------ ------  -------
Redeemable Series A convertible
 preferred stock, no par value;
 redemption and liquidation value of
 $5,000, 1,438,377 shares issued and
 outstanding............................     --     --     4,971     $   --
Commitments and contingencies (Note 9)..
Shareholders' Equity (Deficit):
  Preferred stock, no par value;
   10,000,000 shares authorized.........     --     --       --          --
  Common stock, no par value;
   200,000,000 shares authorized;
   8,461,100, 16,272,164 and
   16,723,840 shares issued and
   outstanding..........................      12    290    3,499       8,470
  Deferred stock compensation...........     --      (6)  (1,994)     (1,994)
  Notes receivable from shareholders....     --    (230)    (492)       (492)
  Retained earnings (accumulated
   deficit).............................     453   (733)    (695)       (695)
                                          ------ ------  -------     -------
   Total shareholders' equity
    (deficit)...........................     465   (679)     318     $ 5,289
                                          ------ ------  -------     -------
     Total liabilities, redeemable
      preferred stock and shareholders'
      equity (deficit)..................  $2,374 $2,584  $11,277
                                          ====== ======  =======
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
SONICWALL, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
Year Ended           Six Months Ended
                                      December 31,              June 30,
                                  -----------------------  ------------------
                                   1996    1997    1998       1998      1999
                                  ------  ------  -------  ----------- ------
                                                           (unaudited)
Revenue
  Internet Security.............. $  --   $  250  $ 2,349    $  405    $5,474
  Ethernet.......................  9,356   9,092    5,166     2,901     1,216
                                  ------  ------  -------    ------    ------
    Total revenue................  9,356   9,342    7,515     3,306     6,690
                                  ------  ------  -------    ------    ------

Cost of revenue
  Internet Security..............    --      225    1,035       375     1,475
  Ethernet.......................  5,915   4,617    2,273     1,277       523
                                  ------  ------  -------    ------    ------
    Total cost of revenue........  5,915   4,842    3,308     1,652     1,998
                                  ------  ------  -------    ------    ------
Gross margin.....................  3,441   4,500    4,207     1,654     4,692
                                  ------  ------  -------    ------    ------
Operating expenses
  Research and development.......  1,048   1,983    1,739       847       962
  Sales and marketing............  1,665   2,468    2,907     1,425     1,854
  General and administrative.....    432     644      753       310       694
  Deferred stock compensation....    --      --        42       --        783
                                  ------  ------  -------    ------    ------
    Total operating expenses.....  3,145   5,095    5,441     2,582     4,293
                                  ------  ------  -------    ------    ------
Income (loss) from operations....    296    (595)  (1,234)     (928)      399
Other income (expense), net......     22      29       54        22       132
                                  ------  ------  -------    ------    ------
Income (loss) before income
 taxes...........................    318    (566)  (1,180)     (906)      531
Benefit from (provision for)
 income taxes....................   (350)     99       (6)      --       (493)
                                  ------  ------  -------    ------    ------
Net income (loss)................ $  (32) $ (467) $(1,186)   $ (906)   $   38
                                  ======  ======  =======    ======    ======
Net income (loss) per share
  Basic.......................... $  --   $(0.06) $ (0.11)   $(0.11)   $  --
                                  ======  ======  =======    ======    ======
  Diluted........................ $  --   $(0.06) $ (0.11)   $(0.11)   $  --
                                  ======  ======  =======    ======    ======
Shares used in computing net
 income (loss) per share
  Basic..........................  8,460   8,461   11,251     8,461    16,322
                                  ======  ======  =======    ======    ======
  Diluted........................  8,460   8,461   11,251     8,461    19,320
                                  ======  ======  =======    ======    ======
Pro forma net income per share
  Basic..........................                                      $  --
                                                                       ======
  Diluted........................                                      $  --
                                                                       ======
Shares used in computing pro
 forma net income per share
  Basic..........................                                      18,420
                                                                       ======
  Diluted........................                                      19,320
                                                                       ======
F-4
SONICWALL, INC.

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                       (in thousands, except share data)
Notes                    Retained       Total
                            Common Stock       Receivable    Deferred     Earnings   Shareholders'
                          ------------------      From        Stock     (Accumulated    Equity
                            Shares    Amount  Shareholders Compensation   Deficit)     (Deficit)
                          ----------  ------  ------------ ------------ ------------ -------------
Balance at December 31,
 1995...................   9,386,004  $   81     $ (70)      $   --       $   952       $   963
Repurchase of common
 stock..................    (934,880)    (70)       70           --           --            --
Issuance of common
 stock..................       9,976       1       --            --           --              1
Net loss................         --      --        --            --           (32)          (32)
                          ----------  ------     -----       -------      -------       -------
Balance at December 31,
 1996...................   8,461,100      12       --            --           920           932
Net loss................         --      --        --            --          (467)         (467)
                          ----------  ------     -----       -------      -------       -------
Balance at December 31,
 1997...................   8,461,100      12       --            --           453           465
Issuance of common
 stock..................   7,811,064     230      (230)          --           --            --
Deferred stock
 compensation...........         --       48       --            (48)         --            --
Amortization of deferred
 stock compensation.....         --      --        --             42          --             42
Net loss................         --      --        --            --        (1,186)       (1,186)
                          ----------  ------     -----       -------      -------       -------
Balance at December 31,
 1998...................  16,272,164     290      (230)           (6)        (733)         (679)
Issuance of common
 stock..................     451,676     438      (300)          --           --            138
Payments of notes
 receivable from
 shareholders...........         --      --         38           --           --             38
Deferred stock
 compensation...........         --    2,771       --         (2,771)         --            --
Amortization of deferred
 stock compensation.....         --      --        --            783          --            783
Net income..............         --      --        --            --            38            38
                          ----------  ------     -----       -------      -------       -------
Balance at June 30,
 1999...................  16,723,840  $3,499     $(492)      $(1,994)     $  (695)      $   318
                          ==========  ======     =====       =======      =======       =======
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
SONICWALL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
Year Ended           Six Months Ended
                                       December 31,              June 30,
                                   -----------------------  -------------------
                                    1996    1997    1998       1998      1999
                                   ------  ------  -------  ----------- -------
                                                            (unaudited)
Cash flows from operating
 activities:
  Net income (loss)..............  $ (32)  $ (467) $(1,186)    $(906)   $    38
  Adjustments to reconcile net
   income (loss) to net cash
   provided by (used in)
   operating activities:
   Depreciation..................      78      63       55         9         22
   Provision for allowance for
    doubtful accounts............     --       52      122        21        133
   Amortization of deferred stock
    compensation.................     --      --        42       --         783
   Changes in operating assets
    and liabilities:
     Accounts receivable.........     488    (252)    (235)      (29)    (1,295)
     Inventories.................    (206)  1,031       20        27       (318)
     Prepaid expenses and other
      current assets.............     (31)   (235)     270        85        (38)
     Deferred income taxes.......     (73)     38      (89)      --      (1,377)
     Other assets................     --      (19)      18        19        --
     Accounts payable............    (407)   (150)    (114)      (91)       287
     Accrued payroll and related
      benefits...................     --      107      (12)      (97)       493
     Other accrued liabilities...      69     (43)     438       638        311
     Deferred revenue............   1,046    (362)     828       558      1,064
     Income taxes payable........      43    (158)     214        (2)       570
                                   ------  ------  -------     -----    -------
Net cash provided by (used in)
 operating activities............     975    (395)     371       232        673
                                   ------  ------  -------     -----    -------
Cash flows from investing
 activities:
  Purchase of property and
   equipment.....................     (10)    (11)    (107)      (25)      (102)
                                   ------  ------  -------     -----    -------
Cash flows from financing
 activities:
  Proceeds from exercise of stock
   options.......................       1     --       --        --         138
  Proceeds from issuance of
   redeemable Series A
   convertible preferred stock...     --      --       --        --       4,971
  Payments of notes receivable
   from shareholders.............     (25)    157      --        --          38
  Payments under line of credit
   agreement.....................     (50)    --       --        --         --
                                   ------  ------  -------     -----    -------
Net cash provided by (used in)
 financing activities............     (74)    157      --        --       5,147
                                   ------  ------  -------     -----    -------
Net increase (decrease) in cash
 and cash equivalents............     891    (249)     264       207      5,718
Cash and cash equivalents at
 beginning of period.............     145   1,036      787       787      1,051
                                   ------  ------  -------     -----    -------
Cash and cash equivalents at end
 of period.......................  $1,036  $  787  $ 1,051     $ 994    $ 6,769
                                   ======  ======  =======     =====    =======
Supplemental disclosure of cash
 flow information:
  Cash paid for income taxes.....  $  380  $  151  $     1     $ --     $ 1,300
                                   ======  ======  =======     =====    =======
Supplemental disclosure of
 noncash investing and financing
 activities:
  Issuance of notes receivable
   upon the exercise of stock
   options.......................  $  --   $  --   $   230     $ --     $   300
                                   ======  ======  =======     =====    =======
The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
SONICWALL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

   SonicWALL, Inc. (the "Company") was incorporated in California in February
1991. SonicWALL, Inc. is a leading provider of Internet security solutions
designed for broadband access customers in the small to medium enterprise, or
SME, branch office, telecommuter and education markets. The Company's SonicWALL
solution is a high-performance, solid state appliance that provides robust,
reliable, easy-to-use and affordable Internet security. The Company's products
enable our customers to securely utilize Internet applications and services as
an integral part of their business.

  The following is a summary of the Company's significant accounting policies:

 Consolidation

   The consolidated financial statements include those of the Company and its
subsidiary. All significant intercompany accounts and transactions are
eliminated in consolidation.

 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.

 Unaudited interim results

   The accompanying statements of operations and of cash flows for the six
months ended June 30, 1998 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of these periods.
The data disclosed in the notes to the financial statements for this period is
unaudited.

 Cash and cash equivalents

   The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

 Fair value

   The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to their relatively short
maturities. The Company does not hold or issue financial instruments for
trading purposes.

 Concentration of credit risk, foreign operations and significant customers

   Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its temporary cash investments in
money market accounts and mutual funds with high credit quality financial
institutions. The Company's accounts receivable are derived from revenue earned
from customers located in the U.S. and certain foreign countries and regions,
including Europe, Canada, Japan and Australia. Sales to foreign customers for
the year ended December 31, 1996, 1997, 1998 and the six months ended June 30,
1999, all of which were

                                      F-7
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

denominated in U.S. dollars, accounted for 40%, 36%, 32% and 35% of total
revenue, respectively. The Company performs ongoing credit evaluations of its
customers' financial condition and requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts receivable based upon
the expected collectibility of accounts receivable.

   During the year ended December 31, 1998, one customer accounted for 34% of
the Company's revenue and at December 31, 1998, this one customer accounted for
39% of total gross receivables. During the six months ended June 30, 1999, two
customers accounted for 41% of the Company's revenue and at June 30, 1999, and
two customers accounted for 70% of total gross receivables.

   The Company is dependent on third party contract manufacturers and some of
the key components in the Company's product come from single or limited sources
of supply.

 Inventories

   Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.

 Property and equipment

   Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over their estimated useful lives, which range from
three to seven years. Depreciation expense for the years ended December 31,
1996, 1997 and 1998 was $78,000, $63,000 and $55,000, respectively.
Depreciation expense for the six months ended June 30, 1999 was $22,000.

 Long-lived assets

   The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment from
the carrying value of long-lived assets, if any, based on the fair value of
such assets.

 Stock-based compensation

   The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25 ,
compensation costs is determined based on the difference, if any, on the grant
date between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock. Compensation expense is recognized over the
vesting period.

   The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
96-18.

 Revenue recognition

   Revenue is generally recognized at the time of shipment if collectibility is
probable and no significant obligations remain. Sales to distributors are
subject to agreements allowing certain rights of return, cooperative
advertising, stock balancing rights and price protection. The largest
distributor has the right to return products that have not been sold to end
users for full credit subject to a restocking fee. Revenue from sales to this

                                      F-8
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

distributor is deferred at the time of shipment and is recognized when the
distributor has sold the product to its customers. Certain other distributors
have limited rights of return which allow them to return a percentage of the
prior quarter's purchases by these distributors. Accordingly, reserves for
estimated returns and exchanges are provided at the time of shipment. These
reserves are estimated and adjusted periodically based upon historical rates of
returns and allowances, inventory levels at the distributors and other related
factors. Reserves for credits for price protection are provided at the time
price reductions are approved.

   Revenue from extended warranty programs, premium technical assistance, and
subscriptions to content filtering services is recognized ratably over the term
of the contract or subscription.

   The standard warranty provisions include technical assistance, insignificant
bug fixes and feature updates and repair or replacement guarantees for units
with product defects. The standard warranty period is one year. The estimated
costs associated with the standard warranty provisions are accrued at the time
of revenue recognition.

   The Company has co-operative advertising agreements with certain of its
distributors. These agreements allow the distributors to be reimbursed by the
Company for approved promotional activities. The amounts available for
reimbursement are related to a percentage of the distributor's eligible
purchases from the Company. The Company accrues for co-operative advertising as
the related revenue is recognized.

 Income taxes

   The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses, research and development credit carryforwards and temporary
differences. A valuation allowance is provided against deferred tax assets
unless it is more likely than not that they will be realized.

 Research and development and capitalized software development costs

   Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Technological feasibility is established upon completion of a working
model, which is typically demonstrated by initial beta shipment. Software
development costs incurred subsequent to the time a product's technological
feasibility has been established, through the time the product is available for
general release to customers, are capitalized if material. To date, software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial and accordingly have not been capitalized.

 Comprehensive income

   Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.

                                      F-9
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Computation of net income (loss) per share and pro forma net income (loss) per
 share

   The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding during the period.
Weighted average shares exclude shares subject to repurchase ("restricted
shares"). Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and
common equivalent shares outstanding during the period, if dilutive. Common
equivalent shares are composed of unvested restricted shares and incremental
common shares issuable upon the exercise of stock options and upon the
conversion of Redeemable Series A Convertible Preferred Stock.

   Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's redeemable Series A convertible preferred stock
into shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1999, or at date of original issuance, if later.

   The following table sets forth the computation of historical and pro forma
basic and diluted net income (loss) per share for the periods indicated (in
thousands, except per share data):
Year Ended December       Six Months
                                                31,             Ended June 30,
                                       -----------------------  ---------------
Historical                              1996    1997    1998     1998    1999
----------                             ------  ------  -------  ------  -------
Numerator:
  Net income (loss)................... $  (32) $ (467) $(1,186) $ (906) $    38
                                       ------  ------  -------  ------  -------
Denominator:
  Weighted average common shares
   outstanding........................  8,460   8,461   11,251   8,461   16,380
  Weighted average unvested common
   shares subject to repurchase.......    --      --       --      --        58
                                       ------  ------  -------  ------  -------
  Denominator for basic calculation...  8,460   8,461   11,251   8,461   16,322
  Common stock equivalents............    --      --       --      --     2,998
                                       ------  ------  -------  ------  -------
  Denominator for diluted
   calculation........................  8,460   8,461   11,251   8,461   19,320
Basic net income (loss) per share..... $  --   $(0.06) $ (0.11) $(0.11) $   --
                                       ======  ======  =======  ======  =======
Diluted net income (loss) per share... $  --   $(0.06) $ (0.11) $(0.11) $   --
                                       ======  ======  =======  ======  =======
Pro forma
---------
Shares used above                                                        16,322
  Pro forma adjustment to reflect
   weighted effect of assumed
   conversion of redeemable
   convertible preferred stock........                                    2,098
                                                                        -------
  Shares used in computing pro forma
   basic net income per share.........                                   18,420
                                                                        =======
  Pro forma basic net income per
   share..............................                                  $   --
                                                                        =======
Pro forma diluted.....................                                   19,320
                                                                        =======
  Pro forma diluted net income per
   share..............................                                  $   --
                                                                        =======
F-10
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Outstanding options to purchase 2,396,880, 2,494,880, 1,163,676 and
1,760,000 shares of common stock at an average exercise price of $0.09, $0.10,
$0.13 and $0.48 per share have not been considered in the computation of
diluted net loss per share for the years ended December 31, 1996, 1997 and 1998
and the six months ended June 30, 1999, respectively, as their effect would
have been anti-dilutive.

   The accompanying pro forma shareholders' equity at June 30, 1999 reflects
the conversion of the redeemable Series A convertible preferred stock at June
30, 1999. The conversion of such preferred stock is automatic upon the
completion of an initial public offering price of at least $5.00 per share and
with proceeds of at least $15,000,000.

   In May 1999, the Company issued from the 1998 Plan 300,000 shares upon the
exercise of certain stock options. At June 30, 1999, 293,750 common shares are
subject to repurchase at the option of the Company. These shares vest ratably
over a 48 month period.

Note 2--Balance Sheet Components:
December
                                                              31,
                                                          ------------  June 30,
                                                          1997   1998     1999
                                                          -----  -----  --------
                                                             (in thousands)
Property and equipment:
     Equipment........................................... $ 299  $ 161   $ 263
     Leasehold improvements..............................     5      5       5
     Software............................................    49     53      53
     Transportation......................................    38     94      94
                                                          -----  -----   -----
                                                            391    313     415
     Less: accumulated depreciation......................  (336)  (206)   (228)
                                                          -----  -----   -----
                                                          $  55  $ 107   $ 187
                                                          =====  =====   =====
   Inventories:
     Raw materials....................................... $  82  $  49   $ 113
     Work-in-process.....................................     2     13      32
     Finished goods......................................   267    269     504
                                                          -----  -----   -----
                                                          $ 351  $ 331   $ 649
                                                          =====  =====   =====
Note 3--Line of Credit:

   At June 30, 1999, the Company had a line-of-credit agreement with a bank
which allows the Company to borrow up to $1,000,000. Borrowings under the line
of credit bear interest at the bank's reference rate plus 1.75% (which equaled
9.5% at June 30, 1999), and are secured primarily by accounts receivable,
inventories, and property and equipment. The line of credit can be utilized at
a percentage of eligible receivables, as defined in the loan agreement. The
agreement contains certain covenants requiring the Company to maintain certain
levels of profitability, minimum tangible net worth, working capital and other
financial ratios and prohibits the payment of cash or stock dividends on common
stock over the life of the agreement. This line of credit will be in force
until terminated by either party by notice of not less than 30 days prior to
the effective date of such termination. No amounts were outstanding under the
line of credit at June 30, 1999.

Note 4--Stock Option Plan:

   The Company's Stock Option Plans (the "Plans"), as amended, authorize the
Board of Directors to grant incentive stock options and nonstatutory stock
options to employees, directors and consultants to purchase up to

                                      F-11
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

a total of 5,958,324 shares of the Company's common stock. Under the Plans,
incentive stock options are granted at an exercise price that is not to be less
than 100% of the fair market value of the Company's common stock on the date of
grant, as determined by the Company's Board of Directors. Nonqualified stock
options are granted at a price that is not to be less than 85% of the fair
market value of the common stock on the date of grant, as determined by the
Board of Directors.

   Generally, options granted under the Plans are exercisable for a period of
ten years after the date of grant, and vest over four years.

   The following table summarizes option activity under the stock option plans:
Options Outstanding
                                               -------------------------------
                                                                      Weighted
                                                                      Average
                                   Available                Exercise  Exercise
                                   for Grant     Shares      Price     Price
                                   ----------  ----------  ---------- --------
Balance at December 31, 1996...    550,000   2,396,880  $0.08-0.09  $0.09
   Granted........................   (204,000)    204,000  $     0.25  $0.25
   Exercised......................        --          --   $      --   $ --
   Canceled.......................    106,000    (106,000) $     0.08  $0.08
                                   ----------  ----------  ----------  -----
   Balance at December 31, 1997...    452,000   2,494,880  $0.08-0.25  $0.10
   Authorized.....................  2,000,000         --   $      --   $ --
   Granted........................ (1,015,000)  1,015,000  $     0.13  $0.13
   Exercised......................        --   (2,134,880) $     0.09  $0.09
   Canceled.......................    211,324    (211,324) $0.08-0.25  $0.19
                                   ----------  ----------  ----------  -----
   Balance at December 31, 1998...  1,648,324   1,163,676  $0.08-0.25  $0.13
   Authorized.....................    958,324
   Granted........................ (1,058,000)  1,058,000  $0.50-1.50  $1.07
   Exercised......................        --     (451,676) $0.08-1.50  $0.97
   Canceled.......................     10,000     (10,000) $0.13-0.25  $0.19
                                   ----------  ----------  ----------  -----
   Balance at June 30, 1999.......  1,558,648   1,760,000  $0.08-1.50  $0.48
                                   ==========  ==========  ==========  =====
The following table summarizes information regarding stock options
outstanding at June 30, 1999:
Options
                                      Options Outstanding         Exercisable
                                ------------------------------- ----------------
                                                     Weighted
                                Weighted             Average            Weighted
                                Average             Remaining           Average
                                Exercise           Contractual          Exercise
   Exercise Prices               Price    Shares   Life (Years) Shares   Price
   ---------------              -------- --------- ------------ ------- --------
$0.08.......................  $0.08      82,000     6.08      76,976  $0.08
   $0.13.......................  $0.13     960,000     9.12     272,168  $0.13
   $0.25.......................  $0.25      70,000     7.61      58,304  $0.25
   $0.50-$0.75.................  $0.73     253,000     9.82      18,706  $0.72
   $1.00-$1.50.................  $1.31     395,000     9.98      11,344  $1.22
                                 -----   ---------     ----     -------  -----
                                 $0.48   1,760,000     9.21     437,498  $0.19
                                 =====   =========     ====     =======  =====
For financial reporting purposes, the Company has determined that the deemed
fair value on the date of grant of certain employee stock options granted in
1998 and 1999 was in excess of the exercise price of the options. The
difference of $48,000 and $2,771,000 in 1998 and 1999, respectively is
considered deferred stock compensation and is amortized against income over the
vesting period of the options.

                                      F-12
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Pro forma stock compensation

   The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the Company's stock
option plan in the accompanying statements of operations. Had compensation cost
for the Company's stock option plan been determined based on the fair market
value at the grant dates for stock options granted in 1998 and 1997 consistent
with the provisions of SFAS No. 123, the Company's net loss would have been
changed to the pro forma amounts indicated below, in thousands:
Year Ended December
                                                       31,            Six Months
                                               ---------------------  Ended June
                                               1996   1997    1998     30, 1999
                                               -----  -----  -------  ----------
Net income (loss)--as reported............. $ (32) $(467) $(1,186)    $38
   Net income (loss)--pro forma............... $(189) $(471) $(1,194)    $26
The pro forma amounts reflect compensation expense related to 1996, 1997,
1998 and 1999 stock option grants only. In future years, the annual
compensation expense will increase relative to the fair value of the stock
options granted in those future years. The weighted average fair value of the
options granted in 1996, 1997, 1998 and the six months ended June 30, 1999 of
$0.02, $0.07, $0.03 and $0.20, respectively.

   The fair value of each grant is estimated on the date of grant using the
minimum value method with the following assumptions:
1996     1997        1998          1999
                                  -------  -------  ------------  -------------
Expected volatility...........       0%       0%            0%             0%
   Risk-free interest rate.......     6.0%     6.0% 4.5% to 5.64% 4.79% to 5.83%
   Expected life................. 5 years  5 years       5 years        4 years
   Dividend yield................       0%       0%            0%             0%
Note 5--Redeemable Series A Convertible Preferred Stock:

   In February 1999, the Company issued 1,438,377 shares of redeemable Series A
convertible preferred stock (Preferred Stock) at $3.48 per share for net
proceeds of $4,971,000.

   Conversion--Each share of Preferred Stock is convertible at the option of
the holder into two shares of common stock based on a conversion price of
$1.74. This conversion price is subject to adjustment in certain circumstances
including certain issuances of common stock at below the conversion price.
Preferred Stock will automatically convert into common stock in the event of an
underwritten public offering of the Company's common stock with proceeds of at
least $15,000,000, and at a price per share of not less than $5.00.

   Voting--Preferred Stock has voting rights, on an as-if converted basis,
identical to common stock.

   Dividends--Holders of the Preferred Stock are entitled to receive
noncumulative dividends in preference to any dividend on the common stock at
the rate of 8 percent per share per annum, when and if declared by the Board of
Directors.

   Liquidation--In the event of liquidation, the holders of Preferred Stock are
entitled to receive $3.48 per share, plus any dividends declared, but unpaid on
such shares. If assets and funds are insufficient to meet the liquidation
preference of the Preferred Stock, such assets and funds will be distributed
ratably between the

                                      F-13
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

holders of the Preferred Stock. Any surplus assets or funds will then be
distributed ratably between holders of the Preferred Stock on an as-converted
common stock basis and the holders of the common stock together until the
holders of the Preferred Stock have received a total of $12.17 per share.
Thereafter holders of common stock share ratably all remaining assets.

   Redemption--Anytime after February 17, 2004, all outstanding shares of the
Preferred Stock are eligible to be redeemed in full upon a written notice by at
least 67% of the holder's of the outstanding Preferred Stock in two
installments the first 75 days followings the notice of redemption and the
second installment one year after the first redemption. In the event of
redemption, each holder of the Preferred Stock would be entitled to receive
$3.48 per share, plus all unpaid dividends on such shares, which have been
declared.

Note 6--Notes Receivable from Shareholders:

   In December 1998, the Company issued notes receivable in connection with the
exercise of 2,134,880 shares of incentive stock options held by two
shareholders. The full recourse notes totaling $192,000 each, accrue interest
at a rate of 8% per annum. Principal and accrued interest shall be paid one-
fourth on the first anniversary date of the note, and one-fourth every year
thereafter for a total of four years.

   In May 1999, the Company issued a full recourse note for $300,000 in
connection with the exercise of 300,000 shares of incentive stock options by
one shareholder. The note accrues interest at a rate of 8% per annum. Principal
and accrued interest shall be paid one-fourth on the first anniversary date of
the note, and one-fourth every year thereafter for a total of four years.

Note 7--Income Taxes:

   The (benefit from) provision for income taxes consist of the following (in
thousands):
Year Ended       Six Months
                                                    December 31,        Ended
                                                   -----------------   June 30,
                                                   1996  1997   1998     1999
                                                   ----  -----  ----  ----------
Current tax expense (benefit):
     Federal...................................... $336  $(138) $ 94   $ 1,620
     State........................................   87      1     1       251
                                                   ----  -----  ----   -------
                                                    423   (137)   95     1,871
                                                   ----  -----  ----   -------
   Deferred tax expense (benefit):
     Federal......................................  (65)    32   (89)   (1,218)
     State........................................   (8)     6    --      (160)
                                                   ----  -----  ----   -------
                                                    (73)    38   (89)   (1,378)
                                                   ----  -----  ----   -------
                                                   $350  $ (99) $  6   $   493
                                                   ====  =====  ====   =======
F-14
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Deferred tax assets comprise the following (in thousands):
December 31,
                                                          ------------  June 30,
                                                          1997   1998     1999
                                                          ------------  --------
Inventory reserves.................................... $  77 $   93   $  105
   Deferred revenue......................................    10    560      882
   Other reserves & accruals.............................   190    278    1,039
                                                          ----- ------   ------
                                                            277    931    2,026
   Valuation allowance...................................   --    (565)    (283)
                                                          ----- ------   ------
                                                          $ 277 $  366   $1,743
                                                          ===== ======   ======
In assessing the realizability of deferred tax assets management has
allocated, to the extent the Company does not have carryback rights, a
valuation allowance at December 31, 1997 and 1998. The ultimate realization of
deferred tax assets at June 30, 1999 is dependent upon the generation of future
taxable income during the periods in which temporary differences representing
net future deductible amounts become deductible.

Note 8--Segment Reporting

   The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No.131 requires publicly held
companies to report financial and other information about key revenue segments
of the entity for which such information is available and is utilized by the
chief operating decision maker. The Company conducts its business within one
business segment.

   Revenue by geographic region is presented as follows (in thousands):
Year Ended December   Six Months Ended
                                                 31,               June 30,
                                         -------------------- ------------------
                                          1996   1997   1998     1998      1999
                                         ------ ------ ------ ----------- ------
                                                              (unaudited)
United States........................ $5,623 $5,986 $5,080   $2,203    $4,354
   Other................................  3,733  3,356  2,435    1,103     2,336
                                         ------ ------ ------   ------    ------
   Total................................ $9,356 $9,342 $7,515   $3,306    $6,690
                                         ====== ====== ======   ======    ======
Revenue to any one foreign country did not exceed 10% of total revenue in
1996, 1997 and 1998. Revenue attributed to Japan accounted for 17% of total
revenue for the six months ended June 30, 1999.

Note 9--Commitments and Contingencies:

   The Company leases its facility under an operating lease which expires in
2001. Future minimum rental payments under the lease are $234,000 in 1999,
$243,000 in 2000 and $167,000 in 2001. Rent expense for the years ended
December 31, 1997 and 1998 was $118,000 and $163,000, respectively. Rent
expense for the six months ended June 30, 1999 was $115,000.

   The Company is involved in various threatened legal actions arising in the
ordinary course of business. Management believes that the outcome of these
actions will not have a material adverse effect on the Company's financial
position or results of operations.

                                      F-15
SONICWALL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 10--Subsequent Events

 Stock split

   Share information for all periods presented has been retroactively adjusted
to reflect a 2 for 1 stock split effected on August 25, 1999.

 1999 Employee Stock Purchase Plan

   The 1999 employee stock purchase plan was adopted by the board of directors
in August 1999. A total of 250,000 shares of common stock have been reserved
for issuance under the plan.

                                      F-16
--------------------------------------------------------------------------------
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 You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that con-
tained in this prospectus. We are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where offers and sales are permit-
ted. The information contained in this prospectus is accurate only as of the
date of this prospectus, regardless of the time of delivery of this prospectus
or of any sale of our common stock.

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

                               TABLE OF CONTENTS

     -------------------
Page
                                                                          ----
Prospectus Summary.......................................................   3
Risk Factors.............................................................   6
Cautionary Note on Forward-Looking Statements............................  16
Use of Proceeds..........................................................  17
Dividend Policy..........................................................  17
Capitalization...........................................................  18
Dilution.................................................................  19
Selected Consolidated Financial Data.....................................  20
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  22
Business.................................................................  30
Management...............................................................  44
Certain Transactions.....................................................  52
Principal and Selling Shareholders.......................................  54
Description of Capital Stock.............................................  56
Shares Eligible for Future Sale..........................................  59
Underwriting.............................................................  61
Legal Matters............................................................  62
Experts..................................................................  63
Where You Can Find More Information......................................  63
Index to Consolidated Financial Statements............................... F-1
-------------------

 Until     , 1999 (25 days after the date of this prospectus), all dealers ef-
fecting transactions in the common stock offered hereby, whether or not partic-
ipating in this distribution, may be required to deliver a prospectus. This is
in addition to the obligations of dealers to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

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                                        Shares

                           [LOGO OF SONICWALL, INC.]

                                  Common Stock

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

                                   PROSPECTUS

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

                            Bear, Stearns & Co. Inc.

                               Hambrecht & Quist

                           Thomas Weisel Partners LLC

                                August   , 1999

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
Securities and Exchange Commission registration fee............... $12,788
     NASD filing fee...................................................       *
     Nasdaq National Market listing fee................................       *
     Blue Sky fees and expenses........................................       *
     Printing and engraving expenses...................................       *
     Legal fees and expenses ..........................................       *
     Accounting fees and expenses......................................       *
     Transfer Agent and Registrar fees.................................       *
     Miscellaneous expenses............................................       *
                                                                        -------
       Total........................................................... $     *
                                                                        =======
----------
    *To be filed by amendment.

Item 14. Indemnification of Directors and Officers

   Section 317 of the California General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Act. Article V of the
Registrant's Amended and Restated Articles of Incorporation, to be filed and
effective upon completion of this offering (Exhibit 3.1 hereto), provides for
indemnification of its directors and officers to the maximum extent permitted
by the California General Corporation Law, and Article VI of the Registrant's
Bylaws, to be effective upon completion of this offering (Exhibit 3.2 hereto),
provides for indemnification of its directors, officers, employees and other
agents to the maximum extent permitted by the California General Corporation
Law. In addition, the Registrant has entered into Indemnification Agreements
(Exhibit 10.4 hereto) with its directors and officers containing provisions
that are in some respects broader than the specific indemnification provisions
contained in the California General Corporation Law. The indemnification
agreements may require the Registrant, among other things, to indemnify its
directors and officers against certain liabilities that may arise by reason of
their status or service as directors of officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms. Reference is also made to Section 7 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, which indemnifies
officers and directors of the Registrant against certain liabilities.

Item 15. Recent Sales of Unregistered Securities

   Since August 1, 1996, SonicWALL has issued and sold the following
securities:

     (1) SonicWALL issued and sold 2,640,064 shares of its common stock to
  officers, directors, employees and consultants for an aggregate purchase
  price of $609,643 pursuant to the exercise of options under its 1994 Stock
  Option Plan and 1998 Stock Option Plan.

     (2) On August 10, 1998, SonicWALL, Inc. issued an aggregate of 5,426,186
  shares of its common stock to Ravi Anne, Sreekanth Ravi, Sudhakar Ravi and
  Bruce Wonnacott, each a general partner of AckFin, a California general
  partnership, in consideration of the purchase of all of the general partner
  interests of AckFin and $150,000 cash.

                                     II-1
(3) On December 29, 1998, SonicWALL, Inc. issued an aggregate of 250,000
  shares of its common stock for an aggregate purchase price of $37,500 to
  several investors.

     (4) On February 19, 1999, SonicWALL, Inc. issued an aggregate of
  1,438,377 shares of its redeemable Series A convertible preferred stock for
  an aggregate purchase price of $4,999,998.39 to several investors.

   The issuances described in paragraph 1 were deemed exempt from registration
under the Act in reliance upon Rule 701 promulgated under the Act. The
issuances of the securities described in paragraphs 2 through 4 were deemed to
be exempt from registration under the Act in reliance on Section 4(2) of the
Act as transactions by an issuer not involving any public offering. In
addition, the recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with SonicWALL, Inc., to information about SonicWALL, Inc.

   No underwriters were used in connection with these sales and issuances.

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits
Number                               Description
 ------                               -----------
1.1*    Form of Underwriting Agreement.

 3.1     Registrant's Amended and Restated Articles of Incorporation.

 3.2     Registrant's Restated Bylaws.

 4.1*    Registrant's specimen common stock certificate.

 4.2     Investor Rights Agreement dated February 19, 1999 by and between
          Registrant and the investors named therein.

 5.1*    Legal opinion of Manatt, Phelps & Phillips, LLP, counsel for the
          Registrant.

 10.1    Registrant's 1994 Stock Option Plan.

 10.2    Registrant's 1998 Stock Option Plan.

 10.3    Registrant's 1999 Employee Stock Option Plan.

 10.4    Form of Indemnity Agreement entered into by Registrant with each of
          its executive officers and directors.

 10.5    Loan and Security Agreement dated May 26, 1995 between Registrant and
          Comerica Bank.

 10.6++  OEM License Agreement dated January 27, 1999 between Registrant and
          Com21, Incorporated.

 10.7++  OEM Purchase Agreement dated January 5, 1999 between Registrant and
          Ramp Networks.

 10.8++  Distribution Agreement dated February 9, 1999 between Registrant and
          Tech Data Product Management, Inc.

 10.9++  Distribution Agreement dated July 5, 1998 between Registrant and
          Sumitomo Metal Systems Development Co.

 10.10++ Distribution Agreement dated November 11, 1992 between Registrant and
          Ingram Micro, Inc.

 10.11   Agreement of Sublease dated as of October 26, 1998 between Registrant
          and AMP Incorporated.

 23.1    Consent of Independent Accountants.

 23.2*   Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).

 24.1    Power of Attorney (contained on signature page).

 27.1    Financial Data Schedule.
II-2
----------
 *To be filed by amendment.
++Confidential treatment has been requested for portions of this exhibit. The
     omitted material has been separately filed with the Securities and
     Exchange Commission.

   (b) Financial Statement Schedules

   Schedule II--Valuation and Qualifying Accounts and Reserves

   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 Act 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. If 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 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 Act, 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 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 Act, 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-3
SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 27th day of August, 1999.

                                          SonicWALL, Inc.

                                                   /s/ Sreekanth Ravi
                                          By:__________________________________
                                                      Sreekanth Ravi,
                                               President and Chief Executive
                                                          Officer

                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sreekanth Ravi and Michael J. Sheridan jointly
and severally, his attorneys-in-fact, each with the power of substitution and
each with power to act alone, for him in any and all capacities, to sign any
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereto ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.

   Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below:
Signature                           Title                  Date
              ---------                           -----                  ----
/s/ Sreekanth Ravi                   President, Chief Executive    August 27, 1999
 ____________________________________  Officer and Director
 Sreekanth Ravi                        (Principal Executive
                                       Officer)

 /s/ Sudhakar Ravi                    Vice President, Engineering   August 27, 1999
 ____________________________________ and Director
 Sudhakar Ravi

 /s/ Robert M. Williams               Director                      August 27, 1999
 ____________________________________
 Robert M. Williams

 /s/ David Shrigley                   Director                      August 27, 1999
 ____________________________________
 David Shrigley

 /s/ Jerrold F. Petruzzelli           Secretary and Director        August 27, 1999
 ____________________________________
 Jerrold F. Petruzzelli

 /s/ Michael J. Sheridan              Vice President, Finance and   August 27, 1999
 ____________________________________  Chief Financial Officer
 Michael J. Sheridan                   (Principal Financial and
                                       Accounting Officer)
II-4
Schedule I

                       Report of Independent Accountants

   In connection with our audits of the consolidated financial statements of
SonicWall, Inc. as of December 31, 1997, 1998 and June 30, 1999, and for each
of the three years in the period ended December 31, 1998 and the six month
period ended June 30, 1999, which financial statements are included in the
Prospectus, we have also audited the financial statement schedule listed in
Item 16 herein.

   In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.

/s/ PricewaterhouseCoopers LLP

San Jose, California
August 25, 1999
Schedule II

                                SonicWALL, Inc.
                       VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to             Balance at
                                   Beginning   Cost and   Write-off    End of
                                   of Period   Expenses  of Accounts   Period
                                   ---------- ---------- ----------- ----------
Year ended December 31, 1997
Allowance for doubtful accounts...    $ 69       $ 52       $ --        $121

Year ended December 31, 1998
Allowance for doubtful accounts...     121        122         50         193

Six months ended June 30, 1999
Allowance for doubtful accounts...     193        133         --         326
INDEX TO EXHIBITS
Number                               Description
 ------                               -----------
1.1*   Form of Underwriting Agreement.

  3.1    Registrant's Amended and Restated Articles of Incorporation.

  3.2    Registrant's Restated Bylaws.

  4.1*   Registrant's specimen common stock certificate.

  4.2    Investor Rights Agreement dated February 19, 1999 by and between
          Registrant and the investors named therein.

  5.1*   Opinion of Manatt, Phelps & Phillips, LLP as to the legality of the
          shares.

 10.1    Registrant's 1994 Stock Option Plan.

 10.2    Registrant's 1998 Stock Option Plan.

 10.3    Registrant's 1999 Employee Stock Option Plan.

 10.4    Form of Indemnity Agreement entered into by Registrant with each of
          its executive officers and directors.

 10.5    Loan and Security Agreement dated May 26, 1995 between Registrant and
          Comerica Bank.

 10.6++  OEM License Agreement dated January 27, 1999 between Registrant and
          Com21, Incorporated.

 10.7++  OEM Purchase Agreement dated January 5, 1999 between Registrant and
          Ramp Networks.

 10.8++  Distribution Agreement dated February 9, 1999 between Registrant and
          Tech Data Product Management, Inc.

 10.9++  Distribution Agreement dated July 5, 1998 between Registrant and
          Sumitomo Metal Systems Development Co.

 10.10++ Distribution Agreement dated November 11, 1992 between Registrant and
          Ingram Micro, Inc.

 10.11   Agreement of Sublease dated as of October 26, 1998 between Registrant
          and AMP Incorporated.

 23.1    Consent of Independent Accountants.

 23.2*   Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1).

 24.1    Power of Attorney (contained on signature page).

 27.1    Financial Data Schedule.
----------
 * To be filed by amendment

++ Confidential treatment has been requested for portions of this exhibit. The
   omitted material has been separately filed with the Securities and Exchange
   Commission.