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WatchGuard Reports Fourth Quarter and Year-End ResultsFourth Quarter Results
WatchGuard reported net revenue of $19.3 million for the fourth quarter of 2004, compared to $19.6 million in the fourth quarter of 2003, and $20.8 million in the previous quarter, the third quarter of 2004. Product revenue was $11.9 million, compared to $13.1 million in the fourth quarter of 2003, and $13.4 million in the previous quarter. Service revenue was $7.4 million, compared to $6.4 million in the fourth quarter of 2003, and $7.4 million in the previous quarter.

On a generally accepted accounting principles, or GAAP, basis, WatchGuard reported a net loss of $2.9 million, or $0.08 per share, in the fourth quarter, compared to a net loss of $4.4 million, or $0.13 per share, in the fourth quarter of 2003, and a net loss of $1.5 million, or $0.05 per share, in the previous quarter. Excluding amortization of acquisition-related costs, impairment charges, non-cash stock-based compensation, and restructuring charges, WatchGuard reported a non-GAAP net loss of $2.6 million, or $0.08 per share, in the fourth quarter, compared to a non-GAAP net loss of $2.8 million, or $0.08 per share, in the fourth quarter of 2003, and a non-GAAP net loss of $0.9 million, or $0.03 per share, in the previous quarter.

2004 Results
For 2004, WatchGuard reported net revenue of $82.8 million, up 4% from $79.6 million in 2003. Product revenue was $54.4 million, up 4% from $52.5 million in 2003. Service revenue was $28.4 million, up 5% from $27.1 million in 2003.

On a GAAP basis, WatchGuard reported a net loss of $7.7 million, or $0.23 per share, in 2004, compared to a net loss of $16.1 million, or $0.49 per share, in 2003. Excluding amortization of acquisition-related costs, impairment charges, non-cash stock-based compensation, and restructuring charges, WatchGuard reported a non-GAAP net loss of $6.3 million, or $0.19 per share, in 2004, compared to a non-GAAP net loss of $9.4 million, or $0.28 per share, in 2003. The reconciliation of WatchGuard's GAAP net loss per share to WatchGuard's non-GAAP net loss per share for the quarter and year ended December 31, 2004, and the quarter and year ended December 31, 2003, is set forth at the end of this press release.

WatchGuard ended December 31, 2004, with $79.8 million in cash and securities, of which $3.0 million is restricted cash under the terms of certain real estate lease agreements.

"We continue to make progress in executing the first stages of our long-term strategic plan by focusing on product development, channel development, and infrastructure development," said Ed Borey, Chief Executive Officer of WatchGuard. "Over the past quarter, we have launched several new products, including our new gateway anti-virus subscription service and the Firebox X Edge Wireless. Both of these new products have exceeded all internal expectations. We have added new channels around the world. In Europe, we added Ingram Micro, AlgolProducts, the largest Italian distributor of network computing technologies, and Feeder, one of the leading French distributors of professional IT services. In Asia, we added PacRim Technologies in Hong Kong, Transition Systems in the Philippines, Afiintra Technologies in Malaysia, NTT West in Japan, and Blitz IT in Singapore. In addition, we have improved many of the ways in which WatchGuard does business by supplying our partners around the world with enhanced tools, reporting, and other services that will help them to drive their WatchGuard business."

"The Firebox X Core recently won the 'Best Small Business Security Solution' award from SC Magazine and our Firebox X Edge was a finalist for the U.S. Excellence Award in the 'Best SOHO Security Solution' category. We believe WatchGuard is headed in the right direction-our network security solutions continue to gain traction and recognition, and we have exciting new products and services planned for the remainder of the year."

As previously disclosed, during the financial statement close and audit process for the year ended December 31, 2004, WatchGuard discovered certain errors in its previously issued consolidated financial statements. These errors pertained to ( i ) inaccurate income statement classification of early pay incentive discounts taken by customers, ( ii ) under-accrual of customer rebate obligations, and ( iii ) timing of revenue recognition associated with specific products and services ( resulting in an overstatement of product revenue and an understatement of deferred revenue ).

GAAP requires early pay incentive discounts to be recorded as a reduction to revenue, not as a component of interest expense, as previously reported by WatchGuard. Accordingly, WatchGuard reclassified early pay incentive discounts from interest expense to revenue for all previously issued consolidated financial statements. This reduced revenue by approximately $288,000 in 2002, $585,000 in 2003 and $509,000 in the first three quarters of 2004, but reduced interest expense by the same amounts. Accordingly, these adjustments will have no effect on our previously reported net losses for these periods.

WatchGuard conducted a comprehensive and detailed evaluation of all errors identified, both individually and in the aggregate, in order to assess the materiality and financial statement impact on its previously issued consolidated financial statements. The evaluation was limited to previously issued consolidated financial statements for all interim periods in 2003 and 2004, as well as prior-period consolidated financial statements required for comparative purposes in WatchGuard's Form 10-K for 2004.

Based on WatchGuard's analysis, it does not believe that the impact of the errors identified, either individually or in the aggregate, would be material to the annual period in which they were reported in 2002 or the annual or interim periods in which they were reported in 2003. However, WatchGuard determined that errors identified and reported in previously issued consolidated financial statements for interim periods in 2004 would have a material impact on those periods. Accordingly, WatchGuard restated its previously issued consolidated financial statements for the first three quarters of 2004. The cumulative financial impact of these restatements on the first three quarters of 2004 resulted in a reduction in revenues of approximately $1.8 million and a corresponding increase in net loss for the nine-month period. These adjustments will also result in an increase in deferred revenue at December 31, 2004, of approximately $1.2 million, which will be recognized as incremental service revenue in 2005.

WatchGuard also determined that it did not properly gross up tenant improvement incentives relating to its Seattle headquarters facility at the inception of its lease in 2000 in accordance with FASB Technical Bulletin 88-1. Based on WatchGuard's analysis, it determined that this had no impact on any prior reported statements of operations, and only minimal impact on certain classifications on its balance sheet and statement of cash flows, such that restatement was not required.

"WatchGuard is fully committed to providing a proper control environment, full transparency, and accurate financial reporting," concluded Borey. "We are working diligently to address any and all issues."

Webcast Information
An Internet broadcast and replay of WatchGuard's conference call discussing its fourth quarter and year end results ( 2:00 PM Pacific/5:00 PM Eastern ) will be available on March 30, 2005, at www.watchguard.com under "Investor Relations."

About WatchGuard Technologies, Inc.
WatchGuard is a leading provider of network security solutions for small- to mid-sized enterprises worldwide, delivering integrated products and services that are robust as well as easy to buy, deploy and manage. The company's Firebox X line of expandable integrated security appliances is designed to be fully upgradeable as an organization grows and to deliver the industry's best combination of security, performance, intuitive interface and value. WatchGuard Intelligent Layered Security architecture protects against emerging threats effectively and efficiently and provides the flexibility to integrate additional security functionality and services offered through WatchGuard. Every WatchGuard product comes with an initial LiveSecurity Service subscription to help customers stay on top of security with vulnerability alerts, software updates, expert security instruction and superior customer care. For more information, please call ( 206 ) 521-8340 or visit www.watchguard.com.

Certain statements in this press release, including statements about our ability to grow our business and improve our results of operations, statements about the potential demand for, and market acceptance of, our Firebox X platform, statements about expected new products, services, features or functionality, statements about when we expect to file our annual report on Form 10-K for the year ended December 31, 2004, and other statements about our plans, objectives, intentions, and expectations are "forward-looking statements" within the meaning of the Securities Act of 1933, as amended. Forward-looking statements are based on the opinions and estimates of management at the time the statements are made and are subject to known and unknown risks and uncertainties and inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risk that our future operating results will fall below expectations, the risk that we are unable to grow our business or improve our results of operations as expected or at all, the risk that our Firebox X platform does not achieve market acceptance or does not perform as we expect, the risk that new products, services, features or functionality will not be available when expected or at all, the risk that we will not file our annual report on Form 10-K for the year ended December 31, 2004, when expected and the other risks described under "Important Factors That May Affect Our Operating Results, Our Business and Our Stock Price" in our quarterly report on Form 10-Q for the quarter ended September 30, 2004, in our annual report on Form 10-K for the year ended December 31, 2004, that we expect to file by March 31, 2005, and in our Securities and Exchange Commission filings from time to time. Readers are cautioned not to place undue reliance upon these forward-looking statements, which speak only as of the date of this release.

WatchGuard, LiveSecurity, and Firebox are either registered trademarks or trademarks of WatchGuard Technologies, Inc. or its subsidiaries in the United States and/or other countries.

For general information please call 206.521.8340.

Contact: Miles Goda
VP of Corporate Development
206.613.0826

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