For the first quarter of 2001, WatchGuard reported net revenues of $17.1 million, an increase of 74% from $9.8 million in the first quarter of 2000. Product sales were $13.3 million for the quarter, an increase of 56% from $8.5 million in the first quarter of 2000. Service subscription revenues were $3.8 million for the quarter, an increase of 192% from $1.3 million for the same period of 2000. For the first quarter of 2001, international sales represented 57% of total revenue.

Pro forma net loss for the first quarter, excluding acquisition related costs and non-cash stock-based compensation, was ($3.2 million), or ($0.12) per share, compared to ($2.1 million), or ($0.10) per share, in the first quarter of 2000. WatchGuard ended the first quarter with over $114.8 million in cash and securities, which is essentially unchanged from the prior quarter.

Our first quarter results and outlook for 2001 have been impacted by economic conditions and the slowdown in IT capital spending by businesses around the world, said Christopher Slatt, President and Chief Executive Officer. While it is difficult to predict exactly when capital spending will rebound, we know that Internet security remains a key issue for businesses worldwide. We have established a leadership position in providing businesses with enterprise-level Internet security and VPN infrastructure that is easy to install and manage. Over the long term, we believe that our core market segment will generate the strongest growth within the broader Internet security space.

Moving forward, we plan to deemphasize our OEM and consumer-oriented programs and streamline our organization to concentrate our efforts on rolling out new products and services aimed at business customers. With our strong brand and worldwide distribution channels, the robust functionality and performance of our award-winning products, and significant financial resources, we are well positioned to capitalize on the business market opportunity as global economies and capital spending improve. We are extremely excited about our long-term growth potential.

In the first quarter, the Company consolidated its development and product marketing activities into product specific areas in order to better focus on business customers, with the promotions of Mark Stevens as Senior Vice President of Perimeter Security and Jack Danahy as Senior Vice President of Server Security. In addition, the Company promoted Simon Webb as Senior Vice President of International Sales and Cary Kosher as Senior Vice President of Americas Sales. Michael Martucci, formerly Vice President of Marketing, and Dennis Cloutier, formerly Senior Vice President of Sales, have retired. The Company has also recently reduced its staff by approximately 50 people, or 16% of the workforce in order to streamline its operations. As a result of the staff reductions and organizational streamlining, WatchGuard expects to incur a charge in the second quarter of 2001 of $1.5 million to $2.0 million.

During the quarter, WatchGuard continued to enhance its security technology and services and strengthen its worldwide brand presence. The Company recently announced:

The beginning of its worldwide rollout of ServerLock, a new software product that extends Watchguard’s security solutions by locking down Web and application servers residing behind network firewalls.

WatchGuard was recognized as the revenue market leader in mid-range VPN (Virtual Private Network) hardware in 2000 according to Infonetics Research.

Its Firebox firewall and VPN (Virtual Private Network) appliance earned IPSec VPN Certification from ICSA Labs.

Its LiveSecurity System has been chosen as the Datamation Security Product of the year for 2000.

SOURCE: COMPANY PRESS RELEASE