##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended DECEMBER 31, 2001

OR



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
 to

Commission file number 0-24544

CYBERGUARD CORPORATION

---

(Exact name of Registrant as Specified in Its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 65-0510339                          
|                                                               |  |                                     
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

|                                                                |  |           
|--------------------------------------------------------------- |  | ----------
|2000 West Commercial Blvd., Suite 200, Fort Lauderdale, Florida |  | 33309     
|                                                                |  |           
|(Address of Principal Executive Offices)                        |  | (Zip Code)

Registrants Telephone Number, Including Area Code 954-958-3900



---

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report


Indicate by check
ü whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports),

Yes ü   No [    ]

and (2) has been subject to such filing requirements for the past 90 days.

Yes ü   No [    ]

As of February 1, 2002, 18,886,829 shares of the Registrants $0.01 par
value Common Stock were outstanding.





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TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I: FINANCIAL INFORMATION                    
|                                                  | Item 1. Financial Statements                                                                 
|                                                  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 3. Quantitative and Qualitative Disclosures Concerning Market Risk                      
|PART II: OTHER INFORMATION                       
|                                                  | Item 1. Legal Proceedings                                                                    
|                                                  | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                  | Item 3. Defaults upon Senior Securities                                                      
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                  | Item 5. Other Information                                                                    
|                                                  | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                       
|EMPLOYMENT AGREEMENT AMENDMENT SCOTT HAMMACK     
|EMPLOYMENT AGREEMENT AMENDMENT PATRICK CLAWSON   
|EMPLOYMENT AGREEMENT AMENDMENT MICHAEL MATTE     
|EMPLOYMENT AGREEMENT AMENDMENT MICHAEL WITTIG    
|EMPLOYMENT AGREEMENT AMENDMENT ADRIANA KOVALOVSKA



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##### Table of Contents



TABLE OF CONTENTS

|                              |                                                                                              
|----------------------------- | ---------------------------------------------------------------------------------------------
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults Upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBITS                     





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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)




PART I: FINANCIAL INFORMATION




Item 1. Financial Statements

CYBERGUARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)

|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |       |        |  
|------------------------------------------------------------------------ | ---------------------------------- | ------------------------ | ------ | ------------------ | ----- | ---------------- | ----- | -------- | ----- | -------- | ------ | ----- | ------ | - | ------ | ----- | ------ | -
|                                                                         |                                    |                          |        | Three Months Ended |       | Six Months Ended
|                                                                         |                                    |                          |        |                    |       |                 
|                                                                         |                                    |                          |        | Dec. 31,           |       | Dec. 31,         |       | Dec. 31, |       | Dec. 31,
|                                                                         |                                    |                          |        | 2001               |       | 2000             |       | 2001     |       | 2000    
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |         
|Revenues:                                                                |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Products                                                                 |                                    | $                        | 3,968  |                    |       | $                | 4,938 |          |       | $        | 6,969  |       |        | $ | 7,879  |      
|Services                                                                 |                                    |                          | 1,785  |                    |       |                  | 1,411 |          |       |          | 3,359  |       |        |   | 2,517  |      
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total revenues           |        |                    | 5,753 |                  |       |          | 6,349 |          |        |       | 10,328 |   |        |       | 10,396 |  
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Cost of revenues:                                                        |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Products                                                                 |                                    |                          | 1,130  |                    |       |                  | 1,222 |          |       |          | 1,866  |       |        |   | 1,880  |      
|Services                                                                 |                                    |                          | 493    |                    |       |                  | 668   |          |       |          | 944    |       |        |   | 1,190  |      
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total cost of revenues   |        |                    | 1,623 |                  |       |          | 1,890 |          |        |       | 2,810  |   |        |       | 3,070  |  
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Gross profit                                                             |                                    |                          | 4,130  |                    |       |                  | 4,459 |          |       |          | 7,518  |       |        |   | 7,326  |      
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Operating expenses:                                                      |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Research and development                                                 |                                    |                          | 1,003  |                    |       |                  | 1,113 |          |       |          | 2,359  |       |        |   | 2,427  |      
|Selling, general and administrative                                      |                                    |                          | 2,986  |                    |       |                  | 3,529 |          |       |          | 5,955  |       |        |   | 6,759  |      
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total operating expenses |        |                    | 3,989 |                  |       |          | 4,642 |          |        |       | 8,314  |   |        |       | 9,186  |  
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Operating income (loss)                                                  |                                    |                          | 141    |                    |       |                  | (183  | )        |       |          | (796   | )     |        |   | (1,860 | )    
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Other income/(expense):                                                  |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Interest income/(expense), net                                           |                                    |                          | 5      |                    |       |                  | (240  | )        |       |          | 27     |       |        |   | (438   | )    
|Gain/(loss) on sale of assets                                            |                                    |                          | (14    | )                  |       |                  | 0     |          |       |          | (17    | )     |        |   | 13     |      
|Other expense                                                            |                                    |                          | (22    | )                  |       |                  | (62   | )        |       |          | (12    | )     |        |   | (60    | )    
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total other expense      |        |                    | (31   | )                |       |          | (302  | )        |        |       | (2     | ) |        |       | (485   | )
|Income (loss) before cumulative effect of change in accounting principle |                                    | $                        | 110    |                    |       | $                | (485  | )        |       | $        | (798   | )     |        | $ | (2,345 | )    
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Cumulative effect of change in accounting principle                      |                                    |                          | 0      |                    |       |                  | (129  | )        |       |          | 0      |       |        |   | (129   | )    
|Net Income (loss)                                                        |                                    | $                        | 110    |                    |       | $                | (614  | )        |       | $        | (798   | )     |        | $ | (2,474 | )    
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Basic earnings (loss) per common share:                                  |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Before cumulative effect of change in accounting principle               |                                    | $                        | 0.01   |                    |       | $                | (0.05 | )        |       | $        | (0.04  | )     |        | $ | (0.24  | )    
|Cumulative effect of change in accounting principle                      |                                    | $                        |       |                    |       | $                | (0.01 | )        |       | $        |       |       |        | $ | (0.01  | )    
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|                                                                         | Net Income (loss) per common share |                          | $      | 0.01               |       |                  | $     | (0.06    | )     |          | $      | (0.04 | )      |   | $      | (0.25 | )     
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Weighted average common shares outstanding                               |                                    |                          | 18,667 |                    |       |                  | 9,907 |          |       |          | 18,610 |       |        |   | 9,878  |      
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Diluted earnings (loss) per common share:                                |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Before cumulative effect of change in accounting principle               |                                    | $                        | 0.01   |                    |       | $                | (0.05 | )        |       | $        | (0.04  | )     |        | $ | (0.24  | )    
|Cumulative effect of change in accounting principle                      |                                    | $                        |       |                    |       | $                | (0.01 | )        |       | $        |       |       |        | $ | (0.01  | )    
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|                                                                         | Net Income (loss) per common share |                          | $      | 0.01               |       |                  | $     | (0.06    | )     |          | $      | (0.04 | )      |   | $      | (0.25 | )     
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      
|Diluted common shares outstanding                                        |                                    |                          | 19,267 |                    |       |                  | 9,907 |          |       |          | 18,610 |       |        |   | 9,878  |      
|                                                                         |                                    |                          |        |                    |       |                  |       |          |       |          |        |       |        |   |        |      

See accompanying notes to condensed consolidated financial statements





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CYBERGUARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Amounts in thousands)

|                                                                                                                                 |                            |                                            |         |          |        |          |         |        |        | 
|-------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | -------- | ------ | -------- | ------- | ------ | ------ | 
|                                                                                                                                 |                            |                                            |         | Dec. 31, |        | June 30,
|                                                                                                                                 |                            |                                            |         | 2001     |        | 2001    
|                                                                                                                                 |                            |                                            |         |          |        |         
|ASSETS                                                                                                                           |                            |                                            |         |          |        |          |         |       
|Cash and cash equivalents                                                                                                        |                            | $                                          | 5,239   |          |        | $        | 4,771   |       
|Restricted cash                                                                                                                  |                            |                                            | 73      |          |        |          | 780     |       
|Accounts receivable, less allowance for uncollectible accounts
of $74 at Dec. 31, 2001 and $36 at June 30, 2001                  |                            |                                            | 4,176   |          |        |          | 4,147   |       
|Inventories, net                                                                                                                 |                            |                                            | 529     |          |        |          | 294     |       
|Other current assets                                                                                                             |                            |                                            | 842     |          |        |          | 1,065   |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 | Total current assets       |                                            |         | 10,859   |        |          |         | 11,057 |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|Property and equipment at cost, less accumulated
depreciation of $1,975 at Dec. 31, 2001 and
$1,710 at June 30, 2001             |                            |                                            | 980     |          |        |          | 1,211   |       
|Capitalized software, net                                                                                                        |                            |                                            | 543     |          |        |          | 741     |       
|Other assets                                                                                                                     |                            |                                            | 90      |          |        |          | 90      |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 |                            | Total assets                               |         | $        | 12,472 |          |         | $      | 13,099 | 
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                             |                            |                                            |         |          |        |          |         |       
|Line of credit and note payable                                                                                                  |                            |                                            | 54      |          |        |          | 919     |       
|Accounts payable                                                                                                                 |                            |                                            | 546     |          |        |          | 967     |       
|Convertible debenture, net                                                                                                       |                            |                                            | 62      |          |        |          | 62      |       
|Deferred revenue                                                                                                                 |                            |                                            | 3,286   |          |        |          | 2,308   |       
|Accrued expenses and other liabilities                                                                                           |                            |                                            | 2,386   |          |        |          | 2,369   |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 | Total liabilities          |                                            |         | 6,334    |        |          |         | 6,625  |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|Shareholders equity                                                                                                             |                            |                                            | 187     |          |        |          | 184     |       
|Common stock par value $0.01 authorized 50,000 shares
issued and outstanding 18,693 at Dec. 31, 2001
and 18,429 at June 30, 2001 |                            |                                            | 187     |          |        |          | 184     |       
|Additional paid-in capital                                                                                                       |                            |                                            | 87,995  |          |        |          | 87,557  |       
|Accumulated deficit                                                                                                              |                            |                                            | (82,264 | )        |        |          | (81,467 | )     
|Accumulated other comprehensive income                                                                                           |                            |                                            | 220     |          |        |          | 200     |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 | Total shareholders equity |                                            |         | 6,138    |        |          |         | 6,474  |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 |                            | Total liabilities and shareholders equity |         | $        | 12,472 |          |         | $      | 13,099 | 
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       

See accompanying notes to condensed consolidated financial statements





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CYBERGUARD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
(Amounts in thousands)

|                                                                                          |                                                     |   |                  |       |          |   |        |      |  
|----------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ---------------- | ----- | -------- | - | ------ | ---- | -
|                                                                                          |                                                     |   | Six Months Ended
|                                                                                          |                                                     |   |                 
|                                                                                          |                                                     |   | Dec. 31,         |       | Dec. 31,
|                                                                                          |                                                     |   | 2001             |       | 2000    
|                                                                                          |                                                     |   |                  |       |         
|Cash flows from operating activities:                                                     |                                                     |   |                  |       |          |   |        |     
|Net loss                                                                                  |                                                     | $ | (798             | )     |          | $ | (2,474 | )   
|Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities: |                                                     |   |                  |       |          |   |        |     
|Depreciation                                                                              |                                                     |   | 353              |       |          |   | 361    |     
|Amortization                                                                              |                                                     |   | 380              |       |          |   | 569    |     
|Disposal of property & equipment                                                          |                                                     |   | 16               |       |          |   |       |     
|Interest on convertible debt                                                              |                                                     |   | 3                |       |          |   | 162    |     
|Provision for uncollectible accounts receivable                                           |                                                     |   | 38               |       |          |   | 46     |     
|Provision for inventory reserve                                                           |                                                     |   | 2                |       |          |   | (1     | )   
|Compensation expense related to the modification of stock options                         |                                                     |   | 55               |       |          |   | 68     |     
|Translation adjustment                                                                    |                                                     |   | 20               |       |          |   | 75     |     
|Changes in assets and liabilities                                                         |                                                     |   |                  |       |          |   |        |     
|Restricted cash                                                                           |                                                     |   | 707              |       |          |   | 97     |     
|Accounts receivable                                                                       |                                                     |   | (66              | )     |          |   | (1,447 | )   
|Other current assets                                                                      |                                                     |   | 223              |       |          |   | (640   | )   
|Inventories                                                                               |                                                     |   | (237             | )     |          |   | (120   | )   
|Accounts payable                                                                          |                                                     |   | (421             | )     |          |   | 1,250  |     
|Accrued expenses and other liabilities                                                    |                                                     |   | 17               |       |          |   | 1,488  |     
|Deferred revenue                                                                          |                                                     |   | 977              |       |          |   | 475    |     
|Other, net                                                                                |                                                     |   | (1               | )     |          |   | (9     | )   
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|                                                                                          | Net cash provided by/(used in) operating activities |   |                  | 1,268 |          |   |        | (100 | )
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|Cash flows used in investing activities:                                                  |                                                     |   |                  |       |          |   |        |     
|Capitalized software costs                                                                |                                                     |   | (182             | )     |          |   | (360   | )   
|Proceeds from the sale of property & equipment                                            |                                                     |   | 10               |       |          |   |       |     
|Purchase of property & equipment                                                          |                                                     |   | (148             | )     |          |   | (574   | )   
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|                                                                                          | Net cash (used in) investing activities             |   |                  | (320  | )        |   |        | (934 | )
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|Cash flows provided by/(used in) financing activities:                                    |                                                     |   |                  |       |          |   |        |     
|Repayment on notes payable                                                                |                                                     |   | (752             | )     |          |   | (214   | )   
|Net repayments on line of credit                                                          |                                                     |   | (113             | )     |          |   | (132   | )   
|Issuance of convertible debt                                                              |                                                     |   |                 |       |          |   | 1,000  |     
|Proceeds from stock options exercised                                                     |                                                     |   | 168              |       |          |   | 109    |     
|Proceeds from issuance of common stock                                                    |                                                     |   | 217              |       |          |   | 106    |     
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|                                                                                          | Net cash provided by/(used in) financing activities |   |                  | (480  | )        |   |        | 869  |  
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|Net increase/(decrease) in cash                                                           |                                                     |   | 468              |       |          |   | (165   | )   
|Cash and cash equivalents at beginning of period                                          |                                                     |   | 4,771            |       |          |   | 2,497  |     
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|Cash and cash equivalents at end of period                                                |                                                     | $ | 5,239            |       |          | $ | 2,332  |     
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|Supplemental disclosure of cash flow information:                                         |                                                     |   |                  |       |          |   |        |     
|Cash paid for interest                                                                    |                                                     |   | 55               |       |          |   | 255    |     
|                                                                                          |                                                     |   |                  |       |          |   |        |     
|Cash paid for income taxes                                                                |                                                     |   |                 |       |          |   |       |     
|                                                                                          |                                                     |   |                  |       |          |   |        |     

Supplemental disclosure of non-cash information:

During fiscal year 2001, approximately 310 options to purchase shares of the
Companys common stock were issued at a below market price which required the
Company to record approximately $54 in compensation expense during the quarter
ended December 31, 2001. During fiscal year 2001, the expiration date of
approximately 129 options to purchase shares of the Companys common stock was
extended by three years which required the Company to record compensation
expense of approximately $68 during the quarter ended December 31, 2000.

During
the quarter ended December 31,2000, the Company recorded $129 as a cumulative
effect of a change in accounting principle and $33 in expense associated with
the recognition of the effective conversion price related to the convertible
debt issued in August 1999 and December 2000.

See accompanying notes to condensed consolidated financial statements





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##### Table of Contents



CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

1. Basis of Presentation

CyberGuard Corporation (the Company) has prepared the consolidated
financial statements included herein, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission with respect to Form
10-Q. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate so as to make the information contained not misleading. These interim
financial statements and the notes should be read in conjunction with the
financial statements and the notes included in the Companys 10-K for the year
ended June 30, 2001 and the risk factors set forth in the Companys annual
report on form 10-K, including, without limitation, risk related to the factors
listed below. In the Companys opinion, all adjustments (consisting only of
normal recurring adjustments) necessary for fair presentation of the
information shown have been included. Generally accepted accounting standards
also requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and disclose
contingent assets and liabilities at the date of the financial statements.
Significant estimates include those made for software development costs,
reserve for inventories, the allowance for uncollectible accounts, and
contingencies. Actual results could differ from those estimates.

The Company recognizes revenues only when a contract or agreement has been
executed, shipment of the product has occurred, the fee is fixed and
determinable and we believe collection is probable. While we generally
recognize product revenue on product shipment, we defer revenues on product
sales for channel partners until the partner demonstrates consistency in
payments and minimal product returns. Service revenues are recognized ratably
on a monthly basis over the contract term. During the quarter ended December
31, 2001, the revenue recognition policy for seven resellers was changed from
cash basis to accrual based on a reasonable assurance of collectibility from
evaluating their payment histories. The impact was to increase revenue by
approximately $531 for the quarter ended December 31, 2001.

The results of operations for the six months ended December 31, 2001 are
not necessarily indicative of the results of operations that may be expected
for the year ending June 30, 2002.

Basic earnings/(loss) per share is computed by dividing net income/(loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings/(loss) per share data is computed on the basis of the weighted
average number of common shares outstanding plus the effect of outstanding
stock options using the treasury method and the convertible debt using the
if-converted method. When the effects of the outstanding stock options,
warrants and/or convertible securities are anti-dilutive, they are not included
in the calculation of diluted earnings/(loss) per share.

The table below
illustrates the components of earnings per share:





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##### Table of Contents



CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

|                                                    |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|--------------------------------------------------- |  | ------------------ | ------ | ------------------ |  | ---------------- | ----- | ---------------- |  |  | ------ | - |  |  | ------- | -
|                                                    |  | Three Months Ended |        | Three Months Ended |  | Six Months Ended |       | Six Months Ended
|                                                    |  | Dec 30, 2001       |        | Dec 30, 2000       |  | Dec 30, 2001     |       | Dec 30, 2000    
|                                                    |  |                    |        |                    |  |                  |       |                 
|Income/(loss) before accounting change              |  | $                  | 110    |                    |  |                  | ($485 | )                |  |  | ($798  | ) |  |  | ($2,345 | )
|Cumulative effect of accounting change              |  |                    | 0      |                    |  |                  | (129  | )                |  |  | 0      |   |  |  | (129    |  
|                                                    |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|Net Income/(loss) available for common shareholders |  | $                  | 110    |                    |  |                  | ($614 | )                |  |  | ($798  | ) |  |  | ($2,474 | )
|                                                    |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|Average outstanding shares of common stock          |  |                    | 18,667 |                    |  |                  | 9,907 |                  |  |  | 18,610 |   |  |  | 9,878   |  
|Dilutive effect of:                                 |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|Employee stock options                              |  |                    | 536    |                    |  |                  | 0     |                  |  |  | 0      |   |  |  | 0       |  
|Convertible debt                                    |  |                    | 64     |                    |  |                  | 0     |                  |  |  | 0      |   |  |  | 0       |  
|                                                    |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|Common stock and common stock equivalents           |  |                    | 19,267 |                    |  |                  | 9,907 |                  |  |  | 18,610 |   |  |  | 9,878   |  
|                                                    |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|Earnings/(loss) per share before accounting change: |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|Basic                                               |  |                    | 0.01   |                    |  |                  | (0.05 | )                |  |  | (0.04  | ) |  |  | (0.24   | )
|Diluted                                             |  |                    | 0.01   |                    |  |                  | (0.05 | )                |  |  | (0.04  | ) |  |  | (0.24   | )
|Earnings/(loss) per share after accounting change:  |  |                    |        |                    |  |                  |       |                  |  |  |        |   |  |  |         |  
|Basic                                               |  |                    | 0.01   |                    |  |                  | (0.06 | )                |  |  | (0.04  | ) |  |  | (0.25   | )
|Diluted                                             |  |                    | 0.01   |                    |  |                  | (0.06 | )                |  |  | (0.04  | ) |  |  | (0.25   | )

The Companys operating results and financial condition may be impacted by
a number of factors including, but not limited to the following, any of which
could cause actual results to vary materially from current and historical
results or the Companys anticipated future results. A portion of the
Companys revenue is derived from its international operations and sources. As
a result, the Companys operations and financial results could be affected by
international factors such as changes in foreign currency exchange rates or
weak economic conditions in the international markets in which the Company
distributes its products. The network security industry is highly competitive
and competition is expected to intensify. There are numerous companies
competing in segments of the market in which the Company does business.
Competitors include organizations significantly larger and with more
development, marketing and financial resources than the Company. In addition,
the Company is subject to risks and uncertainties which include, but are not
limited to, the timely development of and acceptance of new products, impact of
competitive products, competition for and retention of key management and
technology employees, possible attacks on our networks causing changes to the
publics perception of the Company, the ability to secure additional financing,
government regulation, inventory obsolescence, the ultimate outcome of certain
litigation matters, and cash balances in excess of federally insured limits.

2. Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board approved the
issuance of SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill
and Other Intangible Assets. The new standards require that all business
combinations initiated after June 30, 2001 must be accounted for under the
purchase method. In addition, all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset
apart from goodwill. Goodwill and intangibles with indefinite lives will no
longer be subject to amortization, but will be subject to an annual assessment
for impairment by applying a fair value based test. The Company does not expect
that the application of the provisions of SFAS No. 141 and SFAS No. 142 will
have an impact on the Companys operations.

In July 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations, effective for fiscal years
beginning after June 15, 2002. SFAS No. 143





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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

addresses the accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company does not expect
that the application of the provisions of SFAS No. 143 will have an impact on
the Companys operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. The
provisions of the statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001 and are to be applied
prospectively. SFAS No. 144 clarifies the accounting for impairment of
long-lived assets to be disposed of, including the disposal of business
segments and major lines of business. The Company does not expect that the
application of the provisions of SFAS No. 143 will have an impact on the
Companys operations.

3. Reclassifications

Certain reclassifications have been made to prior-period balances to
present the financial statements on a consistent basis with the current year
presentation.

4. Consolidation

The condensed consolidated financial statements include those of the
Company and its wholly owned subsidiaries CyberGuard Europe Ltd. and CYBG
Consultants, Inc. All intercompany accounts and transactions have been
eliminated.

5. Modification of Stock Options

On October 24, 2001, the Board of Directors of the Company resolved that
upon Mr. David Proctors resignation as Chairman of the Board effective
November 15, 2001, additional vesting of 16,667 options to purchase the
Companys common stock granted on April 26, 2000, with the options remaining
exercisable through May 15, 2002. There was no accounting effect as a result
of this resolution.

6. Litigation

On August 24, 1998, the Company announced, among other things, that due to
a review of its revenue recognition practices relating to distributors and
resellers, it would restate prior financial results. After the August 24, 1998
announcement, twenty-five purported class action lawsuits were filed by alleged
shareholders against the Company and certain former officers and directors.
Pursuant to an order issued by the Court, these actions have been consolidated
into one action, styled Stephen Cheney, et al. v. CyberGuard Corporation, et
al., Case No. 98-6879-CIV-Gold, in the United States District Court, Southern
District of Florida. On August 23, 1999, the plaintiffs filed a Consolidated
and Amended Class Action Complaint. This action seeks damages purportedly on
behalf of all persons who purchased or otherwise acquired the Companys common
stock during various periods from November 7, 1996 through August 24, 1998.
The complaint alleges, among other things, that as a result of accounting
irregularities relating to the Companys revenue recognition policies, the
Companys previously issued financial statements were materially false and
misleading and that the defendants knowingly or recklessly published these
financial statements which caused the Companys common stock prices to rise
artificially. The action alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 (Exchange Act) and SEC Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act. Subsequently, the
defendants, including the Company, filed their respective motions to dismiss
the Consolidated and Amended Class Action Complaint. On July 31, 2000, the
Court issued a ruling denying

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

the Companys and Robert L. Carberrys (the
Companys CEO from June 1996 through August 1998) motions to dismiss. The
court granted the motions to dismiss with prejudice for defendants William D.
Murray (the Companys CFO from November 1997 through August 1998), Patrick O.
Wheeler (the Companys CFO from April 1996 through October 1997), C. Shelton
James (the Companys former Audit Committee Chairman), and KPMG Peat Marwick
LLP (KPMG). On August 14, 2000, the plaintiffs filed a motion for
reconsideration of that order. The Company filed an answer to the plaintiffs
Consolidated and Amended Class Action Complaint on August 24, 2000. On March
20, 2001, the Court ruled on the plaintiffs motion for reconsideration that
the previously dismissed defendants William D. Murray, Patrick O. Wheeler and
C. Shelton James should not have been dismissed from the action and shall be
defendants in this action under the control person liability claims under
Section 20(a) of the Exchange Act, and that the plaintiffs may amend the
Consolidated and Amended Class Action Complaint to bring claims against C.
Shelton James under Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder. On April 5, 2001, the plaintiffs filed their Second
Consolidated and Amended Class Action Complaint to include amended claims
against C. Shelton James. On May 10, 2001, the Company filed an answer and
affirmative defenses to plaintiffs Second Consolidated and Amended Class
Action Complaint. On April 20, 2001, the plaintiffs filed amended motion for
class certification. Both parties are currently conducting class certification
and limited merits discovery. The trial date is set to begin on June 2, 2003.

The Companys obligation to indemnify its officers and directors under the
aforementioned lawsuit is insured to the extent of the limits of the applicable
insurance policies. The Company has notified its insurance carrier of the
existence of the lawsuit, and the carrier has sent the Company a reservation of
rights letter. The Company intends to vigorously defend this action, and
believes that in the event that it is unsuccessful, insurance coverage will be
available to defray a portion, or substantially all, of the expense of
defending and settling the lawsuit or paying a judgment. However, the Company
is unable to predict the ultimate outcome of the litigation. There can be no
assurance that the Company will be successful in defending the lawsuit or, if
unsuccessful, that insurance will be available to pay all or any portion of the
expense of the lawsuit. If the Company is unsuccessful in defending the lawsuit
and the insurance coverage is unavailable or insufficient, the resolution of
the lawsuit could have a material adverse effect on the Companys consolidated
financial position, results of operations, and cash flows. The Companys
consolidated financial statements do not include any adjustments related to
these matters.

In August 1998, the Securities and Exchange Commission (SEC) commenced
an informal inquiry into certain accounting and financial reporting practices
of the Company and its officers, directors and employees. On March 25, 1999,
the SEC issued a formal order of investigation (which the Company learned of on
September 27, 1999) into certain accounting and financial reporting practices
of the Company and its officers, directors and employees.

On January 30, 2002, CyberGuard entered into a settlement with the SEC
without admitting or denying any of the SECs findings. The settlement resulted
in the issuance of an administrative order by the SEC finding that CyberGuard
violated the following books and records provisions of the Exchange Act:
Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), as well as the Exchange Act rules
for those provisions. The SEC alleged that CyberGuard had improperly written
off certain capitalized software costs relating to its Firewall Version 2
software at the end of its 1996 fiscal year. Also, the SEC alleged that
CyberGuard engaged in improper recognition of revenue during all of 1997
through the third
quarter of fiscal year 1998 ending March 31, 1998. The order does not make
any finding of fraudulent conduct by CyberGuard. The administrative order
requires that CyberGuard cease and desist from committing or causing any future
violations of the books and records provisions of the Exchange Act. No monetary
penalty or other sanctions were imposed on CyberGuard.

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

The administrative order also sanctions two former officers of CyberGuard
for their role. Specifically, CyberGuards former Chief Financial Officer,
William D. Murray, and CyberGuards former President and Chief Operating
Officer, Tommy D. Steele, were found to have been a cause of CyberGuards books
and records violations and to have committed violations of Section 13(b)(5) of
the Exchange Act. They were also ordered to cease and desist from future
violations.

In addition, the Company is also aware that on January 30, 2002 the SEC
filed an enforcement action in the United States District Court, Southern
District of Florida against CyberGuards former Chief Executive Officer and
Chairman of CyberGuards Board of Directors, Robert L. Carberry; CyberGuards
former Chief Financial Officer and Vice President of North American Sales and
current Vice President of Business Development, Patrick O. Wheeler; and
CyberGuards former Controller, Steven S. Gallers.The SEC alleges violations
of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b- 5 and 13b-2-1
thereunder by Carberry, Wheeler and Gallers and additional violations of Rule
13b2-2 by Carberry and Wheeler. SEC vs. Wheeler et al., Case No.
02-60131-CIV-Graham. The SEC is seeking permanent injunctive relief against
future violations of the Exchange Act as well as civil monetary penalties
against all three defendants and permanent bars against serving as officers and
directors of a public company against Wheeler and Gallers. On January 30, 2002,
simultaneously with the filing of the complaint, Carberry reached a settlement
with the SEC without admitting or denying the allegations of the complaint, by
consenting to the entry of a final judgment permanently enjoining him from
violating the foregoing provisions and requiring him to pay a $50,000 civil
penalty. The Company is unable to determine at this time what impact the SEC
proceedings against the remaining defendants will have on the Company.

On September 16, 1999, the Company filed a lawsuit against KPMG and August
A. Smith, the KPMG engagement partner. The lawsuit is pending in the Circuit
Court of the 17th Judicial Circuit in and for Broward County, Case No.
00-004102-CACE-14. On May 1, 2000, the Company filed the First Amended
Complaint, alleging that KPMG failed to properly audit the Companys financial
statements and provided inaccurate advice on accounting matters for fiscal
years 1996, 1997 and 1998. The action alleges professional malpractice, breach
of fiduciary duty, breach of contract and breach of implied duty of good faith,
and seeks damages in excess of $10 million. KPMG and Mr. Smith filed motions to
dismiss, which were denied. In August 2000, KPMG and Mr. Smith filed their
answers and KPMG filed counterclaims against the Company, alleging the
Companys breach of contract, negligent misrepresentation and abuse of process,
and seeking an unspecified amount of damages consisting of unpaid service fees
and legal fees and costs. The Company filed an answer to KPMGs counterclaims
and moved to dismiss KPMGs abuse of process counterclaim. On April 9, 2001,
the Court dismissed the abuse of process counterclaim with prejudice.

On November 2, 2001, the Company filed a lawsuit against Data Return
Corporation in the United States District Court of the Southern District of
Florida, alleging breach of contract, and seeking, among other remedies,
damages of approximately $4.2 million. On November 26, 2001, Data Return
Corporation filed an answer and affirmative defenses. On or about January 15,
2002, Data Return Corporation filed a motion challenging the jurisdiction of
the U.S. District Court, Southern District of Florida.

The Company is involved from time to time in other litigation on various
matters relating to the conduct of its business. The Company believes that
these other litigation matters will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.

The Company continually evaluates the possibility of re-listing its shares
of Common Stock on a national securities market or exchange and may seek such
re-listing at an appropriate time, although

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

there can be no assurance that the
Company will be able to have its shares of Common Stock re-listed at any time
in the future.

7. Special Option Program

During October 2001, certain officers and employees elected to participate
in a special stock option program offered by the Company. Officers could elect
a base salary reduction ranging from 10.01% to 100% and employees could elect a
base salary reduction ranging from .01% to 100%. This base salary reduction
entitled them to receive a specified number of stock options, as defined in the
program agreement, to purchase shares of the Companys common stock at the then
current market price of $1.30 per share. Approximately 1,751,000 stock
options, with a one-year vesting period that will expire in 10 years from the
grant date were issued related to this program. As a result, the Companys
salary expense decreased by approximately $125 during the quarter ended
December 31, 2001.

8. Subsequent Events

Effective January 5, 2002, the Company terminated the Manufacturers
Representative Agreement with a national channel development firm that had been
retained to develop a regional sales channel in the United States.

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)




Item  2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q contains forward-looking statements about future results,
which are subject to risks, and uncertainties, including those discussed below.
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 significantly from the results
discussed in forward-looking statements as a result of a variety of factors,
including, but not limited to, those set forth in our Form 10-K filed with the
Securities and Exchange Commission. References to we, our, and us refer
to CyberGuard.

The Company provides a full suite of products and services for the network
security industry. The products offered by the Company include the CyberGuard®
Firewall and VPN, proprietary and third party technology (such as
authentication, virus scanning, encryption, advanced reporting, high
availability and centralized management), and consulting, support, and
installation services.

Results of Operations

The quarter ended December 31, 2001 compared to the quarter ended December 31, 2000

Net Revenues

Net revenues consist primarily of network security products and support
related to these products. For the quarter ended December 31, 2001, net
revenues decreased by $596 to $5,753 compared to $6,349 for the quarter ended
December 31, 2000. The decrease was comprised of a decrease of $970 in network
security product revenues and an increase of $374 in service revenues.

The decrease in network security product revenues was primarily the result
of a deferral in spending by some of the Companys major customers due to the
general downturn in business and the aftermath of the events of September 11,
2001, which was partially offset by an increase in service revenue. In
addition, during the current fiscal year the Company re-focused its sales
effort from direct customer sales to distribution through value-added resellers
(VARs). As a result of this change in strategy, direct customer sales have
dropped during the first half of fiscal year 2002. The Company believes the
focus on VARs will provide greater depth and distribution for its products.
Although the change in the sales strategy did not have an immediate positive
impact to revenue, we believe it will result in a larger distribution base for
future growth. Network security products accounted for 69.0% of revenues during
the quarter ended December 31, 2001 as compared to 77.8% of revenues during the
quarter ended December 31, 2000.

Service revenue includes maintenance contracts related to new product
sales, renewal maintenance contracts for products previously deployed,
training, installation and consulting services. The increase in service
revenue corresponds to the growth in the Companys customer base and its timing
of renewal maintenance. Support services for network security products
accounted for 31.0% of revenues during the quarter ended December 31, 2001 as
compared to 22.2% of revenues during the quarter ended December 31, 2000.

During the quarter ended December 31, 2001, the revenue recognition policy
for seven resellers was changed from cash to accrual basis. This change was
based upon a review of all resellers, including

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

history of payments, return practices and credit worthiness. The impact
was an increase to revenue of approximately $531 in the quarter ended December
31, 2001.

Gross Profit

Gross Profit as a percentage of revenues increased to 71.8% from 70.2% for
the quarter ended December 31, 2001 as compared to the quarter ended December
31, 2000. This increase reflects a reduced cost of service coupled with the
increase in support revenue generated from additional maintenance renewal
contracts entered into during the current year compared to the previous year.

The Companys gross margin has been, and will continue to be, affected by
a variety of factors including, competition, the mix and average selling prices
of products, new product introductions and enhancements, and the fluctuations
in manufacturing volumes. We must continue to manage each of these factors
effectively for our gross margins to remain at their current level.

Operating Expenses, Other Income and Expense and Net Loss

Research and development expense includes salaries, non-capitalized
equipment, software tools, and depreciation from capital equipment and
software. Research and development expense decreased by $110 to $1,003 for the
quarter ended December 31, 2001 compared to $1,113 for the quarter ended
December 31, 2000. The decrease is in part the result of the reduction in
salary expense related to the special option program discussed in
Part 1, Item 1, Footnote 7 of this 10Q. As a percentage of total revenue, research and development
expense decreased 0.1% to 17.4% for the quarter ended December 31, 2001 from
17.5% for the quarter ended December 31, 2000. Capitalized
software costs for the quarter ended December 31, 2001 were $182
compared to $360 for the quarter ended December 31, 2000.

We expect to increase our research and development costs in total dollars
to enhance and expand our current product offerings and develop new products.
We also expect research and development costs to increase at a slower rate than
revenues and therefore, expect to see a gradual reduction over time in these
expenses as a percentage of total revenues.

Selling, general and administrative expense includes salaries,
commissions, costs associated with the executive, human resource, finance and
administrative support functions, and legal and accounting professional
services. Selling, general and administrative expense decreased by $543 to
$2,986 for the quarter ended December 31, 2001 from $3,529 for the quarter
ended December 31, 2000. The decrease reflects the Companys continued focus
on streamlining its operations and making cost effective changes in the way we
operate as well as the reduction in salary expense related to the special
option program discussed in Part 1, Item 1, Footnote 7 of this 10Q. As a percentage of
total revenue, selling, general and administrative expense decreased 3.7% to
51.9% for the quarter ended December 31, 2001 compared to 55.6% for the quarter
ended December 31, 2000.

Total Other Expense decreased $271 for the quarter ended December 31, 2001
to $31 compared to $302 for the quarter ended December 31, 2000. This is due to
a decrease in the interest expense associated with the convertible debt and
revolving line of credit and a reduction in foreign currency transaction
expense for the Companys foreign subsidiary.

Net income for the quarter ended December 31, 2001 was $110 compared to a
net loss of $614 for the quarter ended December 31, 2000. The Company did not
provide for income taxes due to the significant net operating loss
carryforwards available.

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

The six-month period ended December 31, 2001 compared to the six-month period ended December 31, 2000

Net Revenues

Net revenues consist primarily of network security products and support
related to these products. For the six-month period ended December 31, 2001,
net revenues decreased $68 to $10,328 compared to $10,396 for the quarter ended
December 31, 2000. The decrease was comprised of a decrease of $910 in network
security product revenues and an increase of $842 in service revenues.

The decrease in network security product revenues was primarily the result
of a deferral in spending by some of the Companys major customers due to the
general downturn in business and the aftermath of the events of September 11,
2001, which was partially offset by an increase in service revenue. In
addition, during the current fiscal year the Company re-focused its sales
effort from direct customer sales to distribution through value-added resellers
(VARs). As a result of this change in strategy, direct customer sales have
dropped during the first half of fiscal year 2002. The Company believes the
focus on VARs will provide greater depth and distribution for its products.
Although the change in the sales strategy did not have an immediate positive
impact to revenue, we believe it will result in a larger distribution base for
future growth. Network security products accounted for 67.5% of revenues during
the six-month period ended December 31, 2001 as compared to 75.8% of revenues
during the six-month period ended December 31, 2000.

Service revenue includes maintenance contracts related to new product
sales, renewal maintenance contracts for products previously deployed,
training, installation and consulting services. The increase in service
revenue corresponds to the growth in the Companys customer base and its timing
of renewal maintenance. Support services for network security products
accounted for 32.5% of revenues during the six-month period ended December 31,
2001 as compared to 24.2% of revenues during the six-month ended December 31,
2000.

Gross Profit

Gross Profit as a percentage of revenues increased to 72.8% from 70.5% for
the six-month period ended December 31, 2001 when compared to the six-month
period ended December 31, 2000. This increase reflects a reduced cost of
service coupled with the increase in support revenue generated from additional
maintenance renewal contracts entered into during the current year compared to
the previous year.

The Companys gross margin has been, and will continue to be, affected by
a variety of factors including, competition, the mix and average selling prices
of products, new product introductions and enhancements, and the fluctuations
in manufacturing volumes. We must continue to manage each of these factors
effectively for our gross margins to remain at their current level.

Operating Expenses, Other Income and Expense and Net Loss

Research and development expense includes salaries, non-capitalized
equipment, software tools, and depreciation from capital equipment and
software. Research and development expense decreased by $68 to $2,359 for the
six-month period ended December 31, 2001 compared to $2,427 for the six-month
period ended December 31, 2000. The decrease is in part the result of the
reduction in salary expense
related to the special option program discussed in Part I,
Item 1, Footnote 7 of this Form
10-Q. As a percentage of

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

total revenue, research and development expense
decreased 0.5% to 22.8% for the six-month period ended December 31, 2001 from
23.3% for the six-month period ended December 31, 2000.
Capitalized software costs for the six-month period ended
December 31, 2001 were $182 compared to $360 for the six-month
period ended December 31, 2000.

We expect to increase our research and development costs in total dollars
to enhance and expand our current product offerings and develop new products.
We also expect research and development costs to increase at a slower rate than
revenues and therefore, expect to see a gradual reduction over time in these
expenses as a percentage of total revenues.

Selling, general and administrative expense includes salaries,
commissions, costs associated with the executive, human resource, finance and
administrative support functions, and legal and accounting professional
services. Selling, general and administrative expense decreased by $804 to
$5,955 for the six-month period ended December 31, 2001 from $6,759 for the
six-month period ended December 31, 2000. The decrease reflects the Companys
continued focus on streamlining its operations and making cost effective
changes in the way we operate as well as the reduction in salary expense
related to the special option program discussed in Part I,
Item 1, Footnote 7 of this
Form 10-Q. As a percentage of total revenue, selling, general and
administrative expense decreased 7.3% to 57.7% for the six-month period ended
December 31, 2001 compared to 65.0% for the six-month period ended December 31,
2000.

Total Other Expense decreased by $483 for the six-month period ended
December 31, 2001 to $2 compared to $485 for the six-months period ended
December 31, 2000. This was due to a decrease in the interest expense
associated with the convertible debt and revolving line of credit and a
reduction in foreign currency transaction expense for the Companys foreign
subsidiary.

Net loss for the six-month period ended December 31, 2001 was $798
compared to $2,474 for the six-month period ended December 31, 2000. The
Company did not provide for income taxes due to the significant net operating
loss carryforwards available.

Liquidity and Capital Resources

The Company has generally experienced losses since its inception as a
network security company. The Companys historical uses of cash have been to
fund net losses from operations, establish inventory stocking levels, and fund
capital expenditures for property, equipment and software. For the quarter
ended December 31, 2001, the Company earned net income of approximately $110 on
revenues of approximately $5,753. For the quarter ended December 31, 2000, the
Company incurred a net loss of approximately $614 on revenues of approximately
$6,349.

The consolidated financial statements do not include any adjustments
relating to the realization of assets and the recognition and satisfaction of
liabilities that might be necessary as a result of the matters described in
this Item 2 or Part II, Item 1 of this report.

At December 31, 2001, the Company had cash and cash equivalents on hand of
$5,239 representing an increase of $468 from $4,771 as of June 30, 2001.
Accounts payable and accrued liabilities decreased $404, accounts receivable
increased $29, property and equipment decreased $231, and inventory levels
increased $235 compared to June 30, 2001.

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

The Companys principal sources of liquidity at December 31, 2001,
consisted of cash, accounts receivable, and vendor trade credit. The Companys
line of credit with Coast Business Credit was paid in full and terminated as of
December 31, 2001.

In March 2001, the Company purchased products from a third-party supplier
for resale to the Companys customer. The customer returned the products to
the Company for defectiveness and the Company subsequently returned the
products for defectiveness to the third-party supplier and has not paid for the
products. The third-party supplier has demanded payment. The Company believes
it does not have any obligation to pay for those products. The total amount in
dispute is approximately $88.

During October 2001, certain officers and employees elected to participate
in a special stock option program offered by the Company. Employees could
elect a base salary reduction which then entitled them to receive a specified
number of stock options to purchase shares of the Companys common stock at the
then current market price of $1.30 per share. Approximately 1,751,000 stock
options, with a one-year vesting period that will expire in 10 years from the
grant date were issued related to this offering.

On October 24, 2001, the Board of Directors of the Company resolved that
upon Mr. David Proctors resignation as Chairman of the Board effective
November 15, 2001, additional vesting of 16,667 options to purchase the
Companys common stock granted on April 26, 2000, with the options remaining
exercisable through May 15, 2002. There was no accounting effect as a result
of this resolution.

Based upon information currently available to the Company, including the
Companys current level of sales, its margins on sales, its expected levels of
expense, opportunities for selling additional network security products and the
availability of additional equity and debt financing, the Company believes that
it has an opportunity to execute on its business plans and achieve
profitability in the long term. There can be no assurance, however, that the
Company will be able to execute on its business plans, or that it will not be
required to obtain additional financing or capital infusions. There can be no
assurance that the Company will be able to secure additional financing or that
such additional financing will be on terms and conditions acceptable to the
Company. Any additional financing may involve dilution of the interests of the
Companys then existing shareholders. The future liquidity of the Company will
be affected by numerous factors, including sales volumes, gross margins, the
levels of selling, general and administrative expenses, levels of required
capital expenditures and access to external sources of financing. Other recent
and possible future events that could also materially impact the Companys
ability to successfully execute on its business plans are described in
Information Relating to Forward Looking Statements of this Report on Form 10-Q.

Information Relating to Forward Looking Statements

Statements regarding future products, prospects, profitability, business
plans and strategies, future revenues and revenue sources, future liquidity and
capital resources, future computer network security market directions, future
acceptance of the Companys products and possible growth in markets, as well as
all other statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements.

Forward-looking statements are based upon assumptions and analyses made by
the Company in light of current conditions, future developments and other
factors the Company believes are appropriate in the circumstances, or
information obtained from third parties and are subject to a number of
assumptions, risks and uncertainties. Readers are cautioned that
forward-looking statements are not guarantees of future performance and that
the actual results might differ materially from those suggested or projected in
the forward-looking statements. Accordingly, there can be no assurance
that the forward-looking

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

statements will occur or that results will not vary
significantly from those described in the forward-looking statements. Some of
the factors that might cause future actual events to differ from those
predicted or assumed include: future advances in technologies and computer
security; the Companys history of annual net operating losses and the
financing of these losses through the sale of assets and newly issued Company
securities; the Companys ability to execute on its business plans; the
Companys dependence on outside parties such as its key customers and alliance
partners; competition from major computer hardware, software, and networking
companies; risk and expense of government regulation and effects on changes in
regulation; the limited experience of the Company in marketing its products;
uncertainties associated with product performance liability; risks associated
with growth and expansion; global economic conditions, overall network
security spending, risks associated with obtaining and maintaining patent and
intellectual property right protection, uncertainties in availability of
expansion capital in the future and other risks associated with capital
markets, including the events of September 11, 2001 and its repercussions. In
addition, certain events that have occurred also are factors that might cause
future actual events to differ from those predicted or assumed, including: the
impact of the restatement of financial results for the Companys fiscal year
ended June 30, 1997 and quarters ended September 30, 1997, December 31, 1997
and March 31, 1998; the completion of the numerous organizational changes and
the assembly of a new management team for CyberGuard; the outcome of a
purported class action lawsuit against the Company and former executive
officers and directors of the Company, relating to the restatement of financial
results for the fiscal periods noted above and a Securities and Exchange
Commission investigation regarding these matters; and the de-listing of the
Company from the NASDAQ National Market. In addition, the forward-looking
statements herein involve assumptions, risks and uncertainties, including, but
not limited to economic, competitive, operational, management, governmental,
regulatory, litigation and technological factors affecting the Companys
operations, liquidity, capital resources, markets, strategies, products, prices
and other factors discussed elsewhere herein and in the other documents filed
by the Company with the Securities and Exchange Commission. Many of the
foregoing factors are beyond the Companys control.

The Companys future success is based largely on its ability to develop
and sell increasingly technologically advanced network security solutions in
sufficient volume and at sufficient prices to become profitable on a consistent
basis. In addition, the network security market is characterized by extremely
rapid technological change, requiring rapid product development. The velocity
of technological change has accelerated, and the Company believes that it is
important to its future that it keeps pace with these changes. The Company
believes that competition will continue to intensify in the rapidly evolving
markets in which the Company is involved, and that the continued development of
technologically advanced products will be necessary to keep its products
current. The Company believes that its ability to generate adequate cash flow
from operations will be critical to its future.




Item 3.  Quantitative and Qualitative Disclosures Concerning Market Risk

We have limited exposure to financial market risks, including changes in
interest rates. The fair value of our investments or related income would not
be significantly impacted by a 100 basis point increase or decrease in interest
rates due mainly to the short-term nature of the major portion of our
investments. A fluctuation in interest rates would not significantly affect
interest expense on debt obligations since a significant portion of the debt
obligation is at a fixed rate of interest.

The Company uses the U.S. Dollar as its reporting currency for financial
statement purposes. The Company conducts business in numerous countries around
the world through its European subsidiary that uses the local currency to
denominate its transactions. Therefore, the Company is subject to certain risks
associated with fluctuating foreign currencies. The resulting changes in the
financial statements do not
indicate any underlying changes in the financial position of the
international subsidiary, but merely

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

reflect the adjustment in the carrying
value of the net assets of this subsidiary at the current U.S. dollar exchange
rate.

Due to the long-term nature of the Companys investment in this
subsidiary, the translation adjustments resulting from these exchange rate
fluctuations are excluded from the results of operations and recorded in a
separate component of consolidated stockholders equity. The Company monitors
its currency exposure but does not hedge its translation exposure due to the
high economic costs of such a program and the long-term nature of its
investment in its European subsidiary.




PART II:  OTHER INFORMATION




Item 1.  Legal Proceedings

Litigation

On August 24, 1998, the Company announced, among other things, that due to
a review of its revenue recognition practices relating to distributors and
resellers, it would restate prior financial results. After the August 24, 1998
announcement, twenty-five purported class action lawsuits were filed by alleged
shareholders against the Company and certain former officers and directors.
Pursuant to an order issued by the Court, these actions have been consolidated
into one action, styled Stephen Cheney, et al. v. CyberGuard Corporation, et
al., Case No. 98-6879-CIV-Gold, in the United States District Court, Southern
District of Florida. On August 23, 1999, the plaintiffs filed a Consolidated
and Amended Class Action Complaint. This action seeks damages purportedly on
behalf of all persons who purchased or otherwise acquired the Companys common
stock during various periods from November 7, 1996 through August 24, 1998.
The complaint alleges, among other things, that as a result of accounting
irregularities relating to the Companys revenue recognition policies, the
Companys previously issued financial statements were materially false and
misleading and that the defendants knowingly or recklessly published these
financial statements which caused the Companys common stock prices to rise
artificially. The action alleges violations of Section 10(b) of the Securities
Exchange Act of 1934 (Exchange Act) and SEC Rule 10b-5 promulgated thereunder
and Section 20(a) of the Exchange Act. Subsequently, the defendants, including
the Company, filed their respective motions to dismiss the Consolidated and
Amended Class Action Complaint. On July 31, 2000, the Court issued a ruling
denying the Companys and Robert L. Carberrys (the Companys CEO from June
1996 through August 1998) motions to dismiss. The court granted the motions to
dismiss with prejudice for defendants William D. Murray (the Companys CFO from
November 1997 through August 1998), Patrick O. Wheeler (the Companys CFO from
April 1996 through October 1997), C. Shelton James (the Companys former Audit
Committee Chairman), and KPMG Peat Marwick LLP (KPMG). On August 14, 2000,
the plaintiffs filed a motion for reconsideration of that order. The Company
filed an answer to the plaintiffs Consolidated and Amended Class Action
Complaint on August 24, 2000. On March 20, 2001, the Court ruled on the
plaintiffs motion for reconsideration that the previously dismissed defendants
William D. Murray, Patrick O. Wheeler and C. Shelton James should not have been
dismissed from the action and shall be defendants in this action under the
control person liability claims under Section 20(a) of the Exchange Act, and
that the plaintiffs may amend the Consolidated and Amended Class Action
Complaint to bring claims against C. Shelton James under Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder. On April 5, 2001, the
plaintiffs filed their Second Consolidated and Amended Class Action Complaint
to include amended claims against C. Shelton James. On May 10, 2001, the
Company filed an answer and affirmative defenses to plaintiffs Second
Consolidated and Amended Class Action Complaint. On April 20, 2001, the
plaintiffs filed amended motion for class certification. Both parties are
currently conducting class certification and limited merits discovery. The
trial date is set to begin on June
2, 2003.

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

The Companys obligation to indemnify its officers and directors under the
aforementioned lawsuit is insured to the extent of the limits of the applicable
insurance policies. The Company has notified its insurance carrier of the
existence of the lawsuit, and the carrier has sent the Company a reservation of
rights letter. The Company intends to vigorously defend this action, and
believes that in the event that it is unsuccessful, insurance coverage will be
available to defray a portion, or substantially all, of the expense of
defending and settling the lawsuit or paying a judgment. However, the Company
is unable to predict the ultimate outcome of the litigation. There can be no
assurance that the Company will be successful in defending the lawsuit or, if
unsuccessful, that insurance will be available to pay all or any portion of the
expense of the lawsuit. If the Company is unsuccessful in defending the lawsuit
and the insurance coverage is unavailable or insufficient, the resolution of
the lawsuit could have a material adverse effect on the Companys consolidated
financial position, results of operations, and cash flows. The Companys
consolidated financial statements do not include any adjustments related to
these matters.

In August 1998, the Securities and Exchange Commission (SEC) commenced
an informal inquiry into certain accounting and financial reporting practices
of the Company and its officers, directors and employees. On March 25, 1999,
the SEC issued a formal order of investigation (which the Company learned of on
September 27, 1999) into certain accounting and financial reporting practices
of the Company and its officers, directors and employees.

On January 30, 2002, CyberGuard entered into a settlement with the SEC
without admitting or denying any of the SECs findings. The settlement resulted
in the issuance of an administrative order by the SEC finding that CyberGuard
violated the following books and records provisions of the Exchange Act:
Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), as well as the Exchange Act rules
for those provisions. The SEC alleged that CyberGuard had improperly written
off certain capitalized software costs relating to its Firewall Version 2
software at the end of its 1996 fiscal year. Also, the SEC alleged that
CyberGuard engaged in improper recognition of revenue during all of 1997
through the third quarter of fiscal year 1998 ending March 31, 1998. The order
does not make any finding of fraudulent conduct by CyberGuard. The
administrative order requires that CyberGuard cease and desist from committing
or causing any future violations of the books and records provisions of the
Exchange Act. No monetary penalty or other sanctions were imposed on
CyberGuard.

The administrative order also sanctions two former officers of CyberGuard
for their role. Specifically, CyberGuards former Chief Financial Officer,
William D. Murray, and CyberGuards former President and Chief Operating
Officer, Tommy D. Steele, were found to have been a cause of CyberGuards books
and records violations and to have committed violations of Section 13(b)(5) of
the Exchange Act. They were also ordered to cease and desist from future
violations.

In addition, the Company is also aware that on January 30, 2002 the SEC
filed an enforcement action in the United States District Court, Southern
District of Florida against CyberGuards former Chief Executive Officer and
Chairman of CyberGuards Board of Directors, Robert L. Carberry; CyberGuards
former Chief Financial Officer and Vice President of North American Sales and
current Vice President of Business Development, Patrick O. Wheeler; and
CyberGuards former Controller, Steven S. Gallers. The SEC alleges violations
of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b- 5 and 13b-2-1
thereunder by Carberry, Wheeler and Gallers and additional violations of Rule
13b2-2 by Carberry and Wheeler. SEC vs. Wheeler et al., Case No.
02-60131-CIV-Graham. The SEC is seeking permanent injunctive relief against
future violations of the Exchange Act as well as civil monetary penalties
against all three defendants and permanent bars against serving as officers and
directors of a public company against Wheeler and Gallers. On January 30, 2002,
simultaneously with the filing of the complaint,
Carberry reached a settlement with the SEC without admitting or denying
the allegations of the complaint, by consenting to the entry of a final
judgment permanently enjoining him from violating

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

the foregoing provisions and
requiring him to pay a $50,000 civil penalty. The Company is unable to
determine at this time what impact the SEC proceedings against the remaining
defendants will have on the Company.

On September 16, 1999, the Company filed a lawsuit against KPMG and August
A. Smith, the KPMG engagement partner. The lawsuit is pending in the Circuit
Court of the 17th Judicial Circuit in and for Broward County, Case No.
00-004102-CACE-14. On May 1, 2000, the Company filed the First Amended
Complaint, alleging that KPMG failed to properly audit the Companys financial
statements and provided inaccurate advice on accounting matters for fiscal
years 1996, 1997 and 1998. The action alleges professional malpractice, breach
of fiduciary duty, breach of contract and breach of implied duty of good faith,
and seeks damages in excess of $10 million. KPMG and Mr. Smith filed motions to
dismiss, which were denied. In August 2000, KPMG and Mr. Smith filed their
answers and KPMG filed counterclaims against the Company, alleging the
Companys breach of contract, negligent misrepresentation and abuse of process,
and seeking an unspecified amount of damages consisting of unpaid service fees
and legal fees and costs. The Company filed an answer to KPMGs counterclaims
and moved to dismiss KPMGs abuse of process counterclaim. On April 9, 2001,
the Court dismissed the abuse of process counterclaim with prejudice.

On November 2, 2001, the Company filed a lawsuit against Data Return
Corporation in the United States District Court of the Southern District of
Florida, alleging breach of contract, and seeking, among other remedies,
damages of approximately $4.2 million. On November 26, 2001, Data Return
Corporation filed an answer and affirmative defenses. On or about January 15,
2002, Data Return Corporation filed a motion challenging the jurisdiction of
the U.S. District Court, Southern District of Florida.

The Company is involved from time to time in other litigation on various
matters relating to the conduct of its business. The Company believes that
these other litigation matters will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.

The Company continually evaluates the possibility of re-listing its shares
of Common Stock on a national securities market or exchange and may seek such
re-listing at an appropriate time, although there can be assurance that the
Company will be able to have its shares of Common Stock re-listed at any time
in the future.




Item 2.  Changes in Securities and Use of Proceeds

None




Item  3.  Defaults upon Senior Securities

None




Item 4.  Submission of Matters to a Vote of Security Holders

On December 6, 2001, the Company held its Annual Meeting of Shareholders
at the Marriott by Courtyard at Cypress Creek, in Fort Lauderdale, Florida.
Scott J. Hammack, Richard L. Scott, and David L. Manning were nominated as
members to the Board of Directors for a period of three years and Daniel J.
Moen was nominated as a member to the Board of Directors for a period of one
year. Mr. Hammack received 17,329,576 votes in favor of his appointment, while
230,884 shares were withheld, Mr. Scott
received 17,328,570 votes in favor of his appointment, while 231,890 shares
were withheld, Mr. Manning received 17,329,573 votes in favor of his
appointment, while 230,887 shares were withheld and Mr. Moen received
17,329,534 votes in favor of his appointment, while 230,926 shares were
withheld.

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2001
(Unaudited)

Two other matters were brought for vote during the annual meeting: the
approval of the Second Amended and Restated Employee Stock Option Plan and the
ratification of Grant Thornton LLP as the Companys independent public
accountants for the fiscal year ending June 30, 2002. The amendment to approve
the Second Amended and Restated Employee Stock Option Plan was passed with
9,624,806 votes in favor, 402,585 votes against and 44,646 votes abstaining.
The ratification of Grant Thornton LLP was passed with 17,523,762 votes in
favor, 20,986 votes against, and 15,711 votes abstaining.




Item 5.  Other Information

None




Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

|            |  |                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Description                                                                                                   
|10.1        |  | Employment Agreement Amendment dated October 1, 2001 between the
Company and Scott Hammack.                           
|10.2        |  | Employment Agreement Amendment dated October 1, 2001 between the
Company and Patrick Clawson.                         
|10.3        |  | Employment Agreement Amendment dated October 1, 2001 between the
Company and Michael Matte.                           
|10.4        |  | Employment Agreement Amendment dated October 1, 2001 between the
Company and Michael Wittig.                          
|10.5        |  | Employment Agreement Amendment dated October 1, 2001 between the
Company and Adriana Kovalovska.                      
|10.6        |  | Second Amended and Restated Employee Stock Option Plan dated
September 4, 1998, as amended through October 16, 2001(1)



|    |  |                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | Reports filed on Form 8-K during the quarter ended December 31, 2001: The
Company filed no reports on Form 8-K during the quarter ended December 31,
2001.



---

|(1) |  | Incorporated herein by reference to the Companys Registration
Statement on Form S-8 (Commission File Number 333-73852, filed on
November 21, 2001).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                       |  |                        |  |                                                                                                   
|---------------------- |  | ---------------------- |  | --------------------------------------------------------------------------------------------------
|Date: February 5, 2001 |  | CYBERGUARD CORPORATION
|                      
|                      
|                       |  | By:                    |  | /s/Scott Hammack                                                                                  
|                       |  |                        |  |                                                                                                   
|                      
|                       |  |                        |  | Chairman and Chief Executive Officer                                                              
|                      
|                      
|                       |  | By:                    |  | /s/Michael Matte                                                                                  
|                       |  |                        |  |                                                                                                   
|                      
|                       |  |                        |  | Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)