##### 



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 MARCH 31, 2002                                           
|       
|       
|       
|       
|       
|        |  | OR                                                                                      
|       
|       
|       
|       
|       
|[     ] |  | TRANSITION 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

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(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 [X] 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 [X] No [     ]

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

Yes [X] No [     ]

As of April 30, 2002, 18,984,419 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
|                             
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|                             
|                             
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|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                             
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|PART II. OTHER INFORMATION   
|                             
|                             
|                             
|                             
|                             
|                              | Item 1. Legal Proceedings                                                                    
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|                             
|                             
|                             
|                             
|                              | 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                                  
|                             
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|                             
|                              | Item 5. Other Information                                                                    
|                             
|                             
|                             
|                             
|                             
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|                             
|                             
|                             
|                             
|                             
|SIGNATURES                   
|                             
|                             
|                             
|                             
|                             
|EXHIBITS                     

1



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##### 





CYBERGUARD CORPORATION

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 |       | Nine Months Ended
|                                                                         |                                    |                          |        |                    |       |                  
|                                                                         |                                    |                          |        | Mar. 31,           |       | Mar. 31,          |        | Mar. 31, |       | Mar. 31,
|                                                                         |                                    |                          |        | 2002               |       | 2001              |        | 2002     |       | 2001    
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |         
|Revenues:                                                                |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Products                                                                 |                                    | $                        | 4,557  |                    |       | $                 | 6,072  |          |       | $        | 11,526 |       |        | $ | 13,951 |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Services                                                                 |                                    |                          | 1,734  |                    |       |                   | 1,563  |          |       |          | 5,093  |       |        |   | 4,080  |      
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total revenues           |        |                    | 6,291 |                   |        |          | 7,635 |          |        |       | 16,619 |   |        |       | 18,031 |  
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Cost of revenues:                                                        |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Products                                                                 |                                    |                          | 1,377  |                    |       |                   | 1,696  |          |       |          | 3,243  |       |        |   | 3,576  |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Services                                                                 |                                    |                          | 511    |                    |       |                   | 606    |          |       |          | 1,455  |       |        |   | 1,796  |      
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total cost of revenues   |        |                    | 1,888 |                   |        |          | 2,302 |          |        |       | 4,698  |   |        |       | 5,372  |  
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Gross profit                                                             |                                    |                          | 4,403  |                    |       |                   | 5,333  |          |       |          | 11,921 |       |        |   | 12,659 |      
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Operating expenses:                                                      |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Research and development                                                 |                                    |                          | 1,239  |                    |       |                   | 1,682  |          |       |          | 3,598  |       |        |   | 4,109  |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Selling, general and administrative                                      |                                    |                          | 3,079  |                    |       |                   | 4,199  |          |       |          | 9,034  |       |        |   | 10,958 |      
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total operating expenses |        |                    | 4,318 |                   |        |          | 5,881 |          |        |       | 12,632 |   |        |       | 15,067 |  
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Operating income/(loss)                                                  |                                    |                          | 85     |                    |       |                   | (548   | )        |       |          | (711   | )     |        |   | (2,408 | )    
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Other income/(expense):                                                  |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Interest income/(expense), net                                           |                                    |                          | 13     |                    |       |                   | (310   | )        |       |          | 40     |       |        |   | (749   | )    
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Gain/(loss) on sale of assets                                            |                                    |                          | 0      |                    |       |                   | (1     | )        |       |          | (17    | )     |        |   | 12     |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Other expense                                                            |                                    |                          | (17    | )                  |       |                   | (29    | )        |       |          | (29    | )     |        |   | (88    | )    
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                         |                                    | Total other expense      |        |                    | (4    | )                 |        |          | (340  | )        |        |       | (6     | ) |        |       | (825   | )
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Income/(loss) before cumulative effect of change in accounting principle |                                    | $                        | 81     |                    |       | $                 | (888   | )        |       | $        | (717   | )     |        | $ | (3,233 | )    
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Cumulative effect of change in accounting principle                      |                                    |                          | 0      |                    |       |                   | 0      |          |       |          | 0      |       |        |   | (129   | )    
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Net Income/(loss)                                                        |                                    | $                        | 81     |                    |       | $                 | (888   | )        |       | $        | (717   | )     |        | $ | (3,362 | )    
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Basic earnings/(loss) per common share:                                  |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Before cumulative effect of change in accounting principle               |                                    | $                        | 0.00   |                    |       | $                 | (0.06  | )        |       | $        | (0.04  | )     |        | $ | (0.28  | )    
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Cumulative effect of change in accounting principle                      |                                    | $                        |       |                    |       | $                 |       |          |       | $        |       |       |        | $ | (0.01  | )    
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                         | Net Income/(loss) per common share |                          | $      | 0.00               |       |                   | $      | (0.06    | )     |          | $      | (0.04 | )      |   | $      | (0.29 | )     
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Weighted average common shares outstanding                               |                                    |                          | 18,883 |                    |       |                   | 14,891 |          |       |          | 18,700 |       |        |   | 11,525 |      
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Diluted earnings/(loss) per common share:                                |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Before cumulative effect of change in accounting principle               |                                    | $                        | 0.00   |                    |       | $                 | (0.06  | )        |       | $        | (0.04  | )     |        | $ | (0.28  | )    
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Cumulative effect of change in accounting principle                      |                                    | $                        |       |                    |       | $                 |       |          |       | $        |       |       |        | $ | (0.01  | )    
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|                                                                         | Net Income/(loss) per common share |                          | $      | 0.00               |       |                   | $      | (0.06    | )     |          | $      | (0.04 | )      |   | $      | (0.29 | )     
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      
|Diluted common shares outstanding                                        |                                    |                          | 22,369 |                    |       |                   | 14,891 |          |       |          | 18,700 |       |        |   | 11,525 |      
|                                                                         |                                    |                          |        |                    |       |                   |        |          |       |          |        |       |        |   |        |      

See accompanying notes to condensed consolidated financial statements

2



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##### 



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

|                                                                                                                                 |                            |                                            |         |          |        |          |         |        |        | 
|-------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------- | -------- | ------ | -------- | ------- | ------ | ------ | 
|                                                                                                                                 |                            |                                            |         | Mar. 31, |        | June 30,
|                                                                                                                                 |                            |                                            |         | 2002     |        | 2001    
|                                                                                                                                 |                            |                                            |         |          |        |         
|ASSETS                                                                                                                           |                            |                                            |         |          |        |          |         |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Cash and cash equivalents                                                                                                        |                            | $                                          | 5,441   |          |        | $        | 4,771   |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Restricted cash                                                                                                                  |                            |                                            | 20      |          |        |          | 780     |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Accounts receivable, less allowance for uncollectible accounts
of $30 at Mar. 31, 2002 and $36 at June 30, 2001                  |                            |                                            | 5,156   |          |        |          | 4,147   |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Inventories, net                                                                                                                 |                            |                                            | 471     |          |        |          | 294     |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Other current assets                                                                                                             |                            |                                            | 973     |          |        |          | 1,065   |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 | Total current assets       |                                            |         | 12,061   |        |          |         | 11,057 |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|Property and equipment at cost, less accumulated
depreciation of $2,117 at Mar. 31, 2002 and
$1,710 at June 30, 2001             |                            |                                            | 982     |          |        |          | 1,211   |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Capitalized software, net                                                                                                        |                            |                                            | 360     |          |        |          | 741     |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Other assets                                                                                                                     |                            |                                            | 91      |          |        |          | 90      |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 |                            | Total assets                               |         | $        | 13,494 |          |         | $      | 13,099 | 
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                             |                            |                                            |         |          |        |          |         |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Line
of credit and note payable                                                                                                  |                            |                                            | 234     |          |        |          | 919     |       
|Accounts payable                                                                                                                 |                            |                                            | 945     |          |        |          | 967     |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Convertible debenture, net                                                                                                       |                            |                                            | 52      |          |        |          | 62      |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Deferred revenue                                                                                                                 |                            |                                            | 3,359   |          |        |          | 2,308   |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Accrued expenses and other liabilities                                                                                           |                            |                                            | 2,259   |          |        |          | 2,369   |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 | Total liabilities          |                                            |         | 6,849    |        |          |         | 6,625  |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|Shareholders equity                                                                                                             |                            |                                            |         |          |        |          |         |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Common stock par value $0.01 authorized 50,000 shares
issued and outstanding 18,970 at Mar. 31, 2002
and 18,429 at June 30, 2001 |                            |                                            | 190     |          |        |          | 184     |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Additional paid-in capital                                                                                                       |                            |                                            | 88,424  |          |        |          | 87,557  |       
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Accumulated deficit                                                                                                              |                            |                                            | (82,183 | )        |        |          | (81,467 | )     
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|                                                                                                                                
|Accumulated other comprehensive income                                                                                           |                            |                                            | 214     |          |        |          | 200     |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 | Total shareholders equity |                                            |         | 6,645    |        |          |         | 6,474  |       
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       
|                                                                                                                                 |                            | Total liabilities and shareholders equity |         | $        | 13,494 |          |         | $      | 13,099 | 
|                                                                                                                                 |                            |                                            |         |          |        |          |         |       

See accompanying notes to condensed consolidated financial statements

3



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##### 



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

|                                                                                          |                                                     |   |                   |       |          |   |        |        |  
|----------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ----------------- | ----- | -------- | - | ------ | ------ | -
|                                                                                          |                                                     |   | Nine Months Ended
|                                                                                          |                                                     |   |                  
|                                                                                          |                                                     |   | Mar. 31,          |       | Mar. 31,
|                                                                                          |                                                     |   | 2002              |       | 2001    
|                                                                                          |                                                     |   |                   |       |         
|Cash flows from operating activities:                                                     |                                                     |   |                   |       |          |   |        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net loss                                                                                  |                                                     | $ | (717              | )     |          | $ | (3,362 | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities: |                                                     |   |                   |       |          |   |        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Depreciation                                                                              |                                                     |   | 504               |       |          |   | 569    |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Amortization                                                                              |                                                     |   | 554               |       |          |   | 1,073  |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Gain/loss on disposal of property & equipment                                             |                                                     |   | 17                |       |          |   |       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Provision for uncollectible accounts receivable                                           |                                                     |   | 30                |       |          |   | 92     |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Provision for inventory reserve                                                           |                                                     |   | 0                 |       |          |   | (4     | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Compensation expense related to the modification of stock options                         |                                                     |   | 106               |       |          |   | 168    |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Non-cash expense for company 401(k) match                                                 |                                                     |   | 193               |       |          |   | 166    |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Beneficial conversion feature on Aug 1999 and Dec 2000 convertible debt                   |                                                     |   |                  |       |          |   | 162    |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Changes
in assets and liabilities                                                         |                                                     |   |                   |       |          |   |        |       
|Restricted
cash                                                                           |                                                     |   | 760               |       |          |   | 38     |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Accounts receivable                                                                       |                                                     |   | (1,039            | )     |          |   | (1,650 | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other current assets                                                                      |                                                     |   | 93                |       |          |   | (284   | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Inventories                                                                               |                                                     |   | (140              | )     |          |   | (331   | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Accounts payable                                                                          |                                                     |   | (22               | )     |          |   | (128   | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Accrued expenses and other liabilities                                                    |                                                     |   | (111              | )     |          |   | 619    |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Deferred revenue                                                                          |                                                     |   | 1,051             |       |          |   | 26     |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Other, net                                                                                |                                                     |   | 13                |       |          |   | 302    |       
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|                                                                                          | Net cash provided by/(used in) operating activities |   |                   | 1,292 |          |   |        | (2,544 | )
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|Cash flows used in investing activities:                                                  |                                                     |   |                   |       |          |   |        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Capitalized software costs                                                                |                                                     |   | (172              | )     |          |   | (360   | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from the sale of property & equipment                                            |                                                     |   | 11                |       |          |   |       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Purchase of property & equipment                                                          |                                                     |   | (338              | )     |          |   | (740   | )     
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|                                                                                          | Net cash used in investing activities               |   |                   | (499  | )        |   |        | (1,100 | )
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|Cash flows provided by/(used in) financing activities:                                    |                                                     |   |                   |       |          |   |        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Borrowings on notes payable                                                               |                                                     |   | 257               |       |          |   |       |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Repayment on notes payable                                                                |                                                     |   | (830              | )     |          |   | 11     |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Net repayments on line of credit                                                          |                                                     |   | (113              | )     |          |   | (1,062 | )     
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Issuance of convertible debt                                                              |                                                     |   |                  |       |          |   | 1,000  |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from stock options exercised                                                     |                                                     |   | 403               |       |          |   | 185    |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from issuance of common stock                                                    |                                                     |   | 160               |       |          |   | 30     |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from exercise of stock purchase warrants                                         |                                                     |   |                  |       |          |   | 4,804  |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Proceeds from sale of securities                                                          |                                                     |   |                  |       |          |   | 500    |       
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|                                                                                          | Net cash provided by/(used in) financing activities |   |                   | (123  | )        |   |        | 5,468  |  
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|Net increase in cash                                                                      |                                                     |   | 670               |       |          |   | 1,824  |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cash and cash equivalents at beginning of period                                          |                                                     |   | 4,771             |       |          |   | 2,497  |       
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|Cash and cash equivalents at end of period                                                |                                                     | $ | 5,441             |       |          | $ | 4,321  |       
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|Supplemental disclosure of cash flow information:                                         |                                                     |   |                   |       |          |   |        |       
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Cash paid for interest                                                                    |                                                     |   | 55                |       |          |   | 608    |       
|                                                                                          |                                                     |   |                   |       |          |   |        |       
|Cash paid for income taxes                                                                |                                                     |   |                  |       |          |   |       |       
|                                                                                          |                                                     |   |                   |       |          |   |        |       

During fiscal year 2002, the Companys CEO, Scott Hammack, participated in a
special intion program which required the Company to record compensation expense
of $47 for the nine-months ended March 31, 2002. During fiscal year 2001,
approximately 310,000 options to purchase shares of the Companys common stock
were issued at a below market price which required the Company to record
approximately $59 in compensation expense during the nine-months ended March 31,
2002 and $27 in compensation expense for the quarter ended March 31, 2001.
During fiscal year 2001, the expiration date of approximately 129,000 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 March 31, 2001. During fiscal year 2001, the Company extended
the exercise period of approximately 150,000 options to purchase shares of the
Companys common stock which required the Company to record approximately $73K

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

4



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##### 



CYBERGUARD CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2002
Amounts in thousands, except per share data
(unaudited)

1. BASIS OF PRESENTATION

CyberGuard Corporation (the Company) has prepared the condensed
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
Form 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.

2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

SOFTWARE
DEVELOPMENT COSTSThe Company capitalizes costs related to the
development of certain software products in accordance with Statement of
Financial Accounting Standards No. 86, Accounting For the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed (SFAS No. 86) which
requires capitalization to begin when technological feasibility has been
established and ends when the product is available for general release to
customers. Software development costs incurred prior to technological
feasibility, defined by completion of a working model, are considered research
and development costs and are expensed as incurred. Capitalized costs are
amortized using the straight-line method over two years. The Company did not
capitalize software development costs for the quarter ended March 31, 2002.

REVENUE RECOGNITIONCyberGuard recognizes revenue in accordance with the
accounting standards for the software companies, including Statement of Position
(SOP) 97-2 Software Revenue Recognition as amended by SOP 98-9, and related
interpretations, including Technical Practices Aids. In December 1999, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB)
101 Revenue Recognition in Financial Statements as amended by SAB 101A and
101B. SAB 101 summarizes certain of the SEC views in applying generally accepted
accounting principles to revenue recognition in financial statements. Cyberguard
believes its current revenue recognition policies and practices are consistent
with the current accounting standards. We generally recognize revenue on product
shipment, however, when factors indicate that the sales price in a reseller or
distributor arrangement is not fixed or that a reasonable basis for estimating
the degree of collectibility of the receivable does not exist, revenue is
recognized as cash is received. During the quarter ended March 31, 2002, the
revenue recognition policy for three 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 $624 for
the quarter ended March 31, 2002 and approximately $1,155 for the nine-months
ended March 31, 2002.

Revenue on post contract customer support is deferred and amortized using
the straight-line method over the term of the contract. The Company also
provides professional support services, which are

5



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##### 



CYBERGUARD CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2002
Amounts in thousands, except per share data
(unaudited)

available under Service Agreements and charged for separately. These services
are generally provided under time and materials contracts and revenue is
recognized as the service is provided.

PRINCIPLES OF
CONSOLIDATIONThe consolidated financial statements include
the accounts of Cyberguard and its wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.

NET LOSS PER
SHAREBasic income/(loss) per share is computed by dividing
net income/(loss) available to common shareholders by the weighted-average
number of common shares outstanding for 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:

|                                                    |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|--------------------------------------------------- |  | ------------ | ------ | ------------ |  | ----------- | ----------- | --------- |  |  | ------ | - |  |  | ------- | -
|                                                    |  | Three Months |        | Three Months |  | Nine Months | Nine Months
|                                                    |  | Ended        |        | Ended        |  | Ended       |             | Ended    
|                                                    |  | March 31,    |        | March 31,    |  | March 31,   |             | March 31,
|                                                    |  | 2002         |        | 2001         |  | 2002        |             | 2001     
|                                                    |  |              |        |              |  |             |             |          
|Income/(loss) before accounting change              |  | $            | 81     |              |  |             | ($888       | )         |  |  | ($717  | ) |  |  | ($3,233 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Cumulative effect of accounting change              |  |              | 0      |              |  |             | 0           |           |  |  | 0      |   |  |  | (129    | )
|                                                    |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|Net Income/(loss) available for common shareholders |  | $            | 81     |              |  |             | ($888       | )         |  |  | ($717  | ) |  |  | ($3,362 | )
|                                                    |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|Average outstanding shares of common stock          |  |              | 18,883 |              |  |             | 14,891      |           |  |  | 18,700 |   |  |  | 11,525  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Dilutive effect of:                                 |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|Employee stock options                              |  |              | 2,570  |              |  |             | 0           |           |  |  | 0      |   |  |  | 0       |  
|                                                   
|                                                   
|                                                   
|                                                   
|Convertible debt                                    |  |              | 53     |              |  |             | 0           |           |  |  | 0      |   |  |  | 0       |  
|                                                   
|                                                   
|                                                   
|                                                   
|Warrants                                            |  |              | 863    |              |  |             | 0           |           |  |  | 0      |   |  |  | 0       |  
|                                                    |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|Common stock and common stock equivalents           |  |              | 22,369 |              |  |             | 14,891      |           |  |  | 18,700 |   |  |  | 11,525  |  
|                                                    |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|Earnings/(loss) per share before accounting change: |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|Basic                                               |  |              | 0.00   |              |  |             | (0.06       | )         |  |  | (0.04  | ) |  |  | (0.28   | )
|                                                   
|                                                   
|                                                   
|                                                   
|Diluted                                             |  |              | 0.00   |              |  |             | (0.06       | )         |  |  | (0.04  | ) |  |  | (0.28   | )
|                                                   
|                                                   
|                                                   
|                                                   
|Earnings/(loss) per share after accounting change:  |  |              |        |              |  |             |             |           |  |  |        |   |  |  |         |  
|                                                   
|                                                   
|                                                   
|                                                   
|Basic                                               |  |              | 0.00   |              |  |             | (0.06       | )         |  |  | (0.04  | ) |  |  | (0.29   | )
|                                                   
|                                                   
|                                                   
|                                                   
|Diluted                                             |  |              | 0.00   |              |  |             | (0.06       | )         |  |  | (0.04  | ) |  |  | (0.29   | )

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

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

6



---



##### 



CYBERGUARD CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2002
Amounts in thousands, except per share data
(unaudited)

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.

3. 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 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. 144 will have an impact on the Companys operations.

In November 2001, the Financial Accounting Standards Boards Emerging
Issues Task Force (EITF) issued EITF No. 01-9, Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendors Products. The EITF
reconciled selected guidance provided in Issue Nos. 00-14, 00-22, and 00-25,
addressing the income statement classification of certain promotional payments.
Primarily effective in 2002, the Company does not expect that the application of
the provisions of EITF No. 01-9 will have a material impact on the Companys
operations.

4. 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.

7



---



##### 



CYBERGUARD CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2002
Amounts in thousands, except per share data
(unaudited)

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. The Company has filed with the Court its
opposition to class certification. The Court will be holding oral argument on
the issue in May 2002 and will decide whether the lawsuit will proceed as a
class action shortly thereafter. 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

8



---



##### 



CYBERGUARD CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2002
Amounts in thousands, except per share data
(unaudited)

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 the foregoing provisions and requiring him to pay a $50,000 civil
penalty. The Company agreed to pay $25,000 to Robert L. Carberry in connection
with the settlement and release of any potential indemnification claim by Mr.
Carberry with respect to the SEC action. 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

9



---



##### 



CYBERGUARD CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2002
Amounts in thousands, except per share data
(unaudited)

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. On or about March 27, 2002, the
action was dismissed by the U.S. District Court for the Southern District of
Florida on jurisdictional grounds. The Company continues to consider its
alternatives with respect to this litigation, including whether to re-file the
action in a different jurisdiction.

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 has and
continues to evaluate and pursue the possibility of re-listing its
shares of Common Stock on a national securities market or exchange.
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.

5. SUBSEQUENT EVENTS

On April 24, 2002, William Rubin was appointed to the Board of Directors.

10



---



##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

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. However, the absence of these
words does not mean that the statements are not forward-looking. Forward-looking
statements include statements about our plans, objectives, expectations,
intentions and other statements that are not historical facts. They are subject
to known and unknown risks and uncertainties and assumptions that could cause
our actual results to differ materially from those expected or implied by the
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including,
but not limited to, the risks described in Part II, Item 7, of the Companys
10-K for the year ended June 30, 2001. You should not unduly rely on these
forward-looking statements, which apply only as of the date of this quarterly
report. We undertake no obligation to update any forward-looking statements to
reflect new information, circumstances or events after the date of this report.
These forward-looking statements are only predictions.

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 March 31, 2002
compared to the quarter ended March 31, 2001

NET REVENUES

Net revenues consist primarily of network security products and support
related to these products. For the quarter ended March 31, 2002, net revenues
decreased by $1,344 to $6,291 compared to $7,635 for the quarter ended March 31,
2001. The decrease was comprised of a decrease of $1,515 in network security
product revenues and an increase of $171 in service revenues. Total
international revenue represented approximately 73.6% of total revenues for the
three months ended March 31, 2002, compared to approximately 53.0% for the three
months ended March 31, 2001.

We believe 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 slow down in the economy, changes in our sales and marketing
organization and the aftermath of the events of September 11, 2001. 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 decreased during the current quarter
and for the nine-months ended March 31, 2002 versus the same period last year.
We believe the focus on VARs will provide greater depth and distribution for our
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 revenue growth. Network security products accounted for 72.4% of
revenues during the quarter ended March 31, 2002 as compared to 79.5% of
revenues during the quarter ended March 31, 2001.

11



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##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

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 27.6% of revenues during the quarter ended March 31, 2002 as compared to
20.5% of revenues during the quarter ended March 31, 2001.

GROSS PROFIT

Gross profit as a percentage of revenues remained constant at 70% for
quarters ended March 31, 2002 and 2001.

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 INCOME/(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 $443 to $1,239 for the quarter
ended March 31, 2002 compared to $1,682 for the quarter ended March 31, 2001.
The decrease is in part the result of a reduction in headcount and the reduction
in salary expense related to the special option program discussed in Part I,
Item 1, Footnote 7 of the Form 10Q filed with the SEC for quarter ending December 31,
2001. As a percentage of total revenues, research and development expense
decreased 2.3% to 19.7% for the quarter ended March 31, 2002 from 22.0% for the
quarter ended March 31, 2001.

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. We plan to continue to make the
necessary investment in research and development to keep our products at a
competitive advantage.

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 $1,120 to $3,079 for the quarter
ended March 31, 2002 from $4,199 for the quarter ended March 31, 2001. The
decrease reflects the Companys continued focus on streamlining its operations
and making cost effective changes in the way we operate, a reduction in
headcount and the reduction in salary expense related to the special option
program referred to above. As a percentage of total revenue, selling,
general and administrative expense decreased 6.1% to 48.9% for the quarter ended
March 31, 2002 compared to 55.0% for the quarter ended March 31, 2001.

Total Other Expense decreased $336 for the quarter ended March 31, 2002 to
$4 compared to $340 for the quarter ended March 31, 2001. This is due to a
decrease in the interest expense associated with the convertible debt that was
converted in January 2001 and revolving line of credit paid off in December
2001, and a reduction in foreign currency transaction expense for the Companys
foreign subsidiary.

12



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##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

Net income for the quarter ended March 31, 2002 was $81 compared to a net
loss of $888 for the quarter ended March 31, 2001. The Company did not provide
for income taxes due to the significant net operating loss carryforwards
available.

The nine-month period ended March 31, 2002 compared to the nine-month period
ended March 31, 2001

NET REVENUES

Net revenues consist primarily of network security products and support
related to these products. For the nine-month period ended March 31, 2002, net
revenues decreased $1,412 to $16,619 compared to $18,031 for the nine-months
ended March 31, 2001. The decrease was comprised of a decrease of $2,425 in
network security product revenues and an increase of $1,013 in service revenues.
Total international revenue represented approximately 63.3% of total revenues
for the nine-months ended March 31, 2002, compared to approximately 48.6% for
the nine-months ended March 31, 2001.

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 decreased for the
nine-months ended March 31, 2002 compared to the same period last year. We
believe the focus on VARs will provide greater depth and distribution for our
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 revenue growth. Network security products accounted for 69.4% of
revenues during the nine-month period ended March 31, 2002 as compared to 77.4%
of revenues during the nine-month period ended March 31, 2001.

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 30.6% of revenues during the nine-month period ended March 31, 2002 as
compared to 22.6% of revenues during the nine-month ended March 31, 2001.

GROSS PROFIT

Gross profit as a percentage of revenues increased to 71.7% for the
nine-month period ended March 31, 2002 from 70.2% for the nine-month period
ended March 31, 2001. 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.

13



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##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

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 $511 to $3,598 for the nine-month
period ended March 31, 2002 compared to $4,109 for the nine-month period ended
March 31, 2001. The decrease is in part the result of a reduction in headcount
and the reduction in salary expense related to the special option program
discussed above. As a percentage of total revenue, research and
development expense decreased 1.2% to 21.6% for the nine-month period ended
March 31, 2002 from 22.8% for the nine-month period ended March 31, 2001.
Capitalized software costs for the nine-month period ended March 31, 2002 were
$172 compared to $360 for the nine-month period ended March 31, 2001.

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. We plan to continue to make the
necessary investment in research and development to keep our products at a
competitive advantage.

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 $1,924 to $9,034 for the
nine-month period ended March 31, 2002 from $10,958 for the nine-month period
ended March 31, 2001. The decrease reflects the Companys continued focus on
streamlining its operations and making cost effective changes in the way we
operate, a reduction in headcount and the reduction in salary expense related to
the special option program discussed above. As a percentage of
total revenue, selling, general and administrative expense decreased 6.4% to
54.4% for the nine-month period ended March 31, 2002 compared to 60.8% for the
nine-month period ended March 31, 2001.

Total Other Expense decreased by $819 for the nine-month period ended March
31, 2002 to $6 compared to $825 for the nine-months period ended March 31, 2001.
This was due to a decrease in the interest expense associated with the
convertible debt converted in January 2001 and revolving line of credit paid off
in December 2001, and a reduction in foreign currency transaction expense for
the Companys foreign subsidiary.

Net loss for the nine-month period ended March 31, 2002 was $717 compared
to $3,362 for the nine-month period ended March 31, 2001. 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
March 31, 2002, the Company earned net income of approximately $81 on revenues
of approximately $6,291. For the quarter ended March 31, 2001, the Company
incurred a net loss of approximately $888 on revenues of approximately $7,635.

14



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##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

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 March 31, 2002, the Company had cash and cash equivalents on hand of
$5,441 representing an increase of $670 from $4,771 as of June 30, 2001.
Accounts payable and accrued liabilities decreased $132, accounts receivable
increased $1,009, property and equipment decreased $229, and inventory levels
increased $177 compared to June 30, 2001.

The Companys principal sources of liquidity at March 31, 2002, 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.

On March 19, 2002, the Company announced that its securities are now
trading on the Over the Counter Bulletin Board (OTCBB) under the symbol CYBG.

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.

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 Item 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

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##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

the forward-looking statements. Accordingly, there can be no assurance that the
forward-looking 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 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; 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 our 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

16



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##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

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. The Company has filed with the Court its opposition to class
certification. The Court will be holding oral argument on the issue in May 2002
and will decide whether the lawsuit will proceed as a class action shortly
thereafter. The trial date is set to begin on June 2, 2003.

17



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CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

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

18



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CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

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 agreed to pay $25,000 to Robert L. Carberry
in connection with the settlement and release of any potential indemnification
claim by Mr. Carberry with respect to the SEC action. 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. On or about March 27, 2002, the
action was dismissed by the U.S. District Court for the Southern District of
Florida on jurisdictional grounds. The Company continues to consider its
alternatives with respect to this litigation, including whether to re-file the
action in a different jurisdiction.

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 has and
continues to evaluate and pursue the possibility of re-listing its
shares of Common Stock on a national securities market or exchange.
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.

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

None

19



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##### 



CYBERGUARD CORPORATIONMarch 31, 2002
(Dollars in thousands, except per share data)

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON
FORM 8-K

(a)  Exhibits:

|            |  |                     |  | 
|----------- |  | ------------------- |  | 
|EXHIBIT NO. |  | EXHIBIT DESCRIPTION
|            |  |                    
|None       

(b)  Reports filed on Form 8-K during the quarter ended March 31, 2002: The
Company filed no reports on Form 8-K during the quarter ended March 31,
2002.

20



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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: May 15, 2002 |  | CYBERGUARD CORPORATION                                                                            
|                  
|                  
|                  
|                  
|                  
|                  
|                  
|                   |  | By: /s/ SCOTT HAMMACK                                                                             
|                   |  |                                                                                                   
|                   |  | Chairman and Chief Executive Officer                                                              
|                  
|                  
|                  
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|                  
|                  
|                   |  | By: /s/ MICHAEL MATTE                                                                             
|                   |  |                                                                                                   
|                   |  | Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

21