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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

|   |  |                                                                                         
|-- |  | ----------------------------------------------------------------------------------------
|x  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 
|   |  |                                                                                         
|   |  | For the quarterly period ended DECEMBER 31, 2002                                        
|   |  |                                                                                         
|OR
|   |  |                                                                                         
|o  |  | 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




(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 þ 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   þ   
No   o

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

Yes   þ   
No   o

As of February 5, 2003, 19,975,951 shares of the Registrants $0.01 par
value Common Stock were outstanding.





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TABLE OF CONTENTS



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



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##### Table of Contents



TABLE OF CONTENTS

|                              |                                                                                               |  |  |    | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I. FINANCIAL INFORMATION |                                                                                               |  |  |   
|                              | Item 1. Financial Statements                                                                  |  |  | 1  | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 4  | 
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  |  | 11 | 
|                              | Item 4. Controls and Procedures                                                               |  |  | 11 | 
|PART II. OTHER INFORMATION    |                                                                                               |  |  |   
|                              | Item 1. Legal Proceedings                                                                     |  |  | 12 | 
|                              | Item 2. Changes in Securities and Use of Proceeds                                             |  |  | 13 | 
|                              | Item 3. Defaults Upon Senior Securities                                                       |  |  | 14 | 
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                   |  |  | 14 | 
|                              | Item 5. Other Information                                                                     |  |  | 14 | 
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |  |  | 14 | 
|SIGNATURES                    |                                                                                               |  |  |   
|EXHIBITS                      |                                                                                               |  |  |   





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##### Table of Contents






PART I: FINANCIAL INFORMATION




Item 1. Financial Statements

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

|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |        |  
|---------------------------------------------------- | ---------------------------- | - | ------------------ | ----- | ---------------- | - | -------- | ----- | -------- | - | ------ | ------ |  | - | ------ | ------ | -
|                                                     |                              |   | Three Months Ended |       | Six Months Ended
|                                                     |                              |   |                    |       |                 
|                                                     |                              |   | Dec. 31,           |       | Dec. 31,         |   | Dec. 31, |       | Dec. 31,
|                                                     |                              |   | 2002               |       | 2001             |   | 2002     |       | 2001    
|                                                     |                              |   |                    |       |                  |   |          |       |         
|Revenues:                                            |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Products                                             |                              |   | 5,795              |       |                  |   | 3,968    |       |          |   | 10,668 |        |  |   | 6,969  |       
|Services                                             |                              |   | 2,438              |       |                  |   | 1,785    |       |          |   | 4,665  |        |  |   | 3,359  |       
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|                                                     | Total revenues               |   |                    | 8,233 |                  |   |          | 5,753 |          |   |        | 15,333 |  |   |        | 10,328 |  
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Cost of revenues:                                    |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Products                                             |                              |   | 1,398              |       |                  |   | 1,130    |       |          |   | 2,622  |        |  |   | 1,866  |       
|Services                                             |                              |   | 721                |       |                  |   | 493      |       |          |   | 1,273  |        |  |   | 944    |       
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|                                                     | Total cost of revenues       |   |                    | 2,119 |                  |   |          | 1,623 |          |   |        | 3,895  |  |   |        | 2,810  |  
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Gross profit                                         |                              |   | 6,114              |       |                  |   | 4,130    |       |          |   | 11,438 |        |  |   | 7,518  |       
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Operating expenses:                                  |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Research and development                             |                              |   | 1,207              |       |                  |   | 1,003    |       |          |   | 2,254  |        |  |   | 2,359  |       
|Selling, general and administrative                  |                              |   | 3,543              |       |                  |   | 2,986    |       |          |   | 6,865  |        |  |   | 5,955  |       
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|                                                     | Total operating expenses     |   |                    | 4,750 |                  |   |          | 3,989 |          |   |        | 9,119  |  |   |        | 8,314  |  
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Operating income (loss)                              |                              |   | 1,364              |       |                  |   | 141      |       |          |   | 2,319  |        |  |   | (796   | )     
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Other income/(expense):                              |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Interest income/(expense), net                       |                              |   | 25                 |       |                  |   | 5        |       |          |   | 54     |        |  |   | 27     |       
|Gain/(loss) on sale of assets                        |                              |   | 3                  |       |                  |   | (14      | )     |          |   | (33    | )      |  |   | (17    | )     
|Other income/(expense):                              |                              |   | 116                |       |                  |   | (22      | )     |          |   | 100    |        |  |   | (12    | )     
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|                                                     | Total other income/(expense) |   |                    | 144   |                  |   |          | (31   | )        |   |        | 121    |  |   |        | (2     | )
|Net income (loss)                                    |                              |   | 1,508              |       |                  |   | 110      |       |          |   | 2,440  |        |  |   | (798   | )     
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Basic earnings (loss) per common share               |                              | $ | 0.08               |       |                  | $ | 0.01     |       |          | $ | 0.13   |        |  | $ | (0.04  | )     
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Weighted average number of common shares outstanding |                              |   | 19,475             |       |                  |   | 18,667   |       |          |   | 19,328 |        |  |   | 18,610 |       
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Diluted earnings (loss) per common share             |                              | $ | 0.06               |       |                  | $ | 0.01     |       |          | $ | 0.10   |        |  | $ | (0.04  | )     
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       
|Diluted common shares outstanding                    |                              |   | 24,316             |       |                  |   | 19,267   |       |          |   | 23,479 |        |  |   | 18,610 |       
|                                                     |                              |   |                    |       |                  |   |          |       |          |   |        |        |  |   |        |       

See accompanying notes to condensed consolidated financial statements





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CYBERGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)

|                                                                                                                                  |                   |                            |                                            |       |          |        |          |       |        |        | 
|--------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------------------------- | ------------------------------------------ | ----- | -------- | ------ | -------- | ----- | ------ | ------ | 
|                                                                                                                                  |                   |                            |                                            |       | Dec. 31, |        | June 30,
|                                                                                                                                  |                   |                            |                                            |       | 2002     |        | 2002    
|                                                                                                                                  |                   |                            |                                            |       |          |        |         
|ASSETS                                                                                                                            |                   |                            |                                            |       |          |        |          |      
|Cash and cash equivalents                                                                                                         |                   | $                          | 8,931                                      |       |          | $      | 6,166    |      
|Restricted cash                                                                                                                   |                   |                            | 75                                         |       |          |        | 44       |      
|Accounts receivable, less allowance for uncollectible accounts
of $437 at Dec. 31, 2002 and $109 at June 30, 2002                 |                   |                            | 6,487                                      |       |          |        | 5,152    |      
|Inventories, net                                                                                                                  |                   |                            | 147                                        |       |          |        | 442      |      
|Other current assets                                                                                                              |                   |                            | 1,174                                      |       |          |        | 801      |      
|                                                                                                                                  |                   |                            |                                            |       |          |        |          |      
|                                                                                                                                  |                   | Total current assets       |                                            |       | 16,814   |        |          |       | 12,605 |       
|Property and equipment at cost, less accumulated
depreciation of $2,850 at Dec. 31, 2002 and
$2,335 at June 30, 2002              |                   |                            | 1,338                                      |       |          |        | 1,212    |      
|Capitalized software, net                                                                                                         |                   |                            | 246                                        |       |          |        | 219      |      
|Other assets                                                                                                                      |                   |                            | 80                                         |       |          |        | 94       |      
|                                                                                                                                  |                   |                            |                                            |       |          |        |          |      
|                                                                                                                                  |                   |                            | Total assets                               |       | $        | 18,478 |          |       | $      | 14,130 | 
|                                                                                                                                  |                   |                            |                                            |       |          |        |          |      
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                              |                   |                            |                                            |       |          |        |          |      
|Note payable                                                                                                                      |                   | $                          | 96                                         |       |          | $      | 140      |      
|Accounts payable                                                                                                                  |                   |                            | 887                                        |       |          |        | 778      |      
|Deferred revenue                                                                                                                  |                   |                            | 4,677                                      |       |          |        | 3,951    |      
|Accrued expenses and other liabilities                                                                                            |                   |                            | 2,501                                      |       |          |        | 2,305    |      
|                                                                                                                                  |                   |                            |                                            |       |          |        |          |      
|                                                                                                                                  | Total liabilities |                            |                                            | 8,161 |          |        |          | 7,174 |       
|Commitments and Contingencies                                                                                                     |                   |                            |                                           |       |          |        |         |      
|Shareholders equity                                                                                                              |                   |                            |                                            |       |          |        |          |      
|Preferred Stock par value $0.01; authorized 5 shares; none issued                                                                 |                   |                            |                                           |       |          |        |         |      
|Common stock par value $0.01; authorized 50,000 shares
issued and outstanding 19,734 at Dec. 31, 2002
and 19,100 at June 30, 2002 |                   |                            | 197                                        |       |          |        | 191      |      
|Additional paid-in capital                                                                                                        |                   |                            | 89,662                                     |       |          |        | 88,673   |      
|Accumulated deficit                                                                                                               |                   |                            | (79,635                                    | )     |          |        | (82,075  | )    
|Accumulated other comprehensive income                                                                                            |                   |                            | 93                                         |       |          |        | 167      |      
|                                                                                                                                  |                   |                            |                                            |       |          |        |          |      
|                                                                                                                                  |                   | Total shareholders equity |                                            |       | 10,317   |        |          |       | 6,956  |       
|                                                                                                                                  |                   |                            |                                            |       |          |        |          |      
|                                                                                                                                  |                   |                            | Total liabilities and shareholders equity |       | $        | 18,478 |          |       | $      | 14,130 | 
|                                                                                                                                  |                   |                            |                                            |       |          |        |          |      

See accompanying notes to condensed consolidated financial statements





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CYBERGUARD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)

|                                                                                         |                                                     |   |                  |       |          |   |       |       |  
|---------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ---------------- | ----- | -------- | - | ----- | ----- | -
|                                                                                         |                                                     |   | Six Months Ended
|                                                                                         |                                                     |   |                 
|                                                                                         |                                                     |   | Dec. 31,         |       | Dec. 31,
|                                                                                         |                                                     |   | 2002             |       | 2001    
|                                                                                         |                                                     |   |                  |       |         
|Cash flows from operating activities:                                                    |                                                     |   |                  |       |          |   |       |      
|Net income/(loss)                                                                        |                                                     | $ | 2,440            |       |          | $ | (798  | )    
|Adjustments to reconcile net income/(loss) to net cash
provided by operating activities: |                                                     |   |                  |       |          |   |       |      
|Depreciation                                                                             |                                                     |   | 476              |       |          |   | 353   |      
|Amortization                                                                             |                                                     |   | 152              |       |          |   | 380   |      
|Loss on disposal of property & equipment                                                 |                                                     |   | 33               |       |          |   | 16    |      
|Interest on convertible debt                                                             |                                                     |   |                 |       |          |   | 3     |      
|Provision for uncollectible accounts receivable                                          |                                                     |   | 328              |       |          |   | 38    |      
|Provision for inventory reserve                                                          |                                                     |   |                 |       |          |   | 2     |      
|Compensation expense related to stock options                                            |                                                     |   | 70               |       |          |   | 55    |      
|Non cash expense for company 401(k) match                                                |                                                     |   | 123              |       |          |   | 117   |      
|Translation adjustment                                                                   |                                                     |   | (74              | )     |          |   | 20    |      
|Changes in assets and liabilities                                                        |                                                     |   |                  |       |          |   |       |      
|(Increase)/Decrease in restricted cash                                                   |                                                     |   | (31              | )     |          |   | 707   |      
|(Increase) in accounts receivable                                                        |                                                     |   | (1,663           | )     |          |   | (66   | )    
|(Increase)/Decrease in other current assets                                              |                                                     |   | (374             | )     |          |   | 223   |      
|(Increase) in inventories                                                                |                                                     |   | (320             | )     |          |   | (237  | )    
|Increase/(Decrease) in accounts payable                                                  |                                                     |   | 110              |       |          |   | (538  | )    
|Increase in accrued expenses and other liabilities                                       |                                                     |   | 196              |       |          |   | 17    |      
|Increase in deferred revenue                                                             |                                                     |   | 726              |       |          |   | 977   |      
|Decrease/(Increase) in other, net                                                        |                                                     |   | 14               |       |          |   | (1    | )    
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|                                                                                         | Net cash provided by operating activities           |   |                  | 2,206 |          |   |       | 1,268 |  
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|Cash flows used in investing activities:                                                 |                                                     |   |                  |       |          |   |       |      
|Capitalized software costs                                                               |                                                     |   | (179             | )     |          |   | (182  | )    
|Proceeds from the sale of property & equipment                                           |                                                     |   |                 |       |          |   | 10    |      
|Purchase of property & equipment                                                         |                                                     |   | (20              | )     |          |   | (148  | )    
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|                                                                                         | Net cash (used in) investing activities             |   |                  | (199  | )        |   |       | (320  | )
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|Cash flows provided by/(used in) financing activities:                                   |                                                     |   |                  |       |          |   |       |      
|Repayment on notes payable                                                               |                                                     |   | (44              | )     |          |   | (752  | )    
|Net repayments on line of credit                                                         |                                                     |   |                 |       |          |   | (113  | )    
|Proceeds from stock options exercised                                                    |                                                     |   | 766              |       |          |   | 168   |      
|Proceeds from issuance of common stock in stock purchase plan                            |                                                     |   | 36               |       |          |   | 217   |      
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|                                                                                         | Net cash provided by/(used in) financing activities |   |                  | 758   |          |   |       | (480  | )
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|Net increase in cash                                                                     |                                                     |   | 2,765            |       |          |   | 468   |      
|Cash and cash equivalents at beginning of period                                         |                                                     |   | 6,166            |       |          |   | 4,771 |      
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|Cash and cash equivalents at end of period                                               |                                                     | $ | 8,931            |       |          | $ | 5,239 |      
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|Supplemental disclosure of cash flow information:                                        |                                                     |   |                  |       |          |   |       |      
|Cash paid for interest                                                                   |                                                     |   | 3                |       |          |   | 55    |      
|                                                                                         |                                                     |   |                  |       |          |   |       |      
|Cash paid for income taxes                                                               |                                                     |   |                 |       |          |   |      |      
|                                                                                         |                                                     |   |                  |       |          |   |       |      

Supplemental disclosure of non-cash information:

During January 2001, approximately 310 options to
purchase shares of the
Companys common stock were issued at a below market
price, which required the
Company to record approximately $11 and $54 in compensation expense for the
period ended December 2002 and 2001 respectively.

For the period ended December 31, 2002, approximately $615 of inventory was
reclassified to fixed assets.

See accompanying notes to condensed consolidated financial statements





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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 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 10-K for the year
ended June 30, 2002 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. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. On an
on-going basis, we evaluate significant estimates used in preparing our
financial statements, including revenue recognition, bad debt, software
development cost, inventory valuation, and reserve for deferred taxes. We base
our estimates on historical experience and various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.

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 implementation of a beta project, are considered
research and development costs and are expensed as incurred. Capitalized costs
are amortized on a straight-line method over two years. The Company capitalized
$76 in software development costs for the quarter ended December 31, 2002 and
$179 for the six months ended December 31, 2002.

Revenue RecognitionRevenues from product sales are recognized only when a
contract or agreement has been executed, delivery of the product has occurred,
the fee is fixed and determinable and we believe collection is probable. While
we generally recognize product revenue on product shipment, we defer revenues
on product sales for value added resellers until the partners demonstrate
consistency of payment within terms and no product returns for a three-month
period. Service revenues are recognized ratably on a monthly basis over the
service contract term. Service revenues primarily include the annual fee for
maintenance, which is sold as part of our security solutions, and for
subscription renewals from our existing customers and end users. These
services provide our customers access to our worldwide support organization for
product updates, general security information and technical support. For the
quarter ended December 31, 2002, no resellers were reclassified from cash basis
to accrual and one reseller was reclassified from accrual to cash basis because
it did not demonstrate consistency of payment within terms. During the six
months ended December 31, 2002, thirteen (13) resellers, net, were changed from
cash basis to accrual, based on a reasonable assurance of collectibility from
evaluating their payment histories and no product returns. The impact of the
reclassification did not have a material effect on revenue.





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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2002
Amounts in thousands, except per share data
(Unaudited)

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

Net Income 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 and warrants
using the treasury 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 Ended |        | Three Months Ended |  | Six Months Ended  |        | Six Months Ended 
|                                                     |  | December 31, 2002  |        | December 31, 2001  |  | December 31, 2002 |        | December 31, 2001
|                                                     |  |                    |        |                    |  |                   |        |                  
|Net Income/(loss)                                    |  | $                  | 1,508  |                    |  | $                 | 110    |                   |  | $ | 2,440  |  |  | $ | (798   | )
|Weighted average
number of common
shares outstanding |  |                    | 19,475 |                    |  |                   | 18,667 |                   |  |   | 19,328 |  |  |   | 18,610 |  
|Dilutive effect of:                                  |  |                    |        |                    |  |                   |        |                   |  |   |        |  |  |   |        |  
|Employee stock options                               |  |                    | 3,559  |                    |  |                   | 536    |                   |  |   | 3,104  |  |  |   | 0      |  
|Warrants                                             |  |                    | 1,282  |                    |  |                   | 64     |                   |  |   | 1,047  |  |  |   | 0      |  
|Weighted average
number of common
shares outstanding |  |                    | 24,316 |                    |  |                   | 19,267 |                   |  |   | 23,479 |  |  |   | 18,610 |  
|Earnings/(loss) per share                            |  |                    |        |                    |  |                   |        |                   |  |   |        |  |  |   |        |  
|Basic                                                |  |                    | 0.08   |                    |  |                   | 0.01   |                   |  |   | 0.13   |  |  |   | (0.04  | )
|Diluted                                              |  |                    | 0.06   |                    |  |                   | 0.01   |                   |  |   | 0.10   |  |  |   | (0.04  | )

The results of operations for the six months ended December 31, 2002 are
not necessarily indicative of the results of operations that may be expected
for the year ending June 30, 2003.

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, weak
economic conditions in the international markets in which the Company
distributes its products and the potential conflict in the Middle East. The
network security industry is highly competitive and competition is expected to
intensify. There are numerous companies competing in segments of the market in
which the Company does business. Competitors include organizations
significantly larger and with more development, marketing and financial
resources than the Company. In addition, the Company is subject to risks and
uncertainties which include, but are not limited to, the

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CYBERGUARD CORPORATION
Notes to Condensed Consolidated Financial Statements
December 31, 2002
Amounts in thousands, except per share data
(Unaudited)

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 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring), as liabilities for these costs are now recognized when
incurred rather than at the date an entity commits to an exit plan. The
provisions of SFAS 146 are effective, on a prospective basis, for exit or
disposal activities initiated by the Company after December 31, 2002. The
Company believes SFAS 146 will not have any impact on the Company at this time.

In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure an amendment of FASB
Statement No. 123. SFAS 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. It also amends the disclosure provisions
of SFAS 123 to require prominent disclosures about the effects on reported net
income of an entitys accounting policy decisions with respect to stock-based
employee compensation. SFAS 148 also amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosures about those effects in interim
financial information. The amendments to SFAS 123 in paragraphs 2(a)-2(e) of
the statement shall be effective for financial statements for fiscal years
ending after December 15, 2002. The amendment to SFAS 123 in paragraph 2(f) of
this statement and the amendment to Opinion 28 in paragraph 3 shall be
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. The Company currently
accounts for its stock-based compensation awards to employees and directors
under the accounting prescribed by Accounting Principles Board Opinion No. 25
and provides the disclosures required by SFAS No. 123. The Company believes
that it will continue to account for its stock-based compensation awards to
employees and directors under the accounting prescribed by Accounting
Principles Board Opinion No. 25 and will adopt the additional disclosure
provisions of SFAS 148 during the first quarter of its year ending December 31,
2003.

4. Contingencies

Refer to Part II, Item 1.

5. Subsequent Events

On January 23, 2003, the Company signed an Asset Purchase Agreement to acquire
certain assets of NetOctave Inc. for approximately $1.5 million in cash and
stock. Subject to certain conditions, the transaction is expected to close by
March 31, 2003.

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CYBERGUARD CORPORATION
December 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, 2002. 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 and consulting,
support, and installation services.

Results of Operations

The quarter ended December 31, 2002 compared to the quarter ended December 31, 2001

Net Revenues

Net revenues consist primarily of the network security products and
maintenance contracts related to these products. For the quarter ended December
31, 2002, net revenues increased by $2,480 to $8,233 compared to $5,753 for the
quarter ended December 31, 2001. The increase was comprised of an increase in
product sales of $1,827 and services of $653. Total international revenue
represented approximately 44% of total revenues for the three months ended
December 31, 2002 compared to approximately 55% for the three months ended
December 31, 2001. The growth in revenues resulted from strong growth in the US
market, particularly in the government sector when compared to the quarter
ended December 31, 2001.

All three worldwide regions experienced significant product revenue
growth during the quarter ended December 31, 2002. Network security
product revenue accounted for 70% of revenue during the quarter ended
December 31, 2002 compared to 69% of revenues during the quarter ended
December 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% of revenues during the quarter ended December 31, 2002 as
compared to 31% of revenues during the quarter ended December 31, 2001.

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

Gross Profit

Gross profit as a percentage of revenues increased to 74.3% for the
quarter ended December 31, 2002 compared to 71.8% for the quarter ended
December 31, 2001. This increase reflects lower components cost. In addition,
service revenue increased because of a growing customer base while service
costs grew at a slower rate than revenue.

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

Research and development expense includes salaries, non-capitalized
equipment, software tools, and depreciation from capital equipment and
software. Research and development expense increased by $204 to $1,207 for the
quarter ended December 31, 2002 compared to $1,003 for the quarter ended
December 31, 2001. The increase is the result of additional headcount and the
return to full salary following the completion of the special option program
discussed in Part I, Item 1, Footnote 7 of the 10Q filed with the SEC for
quarter ending December 31, 2001. Additionally, approximately $76 of research
and development cost was capitalized during the quarter ended December 31, 2002
compared to $182 for the quarter ended December 31, 2001. As a percentage of
total revenue, research and development expense decreased to 14.6% for the
quarter ended December 31, 2002 from 17.4% for the quarter ended December 31,
2001. The lower percentage is primarily the result of an increase in revenues.

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 plan to continue to make the necessary investment in research and
development to keep our products at a competitive advantage which
will include costs associated with the acquisition of NetOctave Inc., discussed
in Part I.

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 increased by $557 to
$3,543 for the quarter ended December 31, 2002 from $2,986 for the quarter
ended December 31, 2001.

The increase in selling, general and administrative expenses for the
quarter ended December 31, 2002, of $557 is primarily attributable to increases
in the sales and marketing area related to increased headcount for training,
marketing, inside sales staff and expansion of personnel within our US
Government sales force. Additionally, the return to full salary following the
special option program as described above in the discussion on research and
development expense also contributed to the increase. Other cost increases
included higher expenditures related to advertising and trade show activity.

Total other income increased $175 for the quarter ended December 31, 2002
to $144 compared to an expense of $31 for the quarter ended December 31, 2001.
The increase in other income is due primarily to a foreign currency gain of
$116 for the quarter ended December 31, 2002, compared to a foreign currency
loss of $22 and a loss on the sale of fixed assets of $14 in the quarter ended
December 31, 2001.

Net income for the quarter ended December 31, 2002 was $1,508 compared to
net income of $110 for the quarter ended December 31, 2001. The Company did not
provide for income taxes due to its estimate of the effective tax rate expected
to be applicable for the full fiscal year and the significant net operating
loss carryforwards available.

The company is currently evaluating the valuation allowance recorded for
the Companys deferred tax asset. Management anticipates that during the
quarter ending March 31, 2003, a significant amount of the valuation allowance
related to the deferred tax asset will be reversed. This reversal will be based
on

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

managements estimate and conclusions regarding the ultimate realization of
the deferred tax asset,
including but not limited to, the companys recent positive financial
results as well as projected earnings through June 30, 2005. The company
will continue to evaluate each quarter the amount, if any, of additional
reduction of the valuation allowance that should be made. The impact of the
reduction of the valuation allowance will be to increase net income in the
period the determination is made which is currently anticipated to be March 31,
2003.

The six-month period ended December 31, 2002 compared to the six-month period ended December 31, 2001

Net Revenues

Net revenues consist primarily of the network security products and
maintenance contracts related to these products. For the six-month period ended
December 31, 2002, net revenues increased by $5,005 to $15,333 compared to
$10,328 for the six-month period ended December 31, 2001. The increase was
comprised of an increase in product sales of $3,699 and services of $1,306.
Total international revenue represented approximately 48% of total revenues for
the six-month period ended December 31, 2002 compared to approximately 54% for
the six-month period ended December 31, 2001.

The increase in revenues for the six-month period ended December 31, 2002 is
attributable to several key factors:



| |  |  | New channel partner revenue contribution                                             
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | Strong government purchases, particularly in the US market                           
|
| |  |  | Continued development and contribution from the Europe, Middle East and Africa region
|
| |  |  | More seasoned sales force                                                            

All three worldwide regions experienced significant product revenue growth
during the six-month period ended December 31, 2002. Network security product
revenue accounted for 70% of revenue during the six-month period ended December
31, 2002 compared to 67% of revenues during the six-month period ended December
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% of revenues during the six-month period ended December 31,
2002 compared to 33% of revenues during the quarter ended December 31, 2001.

Gross Profit

Gross profit as a percentage of revenues increased to 74.6% for the
six-month period ended December 31, 2002 compared to 72.8% for the six-month
period ended December 31, 2001. This increase reflects lower components cost.
In addition, service revenue increased because of a growing customer base while
service costs grew at a slower rate than revenue.

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

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

Research and development expense includes salaries, non-capitalized
equipment, software tools, and depreciation from capital equipment and
software. Research and development expense decreased by $105 to $2,254 for the
six-month period ended December 31, 2002 compared to $2,359 for the six-month
period ended December 31, 2001. The decrease is the result of the reduction in
salary expense related to the special option program discussed in Part I, Item
1, Footnote 7 of the 10Q filed with the SEC for quarter ending December 31,
2001. Capitalized software costs for the six-month period ended December 31,
2002 were $179 compared to $182 for the six-month period ended December 31,
2001. As a percentage of total revenue, research and development expense
decreased to 14.7% for the six-month period ended December 31, 2002 from 22.8%
for the six-month period ended December 31, 2001. The lower percentage is
primarily the result of an increase in revenues.

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. 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 increased by $910 to
$6,865 for the six-month period ended December 31, 2002 from $5,955 for the
six-month period ended December 31, 2001.

The increase in selling, general and administrative expenses for the
six-month period ended December 31, 2002, of $910 is attributable to increased
headcount for training, marketing and inside sales staff, expansion of
personnel within our US Government sales force and severance costs related to
employee termination in the Europe, Middle East and Africa region. Other cost
increases included higher expenditures related to advertising and trade shows.

Total other income increased $123 for the six-month period ended December
31, 2002 to $121 compared to an expense of $2 for the six-month period ended
December 31, 2001. The increase in other income is due primarily to a foreign
currency gain of $100 for the six month period ended December 31, 2002,
compared to a foreign currency loss of $12 for the six-month period ended
December 31, 2001.

Net income for the six-month period ended December 31, 2002 was $2,440
compared to a net loss of $798 for the six-month period ended December 31,
2001. The Company did not provide for income taxes due to its estimate of the
effective tax rate expected to be applicable for the full fiscal year and the
significant net operating loss carryforwards available.

The company is currently evaluating the valuation allowance recorded for
the Companys deferred tax asset. Management anticipates that during the
quarter ending March 31, 2003, a significant amount of the valuation allowance
related to the deferred tax asset will be reversed. This reversal will be based
on managements estimate and conclusions regarding the ultimate realization of
the deferred tax asset, including but not limited to, the companys recent
positive financial results as well as projected earnings through June 30, 2005.
The company will continue to evaluate each quarter the amount, if any, of
additional reduction of the valuation allowance that should be made. The
impact of the reduction of the valuation allowance will be to increase net
income in the period the determination is made which is currently anticipated
to be March 31, 2003.

Liquidity and Capital Resources

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

At December 31, 2002, the Company had cash and cash equivalents on hand of
$8,931 representing an increase of $2,765 from $6,166 as of June 30, 2002. Net
cash provided by operating activities during the six-month period ended
December 31, 2002 of $2,206 was primarily attributable to net income from
operations of $2,440 combined with increases in accounts payable, accrued
expenses and deferred revenue, offset by an increase in accounts receivable,
other current assets and inventory. Net cash used in investing activities
during the six-month period ended December 31, 2002 of $199 related to the
capitalization of software costs and the purchase of property and equipment.
Cash provided by financing activities during the six-month period ended
December 31, 2002 reflects the proceeds from stock options exercised and
purchases made through the Companys Employee Stock Purchase Plan, net of
repayments on a note payable.

The Companys principal sources of liquidity at December 31, 2002,
consisted of cash, accounts receivable, and vendor trade credit.

We believe our existing cash; cash equivalents and short-term investments
will be sufficient to meet our cash requirements at least through the next
twelve months. However, we may be required or could elect to seek additional
funding prior to that time. Our future capital requirements will depend on many
factors, including our rate of revenue growth, the timing and extent of
spending on support, product development efforts and expansion of sales and
marketing, the timing of introductions of new products and enhancement to
existing products, and market acceptance of our products. 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.

We have no other agreements or arrangements for third parties to provide
us with sources of liquidity and capital resources, including off balance sheet
arrangements.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial conditions and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. On an on-going basis, we evaluate
significant estimates used in preparing our financial statements, including
revenue recognition, bad debt, software development cost, inventory valuation,
and reserve for deferred taxes. We based our estimates on historical
experience and various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.

We believe the following critical accounting policies affect the more
significant judgments and estimates used in preparing our consolidated
financial statements:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Revenue recognition rules for software companies are very complex.
CyberGuard follows very specific and detailed guidelines in measuring
revenue; however, certain judgments affect the application of our revenue
policy. The discretion involved in this process makes revenue results
difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in future
operating losses.
|
| | We generate revenues through:                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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

|  |  |                                                                                                                   
|- |  | ------------------------------------------------------------------------------------------------------------------
| |  | Sales of product and services subscriptions indirectly
through our reseller network at a discount from list price;
| |  | Sales of products and services subscriptions directly to our
end users.                                           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Service revenues primarily include the annual fee for maintenance, which
is sold as part of our security solutions, and for subscription renewals
from our existing customers and end users. These services provide our
customers access to our worldwide support organization for product
updates, general security information and technical support.                                                                                                                                                                                                                                                                                                                                                              
|
| | We recognize revenues for product sales only when a contract or agreement
has been executed, delivery of the product has occurred, the fee is fixed
and determinable and we believe collection is probable. While we
generally recognize product revenue on product shipment, we defer
revenues on product sales for value added resellers until the partners
demonstrate consistency of payment within terms and no product returns
for a three-month period. Service revenues are recognized ratably on a
monthly basis over the service contract term.                                                                                                                                                            
|
| | Bad Debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
Significant judgment is required when we assess the ultimate realization
of receivables, including the probability of collection and the
credit-worthiness of each customer. In estimating the allowance for
doubtful accounts, we analyze our accounts receivable aging, historical
bad debts, customer credit-worthiness, current economic trends and other
factors. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowance might be required.                             
|
| | 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 implementation of a beta project, are considered
research and development costs and are expensed as incurred. Capitalized
costs are amortized on a straight-line method over two years.
|
| | Inventory Valuation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Inventories consist primarily of component parts and computer hardware
and are carried at the lower of cost, determined by the
First-In-First-Out (FIFO) method, or market. We write our inventories
down to estimated market value based on assumptions of our future demand,
based on projected product releases and market conditions. Variation in
market trends, customer preferences, introduction of new products
(replacing existing products) or technological advances could, however,
significantly affect these estimates and result in additional inventory
write-downs.                                                                                                                              
|
| | Deferred Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | We have provided a valuation allowance for deferred tax assets, that
cannot be currently recognized due to our cumulative losses. While we
have considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to
realize the deferred tax                                                                                                                                                                                                                                                                                                                                     

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



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | asset, in the future, an adjustment to the deferred tax asset would
increase income in the period the determination was made.

Information Relating to Forward Looking Statements

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

Forward-looking statements are based upon assumptions and analyses made by
the Company in light of current conditions, future developments and other
factors the Company believes are appropriate in the circumstances, or
information obtained from third parties and are subject to a number of
assumptions, risks and uncertainties. Readers are cautioned that
forward-looking statements are not guarantees of future performance and that
the actual results might differ materially from those suggested or projected in
the forward-looking statements. Accordingly, there can be no assurance that the
forward-looking 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 costs associated with the NetOctave Inc. acquisition; the Companys history of annual net operating losses and the
financing of these losses through the sale of assets and newly issued Company
securities; the Companys ability to execute on its business plans; the
Companys dependence on outside parties such as its key customers and alliance
partners; competition from major computer hardware, software, and networking
companies; risk and expense of government regulation and effects on changes in
regulation; the limited experience of the Company in marketing its products;
uncertainties associated with product performance liability; risks associated
with growth and expansion; global economic conditions, overall network
security spending, risks associated with obtaining and maintaining patent and
intellectual property right protection, uncertainties in availability of
expansion capital in the future and other risks associated with capital
markets, including the events of September 11, 2001 and its repercussions. In
addition, certain events that have occurred also are factors that might cause
future actual events to differ from those predicted or assumed, including: the
impact of the restatement of financial results for the Companys fiscal year
ended June 30, 1997 and quarters ended September 30, 1997, December 31, 1997
and March 31, 1998; the completion of the numerous organizational changes and
the assembly of a new management team for CyberGuard; the outcome of a class
action lawsuit against the Company relating to the restatement of financial
results for the fiscal periods noted above. 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

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

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.

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.




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Within the 90 days prior to the date of filing this Quarterly Report on Form
10-Q, the Company carried out an evaluation, under the supervision and with the
assistance of the Chief Executive Officer (CEO), the Chief Financial Officer
(CFO), the Companys Disclosure Control Procedures Committee, and Company
management, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation also considered the proposed amendments to Rule 13a-14 described in
Securities and Exchange Commission Release Nos. 33-8183 and 34-46701. Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Companys disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
the Companys periodic SEC filings. There have been no significant changes in
the Companys internal controls or in other factors that could significantly
affect internal controls subsequent to the date of the evaluation.

Limitations on the Effectiveness of Controls

The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with managements authorization and recorded properly to
permit the preparation of financial statements in accordance with generally
accepted accounting principles. However, the Companys management, including
the CEO and CFO, does not expect that the Companys disclosure controls or
internal controls will prevent all errors and all potential fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls

11



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

must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.




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

12



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

answer and affirmative defenses to plaintiffs Second
Consolidated and Amended Class Action Complaint. On August 14, 2002, the Court
granted the plaintiffs Motion for Class Certification and certified the class
to include all investors who acquired the Companys common stock between
November 7, 1996 and August 24, 1998 and were damaged by the purchase of such
stock. The trial is scheduled for March 2004. The parties are currently
conducting discovery.

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.

On September 16, 1999, the Company filed a lawsuit against KPMG and August
A. Smith, the KPMG engagement partner. The lawsuit was 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 February 13, 2003, the parties settled the lawsuit with the only
consideration being the exchange of mutual releases from liability.

On November 14, 2002, the Company filed a lawsuit against Data Return
Corporation in the United States District Court of the Northern District of
Texas, alleging breach of contract, and seeking, among other remedies, damages
of approximately $4 million. On December 9, 2002, Data Return Corporation filed
an answer and affirmative defenses, and also counterclaims against the Company,
alleging breach of contract, breach of warranty, fraud, negligent
misrepresentation and deceptive trade practices, and seeking unspecified
damages. On December 30, 2002, CyberGuard filed its answer and affirmative
defenses to the counterclaim and a motion to dismiss the fraud, negligent
misrepresentation and deceptive trade practices counterclaims.

The Company is involved from time to time, in the ordinary course of its
business, in various litigation 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.




Item 2. Changes in Securities and Use of Proceeds

None

13



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




Item 3. Defaults upon Senior Securities

None




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

On December 5, 2002, the Company held its Annual Meeting of Shareholders
at The Westin in Fort Lauderdale, Florida. William G. Scott and Daniel J. Moen
were nominated as members to the Board of Directors for a period of three years
and William D. Rubin was nominated as a member to the Board of Directors for a
period of one year. Mr. Scott received 17,972,079 votes in favor of his
appointment, while 52,207 shares were withheld, Mr. Moen received 17,972,025
votes in favor of his appointment, while 52,261 shares were withheld and Mr.
Rubin received 17,971,803 votes in favor of his appointment, while 52,483
shares were withheld.

One other matter was brought for vote during the Annual Meeting: the
ratification of Grant Thornton LLP as the Companys independent public
accountants for the fiscal year ending June 30, 2003. The ratification of Grant
Thornton LLP was passed with 17,923,591 votes in favor, 65,026 votes against,
and 35,609 votes abstaining.




Item 5. Other Information

None




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:

|            |  |   |  |                                                                                                                                                                      
|----------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Exhibit Description                                                                                                                                                  
|            |  |   |  |                                                                                                                                                                      
|99.01       |  |  |  | Certification by Scott J. Hammack, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|99.02       |  |  |  | Certification by Michael D. Matte, Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. 



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

14



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##### Table of Contents






SIGNATURES

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

|                        |  |                        |  |                                                                                                   
|----------------------- |  | ---------------------- |  | --------------------------------------------------------------------------------------------------
|Date: February 13, 2003 |  | CYBERGUARD CORPORATION
|                        |  |                        |  |                                                                                                   
|                        |  | By:                    |  | /s/ Scott J. Hammack                                                                              
|                        |  |                        |  |                                                                                                   
|                        |  |                        |  | Chairman and Chief Executive Officer                                                              
|                        |  |                        |  |                                                                                                   
|                        |  | By:                    |  | /s/ Michael D. Matte                                                                              
|                        |  |                        |  |                                                                                                   
|                        |  |                        |  | Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)





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##### Table of Contents






CERTIFICATIONS

I, Scott J. Hammack, certify that:

1.     I have reviewed this quarterly report on Form 10-Q for CyberGuard
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                 
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                       

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                         |  | 
|---------------------------------------- |  | 
|Date: February 13, 2003                  |  | 
|                                         |  | 
|/S/ SCOTT J. HAMMACK                     |  | 
|                                         |  | 
|Scott J. Hammack
Chief Executive Officer |  | 





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##### Table of Contents



I, Michael D. Matte, certify that:

1.     I have reviewed this quarterly report on Form 10-Q for CyberGuard
Corporation;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure the
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                 
|
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                       

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                         |  | 
|---------------------------------------- |  | 
|Date: February 13, 2003                  |  | 
|                                         |  | 
|/S/ MICHAEL D. MATTE                     |  | 
|                                         |  | 
|Michael D. Matte
Chief Financial Officer |  |