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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                    FORM 10-K
(MARK ONE)
   [X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                                       OR
   [ ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
         FOR THE TRANSITION PERIOD FROM _____________ TO ______________.

                         COMMISSION FILE NUMBER 0-27074

                            ------------------------

                          SECURE COMPUTING CORPORATION
             (Exact name of registrant as specified in its charter)

                DELAWARE                                         52-1637226
     (State or other jurisdiction of                          (I.R.S. Employer
      incorporation or organization)                         Identification No.)

           4810 HARWOOD ROAD,
          SAN JOSE, CALIFORNIA                                     95124
(Address of principal executive offices)                         (ZIP CODE)

Registrant's telephone number, including area code:            (408) 979-6100
                                                               --------------

                            ------------------------

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE

                            ------------------------

     Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of March 15, 2002 was $548,858,228 based on the closing sale
price for the Company's Common Stock on that date. For purposes of determining
this number, all officers and directors of the Registrant are considered to be
affiliates of the Registrant, as well as individual stockholders holding more
than 10% of the Registrant's outstanding Common Stock. This number is provided
only for the purpose of this report on Form 10-K and does not represent an
admission by either the Registrant or any such person as to the status of such
person.

     As of March 15, 2002, the Registrant had 29,247,693 shares of Common Stock
issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held May 9, 2002 for the year ended December 31, 2001 are
incorporated by reference in Part III hereof.

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<PAGE>


                                TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS..............................................................2

ITEM 2. PROPERTIES............................................................15

ITEM 3. LEGAL PROCEEDINGS.....................................................15

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...............................................16

ITEM 6. SELECTED FINANCIAL DATA...............................................17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................18

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................22

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..........................................................22

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................23

ITEM 11. EXECUTIVE COMPENSATION...............................................23

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......23

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................23

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....24


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                                     PART I

         Forward-looking statements made in this Annual Report on Form 10-K or
in the documents incorporated by reference herein that are not statements of
historical fact are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. A number of risks and uncertainties, including
those discussed under the caption "Certain Factors That May Affect Future
Results" in this Form 10-K and the documents incorporated by reference herein,
could affect such forward-looking statements and could cause actual results to
differ materially from the statements made. We do not undertake any obligation
to update or correct any forward-looking statements.

         In this Annual Report on Form 10-K, "Secure Computing," "we," "us,"
"our," and "Registrant" refer to Secure Computing Corporation.

ITEM 1. BUSINESS

*    We develop and sell computer software products and services designed to
     provide secure access control for all users engaging in business over
     public networks, including the Internet, intranets, and extranets. Our
     customers operate some of the largest and most sophisticated electronic
     business (e-business) operations in the world. We have always worked
     closely with these customers, which include major corporations in the
     financial, healthcare and other sectors, as well as agencies of the United
     States government, to deliver the utmost in secure access control and
     innovative new features. With over 20 years in the industry, we are one of
     the foremost information security companies in the world. Over the years,
     we invented many of the technologies and standards that now underlie
     information security as we know it today. In a very literal sense, much of
     the original basis for securing transactions across computers and networks
     began at Secure Computing Corporation.

*    Our solutions enable our customers to control, manage, and personalize
     access for millions of customers, employees, and partners connecting to
     their business. The challenge for organizations conducting e-business is to
     provide application and network solutions that let growing numbers of
     trusted users access business systems, easily, safely, and privately. In
     answer to this challenge, we deliver personalized enterprise access control
     solutions. Our solutions instill in our customers the confidence and
     freedom to continuously grow their business by authenticating both internal
     and external users through virtually any method they choose - Web, virtual
     private network (VPN), Citrix, dialup access and more. Based on the user's
     identity, our products allow administrators to assign the user a role that
     determines that user's access rights, and gives that user the entitlement
     needed to conduct business. Our products also log the user's activity and
     provide administrative management capabilities. Flexibility in access
     control is critical, and therefore we give our customers the means to
     personalize access rights and roles as they choose, according to the needs
     of their users and their business. Moreover, businesses no longer have the
     increased administrative burden and infrastructure costs of replicating
     data for multiple user types. Our access control products ensure that
     authorized users have real-time access to the appropriate information,
     based on their assigned roles.

*    We are the first security company to recognize the global need for
     scalable, integrated user access solutions capable of turning a risk-FILLED
     Internet environment into a manageable, risk-CONTROLLED environment in
     which to build successful, productive relationships. To this point, we have
     been recognized as a leader in network security products. Now, building
     upon our security product expertise, we are setting the pace in providing
     complete, integrated, plug-and-play access control solutions across the
     enterprise.

*    Our partners recognize the value of our products as well. Through alliance
     partnerships, customers gain the combined value of our access control
     solutions along with "best of breed" products from suppliers such as
     Aladdin, CacheFlow, Citrix, CheckPoint, Ericsson, Filanet, Intel, Nortel
     Networks, Rainbow, and Sony. Through strategic partnerships with companies
     such as Cisco, Dell, Hewlett-Packard, EDS, and 3Com, our customers receive
     innovative, comprehensive solutions. In addition, our reseller and systems
     integrator partners, including Westcon, TRW, EDS, CSC, Cap Gemini, Sun PS,
     and NetOne Systems, provide the services and support necessary to ensure
     that our customers can grow with our products year after year.

INDUSTRY BACKGROUND

         Enterprise computing has evolved over the past 25 years from isolated
mainframe computers supporting a number of terminals to networks of
interconnected servers and personal computers. The rapid adoption of the
Internet as a worldwide networking standard has accelerated the distribution and
sharing of data and applications.


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E-BUSINESS

         E-business systems have emerged as the platform for today's electronic
commerce. These systems are a combination of traditional mainframe and
client/server computing systems with Web technologies and the Internet. They
extend internal systems to the external business environment in order to perform
activities such as electronic trading of goods and services, online delivery of
digital content, electronic funds transfers and share trading, electronic bills
of lading, commercial auctions, collaborative design and engineering, online
sourcing, public procurement, direct consumer marketing, and after-sales
service.

         The key reason organizations are moving rapidly to e-business is the
direct interaction between the e-business and its suppliers, customers, and
partners. This direct interaction lowers costs of doing business and expedites
commerce. A well-designed e-business gives any organization a competitive
advantage.

E-BUSINESS SECURITY ISSUES

         The move to Internet-based business processes brings speed and
efficiency, but it also exposes organizations and their partners to increased
security risks of theft, downtime, espionage, and embarrassment. A 2001
FBI/Computer Security Institute study found that 85% of information security
professionals surveyed had experienced computer security breaches during the
previous year, including theft of proprietary information, outsider penetration
of security perimeters, and denial of service attacks. Sixty-four percent of
respondents acknowledged financial losses due to those security incidents.

         Concerns about network security has become an issue at the forefront of
e-business as nearly every week brings stories of security lapses and breaches
that have made news. While outsider attacks receive the most publicity, insider
threats are a growing concern. Remote employees, partners, customers, and others
who are already inside a company's security perimeters pose a big risk. To
mitigate these risks, organizations moving to e-business must have solid and
scalable security architecture, appropriate security policy, and exceptional
security products that can control access to the Internet, intranets, and
extranets.

MARKET NEED AND STRATEGY

         There is tremendous market demand for fast, secure e-business systems.
To survive in the world of the Internet and e-business, organizations must
establish secure, dynamic business relationships with an ever-increasing number
of internal and external users. The traditional Internet security perimeter, the
hallmark of which was the firewall, is being augmented or replaced with more
pervasive solutions that control access to any size entity such as
organizations, business units, and departments as well as to sensitive data and
applications.

         Our strategy is to authenticate users as they connect at secure
gateways and enforcement points, determine their roles and entitlements, direct
them to the applications that they are authorized to use, and audit their
activities while online. Our access management solutions also have unlimited
scalability - a key requirement for enabling e-business. Organizations can
establish role-based security policies that define access control in real-time
as users connect to Web and network resources. Additionally, our intent is to
secure IT and network environments with the most robust and highest possible
assurance against security breaches utilizing our firewall and VPN technology.
The hybrid architecture encompasses the entire range of firewall security
mechanisms including stateful inspection, circuit level proxies, application
filtering, secured servers and real-time Strikeback(TM) alerts. This strategy
provides the user the opportunity to determine their own level of security
within the scope of their individual business security requirements.

         Equally important to our strategy is regulating outbound (employee)
Internet access control by filtering and regulating Web sites that are not
authorized for employee use. Our policy supports flexibility and respect for
users, allowing organizations to create their own positive Web culture.
Protecting employee productivity and limiting organizational liability by
managing Internet access is a bottom-line issue, as well as enabling safe,
private enterprise-wide access control.

         Our goal is to help organizations maximize Internet productivity with
the strongest network-resource protection available, comprehensive
manageability, and greater scalability and interoperability than any other
access control gateway on the market along with the flexibility necessary to
implement and enforce even the most complex security policies.

SECURE COMPUTING SOLUTIONS

         We know our customers' top-level goals, like our own, are to
successfully increase their business by building strong customer and partner
relationships. This means having the ability to conduct and grow business over
the Internet and other public networks. The Internet, more than any other means,
provides the greatest exposure, the most convenience, and the best value. All of
these advantages, however, come with one major caveat: the risk of opening a
company's doors for unlimited business opportunity, while at the same time


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making sure confidential company resources are accessed and used exactly, and
only, in the manner intended. That is where our unique industry knowledge and
experience provide a solid benefit. Our daily commitment is to make secure,
manageable access control a GUARANTEE, not just a desired goal. Our
second-to-none solutions for secure e-business provide our customers with
personalized access control for unlimited users across any public network,
allowing them to grow and expand their e-business relationships in the manner
they choose.

         Our products provide complete solutions in and of themselves, as well
as work together for a more comprehensive solution, depending upon the goals and
needs of our customers. Our solutions are comprised of products and applications
that are easy to use, administer, and manage across different systems as they
grow. Our products' ability to scale as an infrastructure increases or as the
number of users grows has always been, and continues to be, one of our
hallmarks. The more users our customers have, the easier the administrative
process becomes based on the manageability features built into our products.

*    SafeWord(TM) PremierAccess(TM)

         Allowing users secure access to the network resources requires a
solution that's easy to install, simple to manage, and which grows with an
organization's needs. SafeWord PremierAccess efficiently authenticates users at
the first point of contact with the network, providing AAA (authentication,
authorization, and administration) assurance.

         PremierAccess allows the organization to seamlessly manage user access
over multiple access points including Web, VPN, dial-up, Citrix(R), UNIX,
Windows, and many other network applications. PremierAccess provides flexible,
role-based authorization, providing granular control over which users can access
specific resources. The system includes tightly integrated support for the
industry's widest range of authenticators including passwords, tokens, digital
certificates, smart cards, and biometrics. PremierAccess allows the organization
to match their authenticator strength to the desired security level needed for
the resources they wish to protect, giving them maximized control.

         PremierAccess is easy to install and manage, providing out-of-the-box
solutions without custom integration. The powerful Universal Web Agent protects
all Web servers and provides session management, personalization of content, and
cross-domain single sign-on. Advanced deployment capabilities allow Web-based
user self-enrollment and automated deployment of digital certificates, software
authenticators, and client software. PremierAccess also provides brokered
authentication to external directories and RADIUS systems for easy integration
of legacy authentication systems.

*    Sidewinder(TM)

         Sidewinder, the world's strongest firewall and VPN gateway, delivers a
multi-layered network shield that is now available in a high-performance,
rack-dense appliance. Pre-installed and pre-tuned for ease of installation, the
Sidewinder Appliance is designed for the IT professional. It drops seamlessly
into any IP network, providing a simple Power-It-On(TM) experience. No special
training or teams of IT experts are required. With remote backup/restore
capabilities, centralized logging, monitoring and automatic updates, the
Sidewinder Appliance provides administrative convenience with unattended "lights
out" installations.

         Sidewinder has never been compromised. Its hybrid architecture
encompasses the entire range of firewall security mechanisms including stateful
inspection, circuit level proxies, application filtering, secured servers, and
real-time Strikeback alerts. At its hardened core is our SecureOS(TM) with
patented Type Enforcement(TM) technology which puts Sidewinder in a class by
itself. A single-site or worldwide deployment of the Sidewinder Appliance can be
centrally managed from any Windows platform, anywhere. Sidewinder is also
available as a software-only product that can be installed on most leading
Intel-powered servers. Sidewinder is also designed for maximum performance and
scalability. Multiple Sidewinder firewalls can be clustered together, providing
load balancing and high availability.

         In addition, we recently completed the acquisition of the Gauntlet(TM)
firewall and VPN business from Network Associates. This product acquisition,
combined with our Sidewinder product, positions us as the industry leading
provider of application layer firewalls.

*    SmartFilter(TM)

     The world's first universal resource locator (URL) filtering software,
SmartFilter enables organizations to build and enforce sophisticated Web-usage
policies. Users can be coached real-time about the organization's acceptable-use
standards or denied access to specific Web sites, enabling organizations to
build a positive Web culture. SmartFilter's international URL control list
filters every browser click against millions of potentially inappropriate,
pre-categorized Web sites. An independent research organization recently
confirmed the accuracy of the SmartFilter control list with an industry-leading
rating. SmartFilter is designed to increase user productivity, reduce legal
liability and recapture network bandwidth.


                                       4
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         SmartFilter provides many additional benefits to IT organizations. Its
simple yet powerful software plug-in for proxy servers, caching appliances, or
firewalls installs in minutes. Generally, no additional hardware needs to be
purchased or installed on the network. Filtering speeds lead the industry with
SmartFilter's superior On-Box(TM) plug-in architecture and control list
compression techniques. The powerful Cyfin(R) Reporter performs detailed
analysis on all Web-surfing activity and delivers management-ready reports
directly to the manager's desktop without IT involvement. This scalable,
easy-to-use application lets organizations audit and analyze outbound Web usage
activity, providing both detailed and summary management reports.

         SmartFilter works in conjunction with market-leading proxy servers such
as Microsoft and with caching servers such as CacheFlow, Cisco, and Network
Appliance. SmartFilter is the de-facto standard for filtering on edge or caching
devices and is the only web filtering product provided as an On-Box(TM) solution
by all of the aforementioned vendors.

*    Embedded Firewall

         The 3Com Embedded Firewall, which we developed in partnership with
3Com, is a revolutionary offering in network security. By embedding access
control technology inside the network interface cards, independent of the host
operating system, the embedded firewall offers a scalable, tamper-resistant, and
non-by-passable security solution to manage access control INSIDE the corporate
perimeter firewall. The 3Com Embedded Firewall provides the next generation of
secure e-business connectivity, allowing employees, partners, and suppliers to
access information they require, and nothing else. The security technology
resident in the embedded firewall, provides for centrally managed packet
filtering, auditing, and IP Security Option (IPSec) hardware acceleration.

         The embedded firewall delivers a centrally managed architecture.
Through a user-friendly graphical user interface (GUI), administrators may
quickly and easily define access control policies on the EMBEDDED FIREWALL
POLICY SERVER, which then transmits the policies to the embedded firewall
enabled network interface cards. The policy server is a fully replicated system
that provides fail-over capabilities for up to 3000 embedded firewall NICs. This
flexible, scalable solution allows administrators to securely allow access to
resources required by employees, partners, and suppliers, without sacrificing
the integrity and confidentiality of the corporate networks.

SECURITY AND SUPPORT SERVICES

         Our services are designed to ensure that our customers make optimal use
of our products when controlling access to their e-business systems. We provide
a life cycle of support and services: Solution Planning, Solution
Implementation, and Solution Support, comprising implementation services,
training services, and support and maintenance services. These services are
described below.

*    Solution Planning

         Our Security Services offerings include a variety of options for rapid
assessment of a company's current network architecture and evaluation of the
current status of network security. We then compare this information to the
company's business needs, both current and future, to help them plan a scalable,
secure e-commerce solution. In addition, we offer security policy services that
help customers prepare a policy and plan that transfers their security policy
from paper to practice. We provide the following services:

         *    Network architecture security assessment;

         *    E-business assessment and implementation recommendation;

         *    Security policy assessment and development;

         *    AAA system security assessment; and

         *    Extranet disaster recovery plan assessment and development.


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<PAGE>


*    Solution Implementation

         Our Network Services team offers a full range of rapid-deployment
integration services and training to assist our customers through a seamless
implementation and integration of our products. Both the configuration process
of a security system and the security products themselves, by their nature, may
have an impact on several areas within a customer's network. Accordingly, we
offer a complete package of product integration assistance to ensure our
customers maximize network uptime and maintain productivity during the process.
We provide the following services:

         *    Product implementation security policy development;

         *    Product configuration audit and reconfiguration; and

         *    Product training.

         As part of our Network Services training program, we provide extensive
product and network training on-line and on-site worldwide for customers and
partners. These services help our customers understand basic and advanced
administration rules and tools that enable partners to configure, integrate, and
maintain our products as part of a comprehensive e-business solution.

*    Solution Support - SecureSupport(TM)

         We offer industry leading live answer support services. SecureSupport
has a team of technical support engineers that provide customer support around
the clock via e-mail, the Web, or telephone. Service options are tailored for
each of our network security products. Customers can select the SecureSupport
option that best meets their needs. Support is provided on a constant basis
worldwide (24 hours a day, 7 days a week), reflecting the mission-critical
nature of our solutions. Our support center call statistics are published and
posted to our corporate website at www.securecomputing.com.

         We designed SecureSupport Online, a site that is a tool to assist our
customers and channel partners with any problem they may experience with a
Secure Computing product. Through this process, technical expertise is offered
online through a searchable knowledge base, viewable support history, and our
customer support newsletters. Product patches and release notes can also be
downloaded.

         We offer our customers the option to purchase software support and
upgrade service for an annual fee. We provide software updates and technical
support through this program.

ADVANCED TECHNOLOGY CONTRACTS

         Since its early days, Secure Computing has engaged in research and
development of information security technology and products by acquiring and
executing contracts with departments and agencies of the United States
government, including the Defense Advanced Research Projects Agency (DARPA), the
National Security Agency, and the Department of Energy. Our Advanced Technology
Division is a self-funded operation whose mission is to develop new technologies
and products that meet the emerging needs of both the Department of Defense and
the commercial sector. Our strategy is to focus only on development contracts
that add value to our products and services offerings. As a result, we continue
to innovate, providing state-of-the-market products for organizations of all
types and sizes.

         The majority of our contracts require that we perform specified
services, for which we are paid a fee and reimbursed for actual costs. Under
these cost-reimbursement contracts, we have the ability to recoup all legitimate
costs associated with the performance of the contract. Generally, these
contracts are also subject to termination at the convenience of the applicable
government agency. If a contract is terminated, we typically are reimbursed for
our costs to the date of termination plus the cost of an orderly termination and
are paid a portion of the fee. Our United States government contracts are
subject to audit by the Defense Contract Audit Agency (DCAA). The DCAA has
periodically audited our contracts without any cost disallowances.

CUSTOMERS

     Our customers start with larger organizations that must deal with numerous
employees, partners, customers, and suppliers. Commercial accounts include
Global 2000 customers, over half of the Fortune 100 organizations, as well as
numerous nonprofit and major United States government agencies. At the same
time, we are a leading provider of access management products to the
middle-market segment. Customers in industries such as manufacturing and retail,
school systems, and internet service providers (ISPs) represent organizations
that, while smaller in size, have the same access control requirements for their
e-business systems as our largest customers. Our customer list also includes
numerous international organizations and foreign governments. Overseas, our
customers are concentrated primarily in Europe, Japan, China, and the Pacific
Rim.

<PAGE>


     No customer accounted for more than 10% of our total revenue in 2001, 2000
or 1999.

SALES

         We sell our products and services through both indirect and direct
channels, using a worldwide sales organization. For 2001, sales to major end
users comprised 47% of total product sales, while indirect channel sales
comprised the remaining 53%. Indirect channels include sales made to domestic
and international distributors, value-added resellers, major integrators, and
original equipment manufacturers (OEMs).

         Our sales strategy is a hybrid, high-touch model designed to reduce
possible channel conflict and allow the customer to decide how best to acquire
our products. In this model, our direct sales teams work closely with our
channel and OEM partners to ensure that the customer is satisfied. Whether the
customer buys our product and services from a Secure Computing salesperson or
from a channel or OEM partner, both salespeople are compensated for the deal. As
an enterprise software vendor, our goal is to ensure that our applications are
successfully implemented and supported. This model allows the customer to choose
their preferred partner for purchase, implementation and support, all of which
are backed by Secure Computing.

         We have a high-profile United States federal government sales team and
maintain a General Services Administration (GSA) schedule for our products to
facilitate government orders. The United States government is the world's
largest buyer of security products, and this continues to be a strong market for
us.

         International sales accounted for 25% of total revenue during 2001.
Major foreign markets for our products include Europe, Japan, China and the
Pacific Rim. In each country, we have independent channel partners that are
responsible for marketing, selling, and supporting our products to resellers and
end users within their defined territories. Independent market analyst reports
indicate that international markets will continue to provide increased
opportunities for e-business security products in the years ahead. The following
table summarizes information about our international and domestic sales and
operations:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
(IN THOUSANDS)                                          2001          2000          1999
-------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>
REVENUES:
   United States Products and Services sales ...      $ 35,078      $ 27,373      $ 19,631
   International Products and Services sales ...        13,275         7,276         2,915
   Advanced Technology contracts ...............         4,114         4,471         4,567
                                                   ----------------------------------------
                                                      $ 52,467      $ 39,120      $ 27,113
                                                   ========================================
</TABLE>

MARKETING

         We market our products to prospects worldwide using a variety of
programs. Dedicated marketing personnel are based primarily in our corporate
headquarters in San Jose, California. They create and implement marketing
programs in each of our major functional market areas -- corporate marketing for
company and brand awareness, product marketing, and partner marketing.

         We use comprehensive targeted marketing programs to generate sales
leads and brand awareness. Programs include: direct marketing, web marketing,
advertising, seminars, webinars, trade shows, and ongoing customer, channel, and
partner seminars.

         An active public relations program ensures that we receive appropriate
press coverage for our various programs and announcements as well as obtain
product reviews and speaking engagements. In addition to the marketing programs,
we stimulate interest and demand about our e-business solutions through our Web
site, partner Web sites and other industry specific Web sites, providing white
papers, newsletters, and technical notes. Several of our senior technical staff
contribute articles to industry periodicals as well as abstracts for
presentations they provide to industry specific summits and events, further
extending our ability to educate the industry about e-business and extranet
security.

         Through our partnering programs, we enter strategic marketing and
selling relationships with various notable vendors of communications, security,
and network management products or managed services. These partners recommend
our products along with theirs in helping customers build a security solution.
The potential increase in revenues from such relationships may be reduced by
requirements to provide volume price discounts and other allowances and
significant costs incurred in customizing our products. Although we do not


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intend that such relationships be exclusive, we may be required to enter into an
exclusive relationship or forego a significant sales opportunity. To the extent
we become dependent on actions by such parties, we could be adversely affected
if the parties fail to perform as expected. To minimize our risk, we often set
minimum quotas with our customers as a condition of exclusivity.

COMPETITION AND MARKET CONSOLIDATION

         The market for enterprise access control products is intensely
competitive and characterized by rapid technological change. We believe that
competition in this market is likely to persist and to intensify as a result of
increasing demand for security and access control products. Each of our
individual products competes with a different group of competitors and products.
The principal competitors for our existing solutions are:

*    CheckPoint Software Technologies Ltd.;

*    RSA Security, Inc.;

*    SurfControl, plc;

*    Symantec Corporation; and

*    Websense, Inc.

         In the future, we may also face competition from these and other
parties that develop or acquire enterprise access control products based upon
approaches similar to or different from those we employ. There are no guarantees
that our approach will dominate the market for enterprise security and access
control products. While we believe that we do not compete against manufacturers
of other classes of security products (such as encryption) due to the
complementary functions performed by such other classes, our customers may
perceive such other companies as our competitors.

         Current and potential competitors have established, or may in the
future establish, cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of our
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. If this were
to occur, it could materially and adversely affect the financial condition or
results of our operations.

         The trend toward large-scale e-business access control solutions may
result in a consolidation of the market around a smaller number of vendors that
are able to provide the necessary breadth of products and services. In the event
that we are unable to internally develop all of the products needed for a
complete, secure e-business solution, we may need to acquire such technology or
be acquired by a larger entity. However, there is no assurance that, in the
event that we are not able to internally develop all of the products needed for
an enterprise-wide security solution, we will be able to acquire or merge with
other entities on terms favorable to us and our stockholders.

BACKLOG

         Our backlog for commercial products at any point in time is not
significant since products are shipped on receipt of order. We do not believe
that our commercial backlog at any particular point in time is indicative of
future sales levels. The timing and volume of customer orders are difficult to
forecast because our customers typically require prompt delivery of products and
a majority of our sales are booked and shipped in the same quarter. In addition,
sales are generally made pursuant to standard purchase orders that can be
rescheduled, reduced, or canceled prior to shipment with little or no penalty.

         Our backlog relating to Advanced Technology contracts as of February
28, 2002 was approximately $900,000 compared to $3.7 million as of February 28,
2001. Backlog historically has represented firm government orders for research
and development services. Funded backlog represents that portion of backlog for
which our government customers have actually committed to compensate us. As of
February 28, 2002, none of our government contract backlog was funded, compared
to $2.4 million as of February 28, 2001.


                                       8
<PAGE>


MANUFACTURING

         Our manufacturing operations consist primarily of light assembly and
packaging associated with our software products. We use subcontractors to
duplicate our software media and print our user documentation and product
packaging. We then assemble the final software products at our facilities in St.
Paul, Minnesota. We also perform some limited hardware manufacturing operations
that consist of purchasing hardware components, final assembly, and testing.
Hardware components include commercially available computers, memory, monitors,
and third-party peripherals.

         The majority of the materials used in our manufacturing operations are
industry-standard parts that are widely available. Typical materials required
are media and media duplication services, user documentation and other printed
materials, product packaging, and computer systems (personal computers, computer
peripherals, memory disk drives, and storage devices).

         Our SafeWord product line includes a small token, which is available in
various designs, which is used for user authentication. We utilize two
subcontractors for these tokens: ReachOut Ltd., an electronics assembly
manufacturer located in the People's Republic of China, and Lan Plus, Inc., a
California company with manufacturing facilities located in Taiwan. ReachOut
Ltd. currently supplies our Platinum, Gold, and Silver tokens. Lan Plus also
supplies our Platinum tokens. In addition, we utilize specialized robotic
equipment for certain automated deployment services for some of our SafeWord
token customers.

RESEARCH AND DEVELOPMENT

         Our internal engineering staff performs internal development of new
products and features. Of Secure Computing's approximate total of 108
engineering employees at March 15, 2002, 23 held postgraduate degrees.

         We intend to keep our products broadly compatible with a variety of
host computer configurations, other information security products and other
applications. In addition, we will introduce new products as market demand
develops for such products. We design our products so that they support emerging
security standards, such as the Content Vectoring Protocol (CVP), the Public Key
Cryptography Standard (PKCS), the IPSec, and the Lightweight Directory Access
Protocol (LDAP).

         We will continue to seek government research and development contracts
to maintain our high-technology base. We currently have research and development
contracts with government agencies, including the DARPA, the United States Navy,
and the United States Air Force. These contracts address information security
for intrusion detection and response, new firewall architectures, authentication
technologies, security for middleware, and security policy definition and
management. We will continue to pursue, with these and other government
organizations, contracts that add value to our products and services offerings.

PATENTS AND PROPRIETARY TECHNOLOGY

         We rely on patent, trademark, copyright, and trade secret laws,
employee and third-party nondisclosure agreements, and other methods to protect
our proprietary rights. We currently hold 24 patents and have 14 patent
applications pending in the United States relating to computer security software
and hardware products. We have also filed patent applications in the European
Union, Canada, Israel, Australia, Japan, Germany, and the United Kingdom. We
believe that our patents are broad and fundamental to information security
computer products. While we believe that the pending applications relate to
patentable devices or concepts, there are no guarantees that any pending or
future patent applications will be granted. There is also the risk that a
current or future patent, regardless of whether we are an owner or a licensee of
such patent, may be challenged, invalidated, or circumvented. In addition, there
are no guarantees that the rights granted under a patent or under licensing
agreements will provide competitive advantages to Secure Computing.

         Our success depends, in part, upon our proprietary software and
security technology. We also rely on trade secrets and proprietary expertise
that we seek to protect, in part, through confidentiality agreements with
employees, consultants, and other parties. There are no guarantees that these
agreements will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets will not otherwise become known to or
independently developed by competitors. In addition, under their contracts with
Secure Computing, United States government agencies have the right to disclose
certain technology developed with government funding to our competitors as part
of the establishment by the government of second-source manufacturing
arrangements or competitive bidding.

         We are not aware of any third-party claims that Secure Computing or our
products have infringed a patent or other proprietary rights. However, the
computer technology market is characterized by frequent and substantial
intellectual property litigation. Intellectual property litigation is complex
and expensive, and the outcome of such litigation is difficult to predict. In
the event that a third party were to make a claim of infringement against us, we
could be required to devote substantial resources and management time to the
defense of such claim, which could have a material adverse effect on our
business and results of operations.


                                       9
<PAGE>


         We have received or applied for trademark protection in the United
States for our SafeWord, SecureOS, SecureSupport, Sidewinder, SmartFilter,
Secure Computing, SofToken, Strikeback, and Type Enforcement trademarks.

REGULATION AND GOVERNMENT CONTRACTS

         Other than regulations generally applicable to businesses and
regulations applicable to our government contracts described above under
"Advanced Technology Contracts," we are not currently subject to direct
regulation by any government agency. Currently, there are few laws or
regulations directly applicable to access or commerce on the Internet. However,
due to the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing and characteristics, and quality
of products and services. In addition, the adoption of laws or regulations may
slow the growth of the Internet, which could in turn decrease the demand for our
products and increase our cost of doing business or otherwise have an adverse
effect on our business, operating results or financial condition.

EMPLOYEES

         As of March 15, 2002, Secure Computing had approximately 398 employees.
Of these employees, 151 were involved in sales and marketing, 42 in customer
support, 141 in research and development, 11 in production, 23 in information
technology and 30 in administrative, human resources and finance. No employee of
Secure Computing is represented by a labor union or is subject to a collective
bargaining agreement. We believe that we maintain good relations with our
employees.

EXECUTIVE OFFICERS

         Our executive officers and their ages as of March 15, 2002 are as
follows:

      DIRECTORS         AGE        POSITION WITH SECURE COMPUTING CORPORATION
--------------------   -----   -------------------------------------------------
John McNulty            55     Chief Executive Officer and Chairman of the Board
Timothy McGurran        39     President and Chief Operating Officer
Timothy J. Steinkopf    40     Senior Vice President and Chief Financial Officer
Vincent M. Schiavo      44     Senior Vice President of Worldwide Sales

         JOHN MCNULTY is our Chairman and Chief Executive Officer. Mr. McNulty
first joined us as President and Chief Operating Officer in May 1999 and assumed
the positions of Chairman of the Board and Chief Executive Officer in July 1999.
From 1997 until joining us, he served as Senior Vice President of Sales,
Services, and Business Development at Genesys Telecommunications Laboratories, a
leading independent software company in the computer telephony integration
environment. Mr. McNulty was also previously with Intel Corporation, the world's
leading semiconductor manufacturer, where he held a number of positions,
including Director of Marketing and Business Development for the Enterprise
Server Group, which he launched.

         TIMOTHY P. MCGURRAN is our President and Chief Operating Officer. Mr.
McGurran first joined us as Senior Vice President of Operations and Chief
Financial Officer in May 1996 and assumed the positions of President and Chief
Operating Officer on March 5, 2001. From 1984 until joining us, he was at Ernst
& Young LLP, where his last position was Senior Manager.

         TIMOTHY J. STEINKOPF is our Senior Vice President and Chief Financial
Officer. Mr. Steinkopf first joined us as Treasurer and Director of Investor
Relations in September 2000 and assumed the positions of Vice President and
Chief Financial Officer in March 2001. From 1999 until joining us, he served as
Chief Financial Officer and Vice President of Finance at Silicon Entertainment,
Inc. He has been the Vice President of Finance, Secretary and Treasurer at
Watt/Peterson Inc., and prior to that he was at Ernst & Young LLP.

         VINCENT M. SCHIAVO is our Senior Vice President of Worldwide Sales. Mr.
Schiavo joined us in April 2001. From 1998 until joining us, he served as
President of PolyServe, Inc. Prior to that he served as Vice President of
Worldwide Sales at Sonic Solutions and in various other sales management roles
at Radius, Apple Computer and Data General Corporation.

         None of the executive officers is related to each other or to any other
director of Secure Computing.


                                       10
<PAGE>


CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

         The following important factors, among others, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Annual Report on Form 10-K and presented elsewhere by us from time
to time.

         WE HAVE EXPERIENCED OPERATING LOSSES IN THE PAST AND MAY EXPERIENCE
OPERATING LOSSES IN THE FUTURE. We have incurred losses in the past. For
example, for the quarter ended September 30, 2001, we had an operating loss of
$1.8 million, and for the 12 months ended December 31, 2001, we had an operating
loss of $9.8 million. We expect to incur operating losses in the first quarter
of 2002, but expect to incur operating profits in the remaining quarters and in
total for the year 2002. If we are unable to attain operating profits in the
second, third and fourth quarters, and for the year, our stock price may
decline, which could cause you to lose part or all of your investment

         WE HAVE EXPERIENCED NEGATIVE CASH FLOW IN THE PAST AND MAY EXPERIENCE
NEGATIVE CASH FLOW IN THE FUTURE. IF SOURCES OF FINANCING ARE NOT AVAILABLE, WE
MAY NOT HAVE SUFFICIENT CASH TO SATISFY WORKING CAPITAL REQUIREMENTS. We believe
that our current cash balances are sufficient to satisfy our working capital
requirements for at least the next twelve months. We may need to obtain
additional financing at that time or sooner if our plans change or if we expend
cash sooner than anticipated. We currently do not have any commitments from
third parties to provide additional capital. The risk to us is that at the time
we will need cash, financing from other sources may not be available on
satisfactory terms or at all. Our failure to obtain financing could result in
our insolvency and the loss to investors of their entire investment in our
common stock.

         COMPETITION FROM COMPANIES PRODUCING ENTERPRISE NETWORK AND DATA
SECURITY PRODUCTS COULD REDUCE OUR SALES AND MARKET SHARE. Our principal
products are network and data security products which enable organizations to
conduct electronic business safely and confidentially. Because the market for
these products is highly competitive, it may be difficult to significantly
increase our market share and our share may actually decline.

         Our customers' purchase decisions are based heavily upon the quality of
the security our products provide, the ease of installation and management, the
ability to increase the numbers of individuals using our software
simultaneously, and the flexibility of our software. If a competitor can offer
our customers a better solution in these areas and we are unable to rapidly
offer a competitive product, we may lose customers. Competitors with greater
resources could offer new solutions rapidly and at relatively low costs. This
could lead to increased price pressure, reduced margins, and a loss of market
share.

         Many of our competitors and potential competitors have significantly
greater financial, marketing, technical, and other competitive resources than we
have. Our most significant competitors currently include:

*    CheckPoint Software Technologies Ltd.;

*    RSA Security, Inc.;

*    SurfControl, plc;

*    Symantec Corporation; and

*    Websense, Inc..

         Our larger actual and potential competitors may be able to leverage an
installed customer base and/or other existing or future enterprise-wide
products, adapt more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the promotion and sale of
their products than we can. Additionally, we may lose product sales to these
competitors because of their greater name recognition and reputation among
potential customers.

         Our future potential competitors could include developers of operating
systems or hardware suppliers not currently offering competitive enterprise-wide
security products, including Microsoft Corporation, Sun Microsystems, Inc.,
Lucent Technologies, Inc., Nortel Networks, and Novell, Inc. If any of those
potential competitors begins to offer enterprise-wide security systems as a
component of its hardware, demand for our software could decrease. Ultimately,
approaches other than ours may dominate the market for enterprise network and
data security products.

         OTHER VENDORS MAY INCLUDE PRODUCTS SIMILAR TO OURS IN THEIR HARDWARE OR
SOFTWARE AND RENDER OUR PRODUCTS OBSOLETE. In the future, vendors of hardware
and of operating system or other software may continue to enhance their products
or bundle separate products to include functions that are currently provided
primarily by network security software. If network security functions become
standard features of computer hardware or of operating system software or other
software, our products may become obsolete and unmarketable, particularly if the
quality of these network security features is comparable to that of our
products. Furthermore, even if the network security and/or management functions
provided as standard features by hardware providers or operating systems or
other software is more limited than that of our products, our customers might
accept this limited functionality in lieu of purchasing additional software.
Sales of our products would suffer materially if we were then unable to develop
new network security and management products to further enhance operating
systems or other software and to replace any obsolete products.


                                       11
<PAGE>


         TECHNOLOGY IN THE ENTERPRISE NETWORK AND DATA SECURITY MARKETS IS
CHANGING RAPIDLY, AND IF WE FAIL TO DEVELOP NEW PRODUCTS THAT ARE WELL ACCEPTED,
OUR MARKET SHARE WILL ERODE. To compete successfully, we must enhance our
existing products and develop and introduce new products in a timely manner. Our
net sales and operating results could be materially affected if we fail to
introduce new products on a timely basis. The rate of new network and data
security product introductions is substantial, and security products have
relatively short product life cycles. Our customer requirements and preferences
change rapidly. Our net sales and operating results will be materially affected
if the market adopts as industry standards solutions other than those we employ.
In addition, a portion of our basic research efforts are funded by government
contracts. If those contracts are terminated for any reason, it could reduce our
new product stream, which could materially reduce our net sales and operating
results.

         IF THE USE OF PUBLIC SWITCHED NETWORKS SUCH AS THE INTERNET DOES NOT
CONTINUE TO GROW, OUR MARKET AND ABILITY TO SELL OUR PRODUCTS AND SERVICES WILL
BE LIMITED. Our sales also depend upon a robust industry and infrastructure for
providing access to public switched networks, such as the Internet. If the
infrastructure or complementary products necessary to make these networks into
viable commercial marketplaces are not developed or, if developed, these
networks do not become and continue to be viable commercial marketplaces, our
net sales and operating results could suffer.

         OUR PRODUCT LINES ARE NOT DIVERSIFIED BEYOND PROVIDING ACCESS CONTROL
SOLUTIONS TO OUR CUSTOMERS, AND ANY DROP IN THE DEMAND FOR NETWORK AND DATA
SECURITY PRODUCTS WOULD MATERIALLY HARM OUR BUSINESS. Substantially all of our
revenue comes from sales of enterprise network and data security products and
related services. We expect this will continue for the foreseeable future. As a
result, if for any reason our sales of these products and services are impeded,
our net sales and operating results will be significantly reduced.

         OUR STOCK PRICE IS HIGHLY VOLATILE, WHICH MAY IMPAIR OUR ABILITY TO
RAISE MONEY AND CAUSE OUR INVESTORS TO LOSE MONEY. The price of our common
stock, like that of many technology companies, has fluctuated widely. During
2001, our stock price ranged from a per share high of $24.92 to a low of $7.00.
Fluctuation in our stock price may cause our investors to lose money and impair
our ability to raise additional capital. Factors that may affect stock price
volatility include:

*    Unexpected fluctuations in operating results;

*    Secure Computing or its competitors announcing technological innovations or
     new products;

*    General economic uncertainties and weaknesses in geographic regions of the
     world;

*    Developments with respect to our patents or other proprietary rights or
     those of our competitors;

*    Our ability to successfully execute our business plan and compete in the
     network security industry;

*    Relatively low trading volume;

*    Product failures; and

*    Analyst reports and media stories.

         QUARTERLY REVENUES AND OPERATING RESULTS DEPEND ON THE VOLUME AND
TIMING OF ORDERS RECEIVED, WHICH MAY BE AFFECTED BY LARGE INDIVIDUAL
TRANSACTIONS AND WHICH SOMETIMES ARE DIFFICULT TO PREDICT. Our quarterly
operating results may vary significantly depending on a number of other factors,
including:

*    The timing of the introduction or enhancement of products by us or our
     competitors;

*    The size, timing, and shipment of individual orders;

*    Market acceptance of new products;

*    Changes in our operating expenses;

*    Personnel departures and new hires and the rate at which new personnel
     become productive;

*    Mix of products sold;

*    Changes in product pricing;

*    Development of our direct and indirect distribution channels;

*    Costs incurred when anticipated sales do not occur; and

*    General economic conditions.


                                       12
<PAGE>


         Sales of our products generally involve a significant commitment of
capital by customers, with the attendant delays frequently associated with large
capital expenditures. For these and other reasons, the sales cycle for our
products is typically lengthy and subject to a number of significant risks over
which we have little or no control. We are often required to ship products
shortly after we receive orders, and consequently, order backlog at the
beginning of any period has in the past represented only a small portion of that
period's expected revenue. As a result, our product revenue in any period
substantially depends on orders booked and shipped in that period. We typically
plan our production and inventory levels based on internal forecasts of customer
demand, which are highly unpredictable and can fluctuate substantially.

         If customer demand falls below anticipated levels, it could seriously
harm our operating results. In addition, our operating expenses are based on
anticipated revenue levels, and a high percentage of our expenses are generally
fixed in the short term. Based on these factors, a small fluctuation in the
timing of sales can cause operating results to vary significantly from period to
period.

         IF OUR PRODUCTS FAIL TO FUNCTION PROPERLY OR ARE NOT PROPERLY DESIGNED,
OUR REPUTATION MAY BE HARMED, AND CONSUMERS MAY MAKE PRODUCT LIABILITY AND
WARRANTY CLAIMS AGAINST US. Our customers rely on our information security
products to prevent unauthorized access to their networks and data
transmissions. These customers include major financial institutions,
defense-related government agencies protecting national security information,
and other large organizations. These customers use our products to protect
confidential business information with commercial value far in excess of our net
worth. Therefore, if our products malfunction or are not properly designed, we
could face warranty and other legal claims, which may exceed our ability to pay.
We seek to reduce the risk of these losses by attempting to negotiate warranty
disclaimers and liability limitation clauses in our sales agreements and by
maintaining product liability insurance. However, these measures may ultimately
prove ineffective in limiting our liability for damages.

         In addition to any monetary liability for the failure of our products,
an actual or perceived breach of network or data security at one of our
customers could harm the market's perception of our products and our business.
The harm could occur regardless of whether that breach is attributable to our
products.

         We also face the more general risk of bugs and other errors in our
software. Software products often contain undetected errors or bugs when first
introduced or as new versions are released, and software products or media may
contain undetected viruses. Errors or bugs may also be present in software that
we license from third parties and incorporate into our products. Errors, bugs,
or viruses in our products may result in loss of or delay in market acceptance,
recalls of hardware products incorporating the software, or loss of data. Our
net sales and operating results could be materially reduced if we experience
delays or difficulties with new product introductions or product enhancements.

         IF WE LOSE A SIGNIFICANT CUSTOMER, WE WILL INCUR GREATER LOSSES. We
derive a significant portion of our revenues from a limited number of customers.
For example, our top five customers in products and services made up 24% of our
products and services revenue in 2001. If we lose any of these customers and
fail to replace the customer or fail to increase revenues from other customers,
we will incur greater losses. Additionally, if our revenues from any of these
customers are reduced, without an increase in revenues from other customers, we
will incur greater losses.

         IF WE FAIL TO COLLECT AMOUNTS DUE FROM OUR CUSTOMERS ON A TIMELY BASIS,
OUR CASH FLOW AND OPERATING RESULTS MAY SUFFER. Because the timing of our
revenues is difficult to predict and our expenses are often difficult to reduce
in the short run, management of our cash flow is very important to us. Like most
companies, we anticipate that a portion of the amounts owed to us will never be
paid. However, if our actual collection of amounts owed to us is less than we
have estimated, we will have less cash to fund our operations than we
anticipated, and our financial condition and operating results could be
adversely affected.

         In addition, collection of amounts due us from sales to resellers,
distributors, and international customers generally takes longer than for other
sales. Therefore, if our sales to resellers and distributors increase as a
percentage of our total revenue, the average number of days it takes for us to
collect amounts due from our customers may increase. If there is an increase in
the time required for us to collect amounts due us, we will have less cash to
fund our operations than we anticipated. This in turn could adversely affect our
financial condition and operating results.

         We have taken and may from time to time take various forms of action to
manage the amounts due us from customers and granting customer discounts in
exchange for earlier payment.


                                       13
<PAGE>


         ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, SHARE RIGHT
AGREEMENT, AND DELAWARE LAW COULD DISCOURAGE A TAKEOVER OR FUTURE FINANCING. The
terms of our certificate of incorporation and share right agreement permit our
Board of Directors to issue up to 2,000,000 shares of preferred stock and
determine the price, rights, preferences, privileges, and restrictions,
including voting rights, of those shares without any further vote or action by
our stockholders.

         The Board may authorize the issuance of preferred stock with voting or
conversion rights that could materially weaken the voting power or other rights
of the holders of our common stock. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could make it more difficult for a third party to
acquire a majority of our outstanding voting stock. Further, provisions of
Delaware law, our certificate of incorporation and our bylaws, such as a
classified board and limitations on the ability of stockholders to call special
meetings, and provisions of our share rights agreement could delay or make more
difficult a merger, tender offer, proxy contest, or other takeover attempts.

         UNANTICIPATED COSTS AND DISALLOWANCE OF COSTS UNDER OUR GOVERNMENT
CONTRACTS MAY HARM OUR BUSINESS. Under our government contracts, we bear the
risk that increased or unexpected costs of providing our services may reduce our
profit margin. Any material unanticipated costs could therefore harm our
business. In addition, recoverable expenses previously billed by us are subject
to review and audit by the DCAA. If the DCAA disallows any of the costs we claim
under our contracts, it could adversely affect our operating results. We have
not previously experienced any material disallowance of costs with respect to
our government contracts.

         THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO DEVELOP
OUR PRODUCTS AND MANAGE OUR BUSINESS IS EXTREMELY IMPORTANT, AND OUR FAILURE TO
DO SO COULD HARM OUR BUSINESS. We believe our success depends significantly upon
a number of key technical and management employees. We may be unable to achieve
our revenue and operating performance objectives unless we can attract and
retain technically qualified and highly skilled engineers and sales, consulting,
technical, financial, operations, marketing, and management personnel. These
personnel are particularly important to our research and development efforts and
to our growing professional service business, where we employ a large number of
technical personnel holding advanced degrees and special professional
certification. Competition for qualified personnel is intense, and we expect it
to remain so for the foreseeable future. We may not be successful in retaining
our existing key personnel and in attracting and retaining the personnel we
require. Our operating results and our ability to successfully execute our
business plan will be adversely affected if we fail to retain and increase our
key employee population.

         OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS RELATED TO DOING
BUSINESS IN FOREIGN COUNTRIES. International sales are a substantial portion of
our business. Although almost all of our sales are payable in U.S. dollars,
several factors could make it difficult for customers from foreign countries to
purchase our products and services or pay us for obligations already incurred.
Such factors include:

*    Severe economic decline in one of our major foreign markets; and

*    Substantial decline in the exchange rate for foreign currencies with
     respect to the U.S. dollar.

         A decline in our international sales or collections of amounts due us
from customers could materially affect our operations and financial conditions.
In 2000, 19% of our total sales came from international sales. For fiscal year
2001, 25% of our total sales came from international sales. A very large drop in
our sales or collections of amounts due us in these specific countries as a
result of recession or other economic or political disturbances would likely
harm our net sales and operating results.

         In addition, we face a number of general risks inherent in doing
business in international markets, including, among others:

*    Unexpected changes in regulatory requirements;

*    Tariffs and other trade barriers;

*    Legal uncertainty regarding liability;

*    Political instability;

*    Potentially greater difficulty in collecting amounts due us;

*    Longer periods of time to collect amounts due us; and

*    A higher rate of piracy of our products in countries with a high incidence
     of software piracy.


                                       14
<PAGE>


ITEM 2. PROPERTIES

         We are currently headquartered in approximately 11,000 square feet of
office space in San Jose, California with an annual base rent of $670,000. We
have three separate facilities with a combined square footage of approximately
84,000 square feet in St. Paul, Minnesota, that are occupied by production,
research and development, and administration with an annual base rent of
$904,000. We have a research facility located in Concord, California, that
occupies approximately 23,000 square feet at an annual cost of $392,000. We
occupy these premises under leases expiring at various times through the year
2008. In support of our U.S. field sales organization, we also lease 6,200
square feet of office space in Vienna, Virginia, with an annual cost of
$169,000. We also have foreign offices in London, England; Sydney, Australia;
Munich, Germany; Paris, France; Singapore; Japan; and Hong Kong, with an annual
cost of approximately $207,000. We believe that our facilities are adequate for
our current needs.

ITEM 3. LEGAL PROCEEDINGS

         Beginning on April 2, 1999, several purported securities class action
complaints were filed in the United States District Court for the Northern
District of California against us and certain of our present and former
directors and officers by persons who acquired our stock between November 10,
1998 and March 31, 1999. Thereafter, the Court consolidated the actions and
appointed lead plaintiffs. On August 18, 2000, lead plaintiffs filed their First
Amended Complaint. The Complaint alleges that defendants made false and
misleading statements about our business condition and prospects in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule
10b-5. The Complaint seeks unspecified monetary damages. On August 21, 2001, the
Court denied defendants' motion to dismiss. Discovery is proceeding. The Court
has set a trial date of June 23, 2003. Although we believe there are meritorious
defenses to this action and intend to defend ourselves vigorously, an
unfavorable resolution could have a material adverse effect on our business,
results of operations and financial condition.

         On February 11, 2002, a purported derivative action was filed in
California Superior Court, Santa Clara County, against certain of our current
and former officers and directors. We are named as nominal defendant. The
derivative action makes essentially the same factual allegations as the
securities class actions and alleges various causes of action, including that
the defendants breached their corporate fiduciary duties. Although we believe
there are meritorious defenses to this action and intend to defend ourselves
vigorously, an unfavorable resolution could have a material adverse effect on
our business, results of operations and financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the stockholders during the
three months ended December 31, 2001.


                                       15
<PAGE>


                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


MARKET INFORMATION

         Our common stock is listed on the NASDAQ national market. As of March
15, 2002, there were approximately 570 registered holders. The number of
registered holders represents the number of shareholders of record plus the
number of individual participants in security position listings. We believe,
however, that many beneficial holders of our common stock have registered their
shares in nominee or street name and that there are approximately 8,500
beneficial owners. The low price and high price of our common stock during the
last eight quarters are as follows:

         --------------------------------------------------------------------
                                                      Low Price   High Price
                                                      ---------   ----------
         --------------------------------------------------------------------
          2000
          Quarter ended March 31, 2000.............     $8.63       $29.63
          Quarter ended June 30, 2000..............     $6.13       $18.88
          Quarter ended September 30, 2000.........    $16.00       $27.88
          Quarter ended December 31, 2000..........     $8.00       $26.88
         --------------------------------------------------------------------
          2001
          Quarter ended March 31, 2001.............     $7.00       $14.95
          Quarter ended June 30, 2001..............     $7.91       $19.21
          Quarter ended September 30, 2001.........     $7.90       $17.20
          Quarter ended December 31, 2001..........     $8.00       $24.92
         --------------------------------------------------------------------


         We have not paid any dividends on our common stock during the periods
set forth above. It is presently the policy of the Board of Directors to retain
earnings for use in expanding and developing our business. Accordingly, we do
not anticipate paying dividends on the common stock in the foreseeable future.


                                       16
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

         The consolidated statement of operations data set forth below for the
fiscal years ended December 31, 2001, 2000, and 1999, and the consolidated
balance sheet data at December 31, 2001 and 2000, are derived from the audited
consolidated financial statements included elsewhere in this Form 10-K. The
consolidated statement of operations data set forth below for the fiscal years
ended December 31, 1998 and 1997, and the consolidated balance sheet data at
December 31, 1999, 1998, and 1997, are derived from audited consolidated
financial statements which are not included in this Form 10-K. You should read
the data set forth below in conjunction with the financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31
                                               -------------------------------------------------------------------
                                                             (In thousands, except per share amounts)
                                                   2001          2000          1999*         1998         1997
                                               -------------------------------------------------------------------
<S>                                              <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:

  Revenue:
     Products and Services .................     $ 48,353      $ 34,649      $ 22,546      $ 51,500      $ 33,203
     Advanced Technology contracts .........        4,114         4,471         4,567         9,942        13,773
                                               -------------------------------------------------------------------
         Total revenue .....................       52,467        39,120        27,113        61,442        46,976
  Gross profit .............................       43,887        27,226         8,332        41,290        28,210
  Operating loss ...........................       (9,840)      (21,481)      (44,370)       (4,933)       (5,734)
  Net loss .................................       (8,970)      (19,170)      (44,907)       (3,262)       (4,251)
  Net loss per share:
                  Basic and diluted ........        (0.32)        (0.76)        (2.32)        (0.20)        (0.27)

BALANCE SHEET DATA:

   Working capital .........................     $ 19,857      $ 21,517      $  7,297      $ 34,017      $ 17,175
   Total assets ............................       44,833        44,971        25,829        54,348        31,054
   Stockholders' equity ....................       28,696        30,626        15,277        43,053        24,800
</TABLE>

         * 1999 STATEMENT OF OPERATIONS DATA INCLUDES $11,729 IN SIGNIFICANT
CHARGES. PLEASE REFER TO ITEM 7 FOR A DESCRIPTION OF THESE CHARGES.


                                       17
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

         The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions, or strategies regarding the future. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. These
forward-looking statements reflect our view only as of the date of this report.
We cannot guarantee future results, levels of activity, performance, or
achievement. We do not undertake any obligation to update or correct any
forward-looking statements.

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, certain
items from the statements of operations of our company expressed as a percentage
of revenue:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                                    ---------------------------------------------
                                                        2001            2000            1999*
                                                    ---------------------------------------------
<S>                                                     <C>             <C>            <C>
           Revenue:
                 Products and Services                   92.2%           88.6%           83.2%
                 Advanced Technology contracts            7.8            11.4            16.8
                                                    ---------------------------------------------
                 Total revenue                          100.0           100.0           100.0
           Cost of revenue                               16.4            30.4            69.3
                                                    ---------------------------------------------
                 Gross profit                            83.6            69.6            30.7
           Operating expenses:
                   Selling and marketing                 67.3            79.7           109.6
                   Research and development              27.1            33.3            40.5
                   General and administrative             8.0            11.5            26.8
                   Stock option expense                    --              --            17.5
                                                    ---------------------------------------------
                 Total operating expenses               102.4           124.5           194.4
                                                    ---------------------------------------------
                 Operating loss                         (18.8)          (54.9)         (163.7)
                   Interest and other income              1.7             5.9             1.3
                                                    ---------------------------------------------
                   Loss before income taxes             (17.1)          (49.0)         (162.4)
                   Income tax benefit (expense)            --              --            (3.3)
                                                    ---------------------------------------------
                 Net loss                               (17.1)%         (49.0)%        (165.7)%
                                                    =============================================
</TABLE>

           * Includes $11.7 million in significant charges.

         Significant additional expense charges of $11.7 million in the
aggregate are included in the 1999 statement of operations. In 1999, we
commenced and substantially completed, activities related to rationalizing our
product line, refocusing on e-commerce products, and streamlining our executive
management structure. As a result, a portion of our product portfolio was
discontinued, including several firewall products and a URL filtering option
that we no longer considered strategic. We recorded costs of $11.7 million
associated with these activities during 1999. These costs consisted primarily of
$10.2 million in assets which were written off related to discontinued products
and the associated costs which no longer fit our business model. In addition,
$1.5 million of costs related to payments for severance and related benefits,
legal and audit costs, and contract cancellation fees. As of December 31, 2001,
there were no remaining accruals or unpaid costs related to these activities.

         The following table compares the year ended December 31, 1999 statement
of operations items including and excluding the significant additional expense
charges:


                                       18
<PAGE>


<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31, 1999
                                                    ------------------------------------------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                                       INCLUDING                   EXCLUDING
                                                      SIGNIFICANT   SIGNIFICANT   SIGNIFICANT
                                                        CHARGES       CHARGES       CHARGES
                                                    ------------------------------------------
<S>                                                    <C>           <C>           <C>
           Gross profit                                $  8,332      $ (4,700)     $ 13,032

           Operating expenses:
                Selling and marketing                    29,705         4,047        25,658
                Research and development                 10,983           281        10,702
                General and administrative                7,274         1,801         5,473
                Stock option expense                      4,740            --         4,740
                                                    ------------------------------------------
                  Total operating expenses               52,702         6,129        46,573
                                                    ------------------------------------------
           Operating loss:                              (44,370)      (10,829)      (33,541)
                  Net interest income                       363            --           363
                                                    ------------------------------------------
                  Loss before income taxes              (44,007)      (10,829)      (33,178)
                  Income tax expense                        900           900            --
                                                    ------------------------------------------
           Net loss                                    $(44,907)     $(11,729)     $(33,178)
                                                    ==========================================
           Net loss per share -- basic and diluted     $  (2.32)     $   (.60)     $  (1.72)
                                                    ==========================================
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000.

         All forward-looking statements are presented before the impact, if any,
of the acquisition of the assets of the Gauntlet(TM) firewall business in
February 2002.

         REVENUE. Our revenue increased 34.1% to $52.5 million in 2001, up from
$39.1 million in 2000. Products and Services revenue was $48.4 million, an
increase of 39.6% over 2000. We experienced growth across all product lines in
2001 as compared to 2000 as our products have gained momentum in the market
place. In addition, price increases implemented across all product lines in the
first half of 2001 contributed to the increase in revenue. We expect 2002
revenue from Products and Services to grow 35% over 2001. Advanced Technology
contract revenue was $4.1 million in 2001, a decrease of 8.0% from 2000, in
keeping with our strategy of focusing only on development contracts that add
value to our Products and Services offerings. We expect revenue from Advanced
Technology contracts to remain at levels comparable to 2001.

         GROSS PROFIT. Gross profit as a percentage of revenue increased from
69.6% in 2000 to 83.6% in 2001. This improvement was driven by increased sales
volume on software products, which have higher profit margins. Aggregate gross
margins throughout 2002 are expected to be consistent with the 88.0% that was
achieved in the fourth quarter of 2001.

         SELLING AND MARKETING. Selling and marketing expenses consist primarily
of salaries, commissions, and benefits related to personnel engaged in selling,
marketing and customer support functions, along with costs related to
advertising, promotions, public relations, travel and allocations of information
technology, facilities and human resources. Selling and marketing expense
increased 13.2% to $35.3 million in 2001, up from $31.2 million in 2000. This
increase was driven primarily by an increase in payroll and related costs due to
significant growth in selling headcount. As a percentage of revenue, selling and
marketing expense was 67.3% for the year compared to 79.7% in 2000. We expect
selling and marketing expenses to increase on an actual dollar basis but to
continue to decline as a percent of revenue for the full year 2002 when compared
to 2001.

         RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and benefits for our product development personnel and
allocations of information technology, facilities and human resources. Research
and development expense increased 9.1% to $14.2 million in 2001, up from $13.0
million in 2000. This increase was driven primarily by an increase in payroll
and related costs. As a percentage of revenue, research and development expense
was 27.1% for the year compared to 33.3% in 2000. We expect research and
development expense levels as a percent of revenue to decline for the full year
2002, while the dollar levels will remain consistent with 2001.

          GENERAL AND ADMINISTRATIVE. General and administrative expenses
consist primarily of salaries, benefits and related expenses for our executive,
finance and legal personnel along with allocated information technology,
facilities and human resources expenses. General and administrative expense
decreased 6.1% to $4.2 million in 2001, down from $4.5 million in 2000. As a
percentage of revenue, general and administrative expense was 8.0% for the year
compared to 11.5% in 2000. We expect general and administrative expense levels
as a percent of revenue to decline for the full year 2002, while the dollar
levels will increase slightly compared to 2001.


                                       19
<PAGE>


         INTEREST AND OTHER INCOME. Net interest and other income was $870,000
in 2001, a decrease from $2.3 million in 2000. The decrease reflects higher
average cash and investment balances in 2001 as compared to 2000 offset by the
$1.6 million gain on the sale of the Professional Services group included in
2000.

         INCOME TAXES. We recognized no income tax expense or tax benefit for
either 2001 or 2000. We believe it is more likely than not that deferred tax
assets of $2.7 million at December 31, 2001 will be realized. The computations
of our deferred tax assets and valuation allowance are based on taxable income
we expect to earn on government contracts, commercial products, and projected
interest income over the next three years. Future taxable income of $6.8 million
is required to realize the $2.7 million deferred tax asset at December 31, 2001.
We had total net operating loss carryforwards of approximately $128.6 million at
December 31, 2001. Of these carryforwards, $29.7 million relates to stock option
exercises. These deductions currently have a full valuation allowance, and when
realized for financial statement purposes, they will not result in a reduction
in income tax expense. Rather, the benefit will be recorded as an increase to
additional paid-in capital. Of the remaining benefit associated with the
carryforwards, approximately $92.2 million have yet to be recognized as a
benefit in the statement of operations. However, there are no assurances that
these carryforwards will be available to offset future income tax expense when
taxable income is realized.

COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999.

         REVENUE. Our revenue increased 44.3% to $39.1 million in 2000, up from
$27.1 million in 1999. Products and Services revenue was $34.6 million, an
increase of 53.7% over 1999. We experienced significant growth across all
product lines in 2000 as compared to 1999, which was negatively impacted by
purchasing delays based on "Year 2000" concerns. Advanced Technology contract
revenue was $4.5 million, a decrease of 2.1% from 1999, which reflects a
strategy of focusing only on development contracts that add value to our
Products and Services offerings.

         GROSS PROFIT. Gross profit as a percentage of revenue increased from
30.7% in 1999 to 69.6% in 2000. Excluding significant charges related to
discontinued products in 1999, total gross profit as a percentage of revenue
increased from 48.1% in 1999 to 69.6% of revenue in 2000. The increase resulted
primarily from increased software license revenues and the disposition of our
lower-margin Professional Services consulting group in the first quarter of
2000.

         SELLING AND MARKETING. Selling and marketing expense increased 5.0% to
$31.2 million in 2000, up from $29.7 million in 1999. As a percentage of
revenue, selling and marketing expense was 79.7% for the year compared to 109.6%
in 1999.

         Excluding significant charges in 1999 resulting from discontinued
product activities and severance pay associated with the streamlining of our
management structure, selling and marketing expense increased 21.6% to $31.2
million in 2000, up from $25.7 million in 1999. As a percentage of revenue,
selling and marketing expense was 79.7% for the year compared to 94.6% in 1999.
The increased spending levels resulted primarily from increased discretionary
marketing efforts.

         RESEARCH AND DEVELOPMENT. Research and development expense increased
18.5% to $13.0 million in 2000, up from $11.0 million in 1999. As a percentage
of revenue, research and development expense was 33.3% for the year compared to
40.5% in 1999.

         Excluding significant charges in 1999, mainly for employee relocation
expense, research and development expense increased 21.6% to $13.0 million in
2000, up from $10.7 million in 1999. As a percentage of revenue, research and
development expense was 33.3% for the year compared to 39.5% in 1999. The
increased spending levels resulted primarily from our continued investment in
next generation embedded firewall technology.

         GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased 38.1% to $4.5 million in 2000, down from $7.3 million in 1999. As a
percentage of revenue, general and administrative expense was 11.5% for the year
compared to 26.8% in 1999.

         Excluding significant charges in 1999, mainly for severance pay
associated with the streamlining of our management structure and litigation
settlements, general and administrative expense decreased 17.7% to $4.5 million
in 2000, down from $5.5 million in 1999. As a percentage of revenue, general and
administrative expense was 11.5% for the year compared to 20.2% in 1999. The
decreased spending levels resulted primarily from duplicative executive
compensation during our chief executive officer transition period and increased
legal fees related to legal proceedings in 1999.


                                       20
<PAGE>


         INTEREST AND OTHER INCOME. Net interest and other income was $2.3
million in 2000, an increase from $363,000 in 1999. The increase reflects higher
average cash and investment balances in 2000 as compared to 1999 as well as the
gain on the sale of the Professional Services group in early 2000.

         INCOME TAXES. We recognized no income tax expense in 2000 compared to
income tax expense of $900,000 in 1999. We believe it is more likely than not
that deferred tax assets of $2.7 million at December 31, 2000 will be realized.
The computations of our deferred tax assets and valuation allowance are based in
part on taxable income we expect to earn on government contracts, commercial
products, and projected interest income. The amount of the deferred tax assets
considered realizable could be reduced in the near term if estimates of future
taxable income are reduced. We had total net operating loss carryforwards of
approximately $110.3 million at December 31, 2000. Of these carryforwards, $21.7
million relates to stock option exercises. These deductions currently have a
full valuation allowance, and when realized for financial statement purposes,
they will not result in a reduction in income tax expense. Rather, the benefit
will be recorded as an increase to additional paid-in capital. Of the remaining
benefit associated with the carryforwards, approximately $81.9 million had yet
to be recognized as a benefit in the statement of operations. However, there are
no assurances that these carryforwards will be available to offset future income
tax expense when taxable income is realized.

LIQUIDITY AND CAPITAL RESOURCES

         Our cash, cash equivalents and short term investments decreased by $5.3
million from December 31, 2000 to December 31, 2001. The decrease resulted
primarily from the use of cash to fund operations and purchase capital equipment
offset by approximately $5.1 million in proceeds from the issuance of common
stock and $2.1 million in proceeds from the conversion of the warrants
associated with our 1998 Series C Preferred Stock financing in the second
quarter of 2001. As of December 31, 2001 we had working capital of $19.9
million. We anticipate using available cash to fund growth in operations, invest
in capital equipment, acquire businesses and to license technology or products
related to our line of business.

         Capital additions were $2.7 million, $3.6 million, and $2.3 million for
the years ended December 31, 2001, 2000, and 1999, respectively. These additions
were made up of computer equipment, technology upgrades, office furniture, and
leasehold improvements.

         We believe that we have sufficient financial resources available to
fund our current working capital and capital expenditure requirements for at
least the next twelve months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         REVENUE RECOGNITION. Our revenue is derived from three primary sources:
(1) product revenue which includes software license, hardware, and royalty
revenue, (2) services revenue which consists primarily of maintenance revenue
for providing product upgrades and customer support, and (3) Advanced Technology
contract revenue. We recognize revenue in accordance with SOP 97-2, "Software
Revenue Recognition," as modified by SOP 98-9.

         Revenue from products is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and determinable,
and collection is probable. Maintenance revenue for providing product upgrades
and customer support is deferred and recognized ratably over the service period.

         For arrangements with multiple elements we allocate revenue to the
various elements based on the fair value of each element sold. We determine the
fair value of each element based on its selling price when sold separately.
Evidence of fair value includes the approved price list and discount schedule
and the actual prices charged for comparable arrangements. These price lists and
discount schedules may change from time to time in response to factors including
market conditions, value of services and product provided and competitive
positioning. Historically, we have not offered significant discounts off of our
list prices.

         Further, it is our policy that our distributors and resellers are not
allowed to hold inventory.

         Advanced Technology contract revenues for cost-plus-fixed-fee contracts
are recognized on the basis of costs incurred during the period plus the fee
earned. Award fees are recognized based upon the percentage of completion and
forecasted profit. A provision is made for the estimated loss, if any, on the
contracts in the period the loss becomes probable.

         ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.


                                       21
<PAGE>


         DEFERRED TAX ASSETS. The computations of our deferred tax asset and
valuation allowance are based on taxable income we expect to earn on government
contracts, commercial products, and projected interest income over the next
three years. We believe this is a conservative approach in determining the
deferred tax asset that may be realized. The risk factors noted above in
"Certain Factors That May Affect Future Results," could adversely affect our
ability to generate future taxable income, thereby also adversely impacting our
ability to realize the deferred tax asset.

INFLATION

         To date, we have not been significantly affected by inflation.

THE EURO CONVERSION

         We do not anticipate nor have we experienced any material problems
related to the Euro conversion.

FORWARD-LOOKING STATEMENTS

         Certain statements made above are forward-looking statements that
involve risks and uncertainties, and actual results may be materially different.
Factors that could cause actual results to differ include those under the
section entitled "Certain Factors That May Affect Future Results."


ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not have any material exposure to quantitative and qualitative
market risks because we do not own any risk-sensitive financial instruments. We
invest our cash in a variety of financial instruments, including bank time
deposits and commercial paper. Investments in fixed rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates. Due
in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities which have seen a decline in market value
due to changes in interest rates. Our investment securities are held for
purposes other than trading.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Part IV, Item 14 of this Form 10-K.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         Not applicable.


                                       22
<PAGE>


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Incorporated herein by reference is the information under the heading
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance," in the Registrant's Proxy Statement to be filed on or about April
8, 2002. See also Part I, Item 1, "Executive Officers" of this Form 10-K.


ITEM 11. EXECUTIVE COMPENSATION

         Incorporated herein by reference is the information appearing in the
Registrant's Proxy Statement which the Registrant anticipates filing on or about
April 8, 2002, under the headings "Election of Directors, "Report of the
Compensation Committee," "Executive Officer Compensation Program," "Summary
Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Employment
Contracts; Severance, Termination of Employment and Change-in-Control
Arrangements," and "Performance Evaluation."


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated herein by reference is the information appearing under the
heading "Security Ownership of Principal Stockholders and Management" in the
Registrant's Proxy Statement that the Registrant anticipates filing on or about
April 8, 2002.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated herein by reference is the information appearing under the
heading "Certain Transactions" in the Registrant's Proxy Statement that the
Registrant anticipates filing on or about April 8, 2002.


                                       23
<PAGE>


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS PART OF THIS REPORT:

         1.       Consolidated Financial Statements:

                  Consolidated Balance Sheets as of December 31, 2001 and 2000
                  Consolidated Statements of Operations for the years ended
                      December 31, 2001, 2000, and 1999
                  Consolidated Statement of Stockholders' Equity for the years
                      ended December 31, 2001, 2000, and 1999
                  Consolidated Statements of Cash Flows for the years ended
                      December 31, 2001, 2000, and 1999
                  Notes to Consolidated Financial Statements
                  Report of Independent Auditors

         2.       Consolidated Financial Statement Schedules:

                  Schedule II - Valuation and Qualifying Accounts. Such schedule
                  should be read in conjunction with the consolidated financial
                  statements. All other supplemental schedules are omitted
                  because of the absence of conditions under which they are
                  required.

(b) REPORTS ON FORM 8-K:

         A Form 8-K was not filed during the quarter ended December 31, 2001.

(c) EXHIBITS:

         The following exhibits are filed as part of this Annual Report on Form
10-K for the fiscal year ended December 31, 2001:

 Exhibit                               Description
---------  ---------------------------------------------------------------------
  3.1      Restated Certificate of Incorporation, effective March 6, 1996, as
           amended by the Certificate of Amendment of Certificate of
           Incorporation effective December 11, 1988, the Certificate of
           Designations of Series E 4% Cumulative Preferred Stock effective
           January 26, 2000; and the Certificate of Designations of Series F 4%
           Cumulative Convertible Preferred Stock effective June 30, 2000. (1)
  3.2      By-Laws of the Registrant. (2)
  4.1      Specimen of common stock certificate. (3)
  4.2      Amended and Restated 1995 Omnibus Stock Plan. (4)
 23.1      Consent of Ernst & Young LLP.
 24.1      Power of Attorney (see page 42)

-------------------------

(1)      Incorporated herein by reference to Exhibit 3.1 to Secure Computing's
         Amended Quarterly Report on Form 10-Q filed on September 6, 2000.

(2)      Incorporated herein by reference to Exhibit 3.3 to Secure Computing's
         Registration Statement on Form S-1 (Registration Number 33-97838).

(3)      Incorporated herein by reference to the same numbered Exhibit to
         Amendment No. 2 to Secure Computing's Registration Statement on Form
         S-1 (Registration Number 33-97838).

(4)      Incorporated herein by reference to the Exhibit 10.1 to Secure
         Computing's Current Report on Form 8-K filed on October 8, 1999.


                                       24
<PAGE>


                          SECURE COMPUTING CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,      DECEMBER 31,
                                     ASSETS                                            2001              2000
                                                                                   ------------      ------------
<S>                                                                                <C>               <C>
CURRENT ASSETS
            Cash and cash equivalents ........................................     $     15,956      $     12,496
            Investments ......................................................            5,085            13,831
            Accounts receivable, (net of
            reserves of 2001 -- $1,404; 2000 -- $1,775) ......................           11,006             6,762
            Deferred income taxes ............................................            1,400               690
            Inventories ......................................................              757               630
            Other current assets .............................................            1,790             1,453
                                                                                   ------------      ------------
              Total current assets ...........................................           35,994            35,862

PROPERTY AND EQUIPMENT
            Equipment ........................................................           12,946            10,907
            Furniture and fixtures ...........................................            2,202             2,141
            Leasehold improvements ...........................................            1,697             1,242
                                                                                   ------------      ------------
                                                                                         16,845            14,290
            Accumulated depreciation .........................................          (11,053)           (8,632)
                                                                                   ------------      ------------
                                                                                          5,792             5,658
INTANGIBLE ASSETS (net of accumulated amortization of 2001 -- $1,160;
2000 -- $1,266) ..............................................................            1,167             1,279
DEFERRED INCOME TAXES ........................................................            1,300             2,010
OTHER ASSETS .................................................................              580               162
                                                                                   ------------      ------------
            TOTAL ASSETS .....................................................     $     44,833      $     44,971
                                                                                   ============      ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
            Accounts payable .................................................     $      1,859      $      2,950
            Accrued payroll ..................................................            3,523             3,767
            Other accrued expenses ...........................................            1,601             1,378
            Deferred revenue .................................................            9,154             6,250
                                                                                   ------------      ------------
              Total current liabilities ......................................           16,137            14,345

STOCKHOLDERS' EQUITY
            Convertible preferred stock, par value $.01 per share:
              Authorized -- 2,000,000 shares; issued and outstanding shares -
              December 31, 2001 - none and December 31, 2000 - 7,700 .........               --                --
            Common stock, par value $.01 per share:
              Authorized - 50,000,000 shares; issued and outstanding shares --
              December 31, 2001 - 28,830,992 and
              December 31, 2000 - 26,675,230 .................................              288               267
            Additional paid-in capital .......................................          148,585           141,484
            Accumulated deficit ..............................................         (119,687)         (110,717)
            Accumulated other comprehensive loss .............................             (490)             (408)
                                                                                   ------------      ------------
              Total stockholders' equity .....................................           28,696            30,626
                                                                                   ------------      ------------
              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .....................     $     44,833      $     44,971
                                                                                   ============      ============
</TABLE>

                             SEE ACCOMPANYING NOTES.


                                       25
<PAGE>


                          SECURE COMPUTING CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31
                                                     ---------------------------------------------
                                                          2001            2000            1999
                                                     ---------------------------------------------
<S>                                                    <C>             <C>             <C>
REVENUE
    Products and Services ........................     $   48,353      $   34,649      $   22,546
    Advanced Technology contracts ................          4,114           4,471           4,567
                                                     ---------------------------------------------
                                                           52,467          39,120          27,113
COST OF REVENUE ..................................          8,580          11,894          18,781
                                                     ---------------------------------------------
GROSS PROFIT .....................................         43,887          27,226           8,332

OPERATING EXPENSES
    Selling and marketing ........................         35,299          31,187          29,705
    Research and development .....................         14,202          13,018          10,983
    General and administrative ...................          4,226           4,502           7,274
    Stock option expense .........................             --              --           4,740
                                                     ---------------------------------------------
                                                           53,727          48,707          52,702
                                                     ---------------------------------------------
OPERATING LOSS ...................................         (9,840)        (21,481)        (44,370)
    Interest and other income ....................            870           2,311             363
    Loss before income tax expense ...............         (8,970)        (19,170)        (44,007)
    Income tax expense ...........................             --              --             900
                                                     ---------------------------------------------
NET LOSS .........................................     $   (8,970)     $  (19,170)     $  (44,907)
                                                     =============================================

NET LOSS PER SHARE -- BASIC AND DILUTED ..........     $    (0.32)     $    (0.76)     $    (2.32)

WEIGHTED AVERAGE SHARES OUTSTANDING--
     BASIC AND DILUTED ...........................         28,114          25,163          19,323
</TABLE>

                             SEE ACCOMPANYING NOTES.


                                       26
<PAGE>


                          SECURE COMPUTING CORPORATION
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                             Accumulated
                                       Preferred Stock        Common Stock       Additional     Other                     Total
                                   ---------------------  ---------------------   Paid-In   Comprehensive Accumulated  Stockholders'
                                     Shares     Amount      Shares     Amount     Capital        Loss       Deficit       Equity
                                   ----------  ---------  ----------  ---------  ---------- ------------- -----------  ------------
<S>                                <C>         <C>        <C>         <C>        <C>          <C>          <C>          <C>
BALANCE, December 31, 1998 .......     16,000  $      --  16,545,987  $     165  $   89,730   $     (202)  $  (46,640)  $   43,053
  Comprehensive loss:
       Net loss for the year .....         --         --          --         --          --           --      (44,907)     (44,907)
       Foreign currency
         translation adjustment ..         --         --          --         --          --          (36)          --          (36)
                                                                                                                        ----------
  Total comprehensive loss .......                                                                                         (44,943)
  Exercise of incentive stock
    options ......................         --         --     643,205          7       4,103           --           --        4,110
  Employee stock purchase plan
    activity .....................         --         --     417,166          4       1,171           --           --        1,175
  Conversion of preferred stock ..    (17,794)             5,416,526         54         (54)          --           --           --
  Compensation expense on
    options ......................         --         --          --         --       4,740           --           --        4,740
  Preferred stock issued .........      7,500         --          --         --       7,142           --           --        7,142
                                   ----------  ---------  ----------  ---------  ----------   ----------   ----------   ----------
BALANCE, December 31, 1999 .......      5,706         --  23,022,884        230     106,832         (238)     (91,547)      15,277
  Comprehensive loss:
       Net loss for the year .....         --         --          --         --          --           --      (19,170)     (19,170)
       Foreign currency
         translation adjustment ..         --         --          --         --          --         (170)          --         (170)
                                                                                                                        ----------
  Total comprehensive loss .......                                                                                         (19,340)
  Exercise of incentive stock
    options ......................         --         --     469,013          5       2,231           --           --        2,236
  Employee stock purchase plan
    activity .....................         --         --      40,369          1         590           --           --          591
  Conversion of preferred stock ..    (30,756)        --   2,706,477         27         (27)          --           --           --
  Conversion of warrants .........         --         --     436,487          4          (4)                                    --
  Compensation expense on
    options ......................         --         --          --         --         548           --           --          548
  Preferred stock issued .........     32,750         --          --         --      31,314                                 31,314
                                   ----------  ---------  ----------  ---------  ----------   ----------   ----------   ----------
BALANCE, December 31, 2000 .......      7,700         --  26,675,230        267     141,484         (408)    (110,717)      30,626
  Comprehensive loss:
       Net loss for the year .....         --         --          --         --          --           --       (8,970)      (8,970)
       Foreign currency
         translation adjustment ..         --         --          --         --          --          (82)          --          (82)
                                                                                                                        ----------
  Total comprehensive loss .......                                                                                          (9,052)
  Exercise of incentive stock
    options ......................         --         --     779,647          9       3,983           --           --        3,992
  Employee stock purchase plan
    activity .....................         --         --     149,679         --       1,102           --           --        1,102
  Conversion of preferred stock ..     (7,700)        --   1,051,972         10         (64)          --           --          (54)
  Conversions of warrants ........         --         --     174,464          2       2,080           --           --        2,082
                                   ----------  ---------  ----------  ---------  ----------   ----------   ----------   ----------
BALANCE, December 31, 2001 .......         --  $      --  28,830,992  $     288  $  148,585   $     (490)  $ (119,687)  $   28,696
                                   ==========  =========  ==========  =========  ==========   ==========   ==========   ==========
</TABLE>

                             SEE ACCOMPANYING NOTES.


                                       27
<PAGE>


                          SECURE COMPUTING CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31
                                                                                 ---------------------------------------------
                                                                                       2001            2000            1999
                                                                                 ---------------------------------------------
<S>                                                                                <C>             <C>             <C>
OPERATING ACTIVITIES
            Net loss ..........................................................    $   (8,970)     $  (19,170)     $  (44,907)
            Adjustments to reconcile net loss to net cash used in operating
            activities:

               Proceeds from the sale of Professional Services ................            --           4,296              --
               Depreciation ...................................................         2,433           2,021           1,472
               Loss on disposals of property and equipment ....................           107              21             362
               Loss on disposals of intangible assets .........................           148              --             402
               Amortization ...................................................           285             560             557
               Deferred income tax ............................................            --              --             900
               Stock option expense ...........................................            --              --           4,740
            Changes in operating assets and liabilities:
               Accounts receivable ............................................        (4,244)         (1,540)         14,295
               Inventories ....................................................          (127)            198           1,533
               Other current assets ...........................................          (337)            541            (956)
               Accounts payable ...............................................        (1,091)           (248)           (622)
               Accrued liabilities and reserves ...............................           (21)         (1,823)         (1,350)
               Deferred revenue ...............................................         2,904           2,468           1,229
                                                                                 ---------------------------------------------
                Net cash used in operating activities .........................        (8,913)        (12,676)        (22,345)

INVESTING ACTIVITIES
               Purchases of investments .......................................       (11,551)        (16,544)             --
               Proceeds from sales of investments .............................        20,297           7,925           5,674
               Purchase of property and equipment .............................        (2,674)         (3,642)         (2,255)
               (Increase) decrease in intangibles and other assets ............          (739)           (216)            221
                                                                                 ---------------------------------------------
                Net cash provided by (used in) investing activities ...........         5,333         (12,477)          3,640

FINANCING ACTIVITIES
               Net proceeds from issuance of preferred stock ..................            --          31,314           7,142
               Proceeds from issuance of common stock .........................         5,040           2,827           5,285
               Proceeds from the conversion of warrants .......................         2,082              --              --
                                                                                 ---------------------------------------------
                Net cash provided by financing activities .....................         7,122          34,141          12,427

EFFECT OF FOREIGN CURRENCY TRANSLATION ........................................           (82)           (170)            (36)
                                                                                 ---------------------------------------------

               Net increase (decrease) in cash and cash equivalents ...........         3,460           8,818          (6,314)
               Cash and cash equivalents, beginning of year ...................        12,496           3,678           9,992
                                                                                 ---------------------------------------------
               Cash and cash equivalents, end of year .........................    $   15,956      $   12,496      $    3,678
                                                                                 =============================================
</TABLE>

                             SEE ACCOMPANYING NOTES.


                                       28
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

         We develop and sell computer software products and services designed to
provide secure access control for all users engaging in business over public
networks, including the Internet, intranets, and extranets. Our solutions enable
our customers to control, manage, and personalize access for millions of
customers, employees, and partners connecting to their business.

BASIS OF PRESENTATION

         The consolidated financial statements include the accounts of Secure
Computing and our subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.

REVENUE RECOGNITION

         Our revenue is derived from three primary sources: (1) product revenue
which includes software license, hardware, and royalty revenue, (2) services
revenue which consists primarily of maintenance revenue for providing product
upgrades and customer support, and (3) Advanced Technology contract revenue. We
recognize revenue in accordance with SOP 97-2, "Software Revenue Recognition,"
as modified by SOP 98-9.

PRODUCTS AND SERVICES

         Revenue from products is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and determinable,
and collection is probable.

         Maintenance revenue for providing product upgrades and customer support
is deferred and recognized ratably over the service period. Services revenue
represented 23%, 27% and 40% of Products and Services revenue for the years
ended December 31, 2001, 2000 and 1999, respectively.

         For arrangements with multiple elements we allocate revenue to the
various elements based on the fair value of each element sold. We determine the
fair value of each element based on its selling price when sold separately.
Evidence of fair value includes the approved price list and discount schedule
and the actual prices charged for comparable arrangements. These price lists and
discount schedules may change from time to time in response to factors including
market conditions, value of services and product provided and competitive
positioning. Historically, we have not offered significant discounts off of our
list prices.

         Further, it is our policy that our distributors and resellers are not
allowed to hold inventory.

ADVANCED TECHNOLOGY CONTRACTS

         Advanced Technology contract revenues for cost-plus-fixed-fee contracts
are recognized on the basis of costs incurred during the period plus the fee
earned. Award fees are recognized based upon the percentage of completion and
forecasted profit. A provision is made for the estimated loss, if any, on the
contracts in the period the loss becomes probable.

         Under our Advanced Technology contracts, we bear the risk that
increased or unexpected costs required to perform specified services may reduce
our profitability. In addition, recoverable expenses we bill for government
contracts are subject to review and audit by the Defense Contract Audit Agency,
which could result in amounts previously billed being renegotiated. We have had
no adjustments as a result of these periodic audits. Pursuant to their terms,
these contracts are also generally subject to termination at the convenience of
the applicable government agency. If a contract is terminated, we would
typically be reimbursed for our costs to the date of our termination plus the
cost of an orderly termination and paid a portion of the fee.


                                       29
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH EQUIVALENTS

         We consider all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost, which approximates market. We have restricted cash pledged
against our letters of credit of $507 and $471 at December 31, 2001 and December
31, 2000, respectively.

INVENTORIES

         Inventories consist mainly of purchased components and prepaid licenses
and are valued at the lower of cost (first-in, first-out method) or market.

PROPERTY AND EQUIPMENT

         Property and equipment are carried at cost. Depreciation is calculated
using the straight-line method with estimated useful lives ranging from 3 to 10
years.

INTANGIBLE ASSETS

         Intangible assets consist of patents and trademarks and are amortized
using the straight-line method over the estimated useful lives of the assets,
which range up to 17 years.

IMPAIRMENT OF LONG-LIVED ASSETS

         We review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

         Foreign assets and liabilities are translated using the year-end
exchange rate. Results of operations are translated using the average exchange
rates throughout the year. Translation gains or losses, net of applicable
deferred taxes, are accumulated as a separate component of stockholders' equity.

SELLING AND MARKETING

         Selling and marketing expenses consist primarily of salaries,
commissions, and benefits related to personnel engaged in selling, marketing and
customer support functions, along with costs related to advertising, promotions,
public relations.

RESEARCH AND DEVELOPMENT

         Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.


                                       30
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

          Based on our product development process, technological feasibility is
established upon completion of a working model. Costs that we incur between
completion of the working model and the point at which the product is generally
available for sale are capitalized and amortized over their estimated useful
life of three years. We have capitalized software development costs net of
accumulated amortization of $318 and $503 at December 31, 2001 and 2000,
respectively. Amortization expense was $257, $533, and $918 for the years ended
December 31, 2001, 2000, and 1999, respectively.

USE OF ESTIMATES

         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 financial statements and
accompanying notes. Actual results could differ from those estimates.

NET LOSS PER SHARE

         Basic earnings per share are computed using the weighted average number
of common shares outstanding. Diluted earnings per share are computed using the
combination of dilutive common share equivalents and the weighted average number
of common shares outstanding. Diluted earnings per share are not presented
separately, as the effect of outstanding options, warrants, and preferred stock
is antidilutive.

COMPREHENSIVE LOSS

         Our comprehensive loss for the years ended December 31, 2001, 2000, and
1999, was $(9,051), $(19,340), and $(44,934), respectively. The components of
our comprehensive loss are net loss and foreign currency translation
adjustments.

 STOCK OPTIONS

         We follow the disclosure only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," regarding disclosure of pro forma information for
stock compensation. As permitted by SFAS No. 123, we measure compensation cost
using the methods described in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."

RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 2001, the FASB issued Statement No. 141, "Business
Combinations," effective for all business combinations initiated after June 30,
2001. The Statement eliminates the pooling-of-interest methods of accounting for
business combinations and further clarifies the criteria to recognize intangible
assets separately from goodwill. Adoption of this Statement will not have an
effect on the accounting treatment of assets we have acquired in business
combinations prior to the effective date of this Statement.

         In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets," effective for the year ending December 31, 2002. Under this
Statement, goodwill and indefinite-lived intangible assets are no longer
amortized but are reviewed at least annually for impairment. Adoption of this
Statement will not have an effect on the accounting treatment of assets
presented in our Financial Statements prior to the effective date.


                                       31
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


2. INVES(TM)ENTS

         At December 31, 2001, and 2000, investments consisted of commercial
paper with maturities of less than one year. The investments are considered
available for sale and are stated at cost plus accrued interest which
approximates fair market value.

3. ACCOUNTS RECEIVABLE

         Approximately 3% and 14% of accounts receivable were due from the
United States government at December 31, 2001 and 2000. Unbilled accounts
receivable from all customers were $350 and $369 at December 31, 2001 and 2000,
respectively and are included in other current assets.

4. LEASES

         We lease office space for all of our locations. Future lease payments
for all operating leases, excluding executory costs such as management and
maintenance fees and property tax, are as follows:

                          FUTURE LEASE                         NET FUTURE LEASE
                           OBLIGATIONS         SUBLEASES          OBLIGATIONS
                         -------------------------------------------------------
                   2002        $   2,329          $    (95)           $   2,234
                   2003            1,990               (97)               1,893
                   2004            1,845              (103)               1,742
                   2005            1,874              (106)               1,768
                   2006            1,177               (88)               1,089
             Thereafter            1,364                --                1,364
                         -------------------------------------------------------
                               $  10,579          $   (489)           $  10,090
                         =======================================================


         Rent expense including executory costs was $3,040, $2,569, and $2,459
for the years ended December 31, 2001, 2000, and 1999, respectively.

         In addition, in September 1999, we entered into a sales-leaseback
agreement pertaining to certain previously acquired computer equipment and
software expiring March 31, 2002, with monthly rental payments of $11.

5. CAPITAL STOCK

PREFERRED STOCK

         In June 1998, we sold 16,000 shares of newly issued Series C
Convertible Preferred Stock (the "Series C Stock") to two investors. In 1999,
all of the Series C Stock was converted by the holders into 5,174,493 shares of
Common Stock.

         In December 1999, we sold in two separate transactions, a total of
7,500 shares of Series D 4% Cumulative Convertible Preferred Stock (the "Series
D Stock") to Elliott International, L.P. ("Elliott International", formerly
known as Westgate International, L.P.) resulting in total gross proceeds of
$7,500. As of December 31, 2001, all outstanding shares of the Series D Stock
were converted into 793,205 shares of our Common Stock at an average price of
$9.46 per share.


                                       32
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


5. CAPITAL STOCK (CONTINUED)

         In January 2000, we entered into a Put and Call Agreement with Elliott
International which provided for the sale of up to 17,500 shares of Series E 4%
Cumulative Convertible Preferred Stock (the "Series E Stock") to Elliott
International at $1,000 per share. In February 2000 we sold 8,750 shares of the
Series E Stock to Elliott International resulting in gross proceeds of $8,750.
In June 2000 we sold the remaining 8,750 shares of the Series E Stock to
Westgate resulting in gross proceeds of $8,750. All sales of securities to
Elliott International were completed pursuant to the exemption provided by
Regulation D under the Securities Act of 1933. As of December 31, 2001 all
outstanding shares of the Series E Stock were converted into 1,596,618 shares of
our Common Stock at an average price of $11.03 per share.

         In June 2000, we entered into a Put and Call Agreement with Elliott
International, which provided for the sale of up to 15,250 shares of Series F 4%
Cumulative Convertible Preferred Stock (the "Series F Stock") to Elliott
International at $1,000 per share. In August 2000, Elliott International
assigned, and Elliott Associates, L.P. ("Elliott Associates") assumed, 50% of
Elliott International's rights and obligations under the put/call agreement.
Later in August 2000, we sold to each of Elliott International and Elliott
Associates 2,625 shares of the Series F Stock resulting in total gross proceeds
of $5,250. In December 2000, we sold to each of Elliott International and
Elliott Associates an additional 5,000 shares of the Series F Stock resulting in
total gross proceeds of $10,000. All sales of securities to Elliott
International and Elliott Associates were completed pursuant to the exemption
provided by Regulation D under the Securities Act of 1933. As of December 31,
2001 all outstanding shares of the Series F Stock were converted to 1,568,559
shares of our Common Stock at an average price of $9.74 per share.

WARRANTS

         In June 1998, we issued to each of Marshall Capital Management, Inc.
("Marshall Capital") and CC Investments LDC ("CC Investments") warrants to
purchase shares of our Common Stock. In June 2001, Marshall capital and CC
Investments each exercised their entire warrant of 87,232 shares of our Common
Stock.

         In October 1999 we issued a warrant to Manchester Securities
Corporation ("Manchester"). In November 2000, Manchester effected a net-issue
exercise of the entire warrant for 436,487 shares of our Common Stock.

6. STOCK OPTIONS

         In September 1995, our Board of Directors and stockholders approved our
1995 Omnibus Stock Plan (the "Stock Plan"). Under the terms of the Stock Plan,
key employees and nonemployees may be granted options to purchase up to
10,244,131 shares of our Common Stock. The majority of options granted typically
have 10-year terms and vest either annually over three years, or fully vest at
the end of three years. In addition, we have programs where options are subject
to accelerated vesting based on the performance of our stock price over a
specified period of time ranging from one to three years.


                                       33
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


6. STOCK OPTIONS (CONTINUED)

         A summary of changes in outstanding options and common shares reserved
under the Stock Plan is as follows:

<TABLE>
<CAPTION>
                                                                                             WEIGHTED AVERAGE
                                                       SHARES AVAILABLE        OPTIONS      EXERCISE PRICE PER
                                                          FOR GRANT          OUTSTANDING          SHARE
                                                     ---------------------------------------------------------
<S>                                                        <C>                <C>               <C>
   Balance at December 31, 1998.....................        1,594,988          4,247,192        $  7.75
     Shares authorized .............................               --                 --             --
     Granted .......................................       (3,646,294)         3,646,294           4.99
     Exercised .....................................               --           (643,205)          6.39
     Canceled ......................................        2,520,708         (2,520,708)          7.95
                                                     ----------------------------------------
   Balance at December 31, 1999 ....................          469,402          4,729,573           5.70
     Shares authorized .............................        2,500,000                 --             --
     Granted .......................................       (2,560,986)         2,560,986          11.20
     Exercised .....................................               --           (506,146)          6.43
     Canceled ......................................          976,156           (976,156)          6.40
                                                     ----------------------------------------
   Balance at December 31, 2000 ....................        1,384,572          5,808,257           7.94
     Shares authorized .............................        1,250,000                 --             --
     Granted .......................................       (2,462,308)         2,462,308          12.64
     Exercised .....................................               --           (781,300)          5.14
     Canceled ......................................          785,723           (785,723)          9.12
                                                     ----------------------------------------
   Balance at December 31, 2001 ....................          957,987          6,703,542         $ 9.86
                                                     ========================================
</TABLE>

The following table summarizes information about the stock options outstanding
at December 31, 2001:

<TABLE>
<CAPTION>
                                         Options Outstanding                            Options Exercisable
                          -----------------------------------------------------     ---------------------------
                                              Weighted           Weighted                          Weighted
                              Number     Average Remaining        Average          Number          Average
Range of Exercise Price    Outstanding    Contractual Life    Exercise Price     Exercisable    Exercise Price
---------------------------------------------------------------------------------------------------------------
<S>                        <C>               <C>                 <C>             <C>              <C>
$  .01 - $ 3.03              134,073         4.6 years           $  1.98            98,425        $  1.71
$ 3.03 - $ 6.05            1,403,259         7.4 years              3.86           914,397           3.97
$ 6.05 - $ 9.08              752,538         6.8 years              6.77           449,336           6.65
$ 9.08 - $12.10            2,721,203         8.5 years             10.20           520,810          10.06
$12.10 - $15.13              648,069         9.1 years             13.53            49,429          13.46
$15.13 - $18.15              771,250         8.8 years             16.85           133,008          17.20
$18.15 - $21.18              108,250         9.2 years             18.61            53,416          18.55
$21.18 - $24.20              145,900         8.7 years             22.45            38,461          22.62
$24.20 - $27.23               19,000         7.2 years             25.89            11,665          25.91
                         -------------                                         -------------
$  .01 - $27.23            6,703,542         8.1 years           $  9.86         2,268,947        $  7.56
                         =============                                         =============
</TABLE>


                                       34
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


6. STOCK OPTIONS (CONTINUED)

         Options outstanding under the Stock Plan expire at various dates from
2002 to 2011. The number of options exercisable as of December 31, 2001, 2000,
and 1999, was 2,268,947, 1,761,057, and 1,062,353, at weighted average exercise
prices of $7.56, $6.21, and $7.13, respectively. The weighted average fair value
of options granted and the weighted average remaining contractual life of
options granted during 2001, 2000, and 1999 are $9.86, $7.94 and $5.70 and 8.1,
8.5, and 8.1 years, respectively.

         We had an executive stock option program under which options would only
vest if certain price performance targets were met. Upon meeting those targets,
compensation expense would be recorded. During the life of this program,
1,390,000 options were granted, while 81,000 options remain exercisable as of
December 31, 2001. For the year ended December 31, 1999, we recognized $4,740 of
compensation expense related to the vesting of options under this program.

         We also have an executive stock option program under which 420,000
performance-based options were granted and are subject to accelerated vesting
based on our stock price reaching certain price performance targets prior to
specified dates. These options will vest in a lump sum five years after the date
of grant regardless of company stock price performance. There will not be
expense related to the granting of these options.

         We recognized $548 of compensation expense for the year ended December
31, 2000 related to the accelerated vesting of a group of options and the
extended vesting of another group of options associated with the sale of the
Professional Services group.

         Pro forma information regarding net loss and loss per share is required
by SFAS No. 123 and has been determined as if we had accounted for our employee
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 2001, 2000,
and 1999, respectively: a risk-free interest rate of 6.0%; volatility factors of
the expected market price of our Common Stock of .99, 1.17, and 1.27; no
expected dividends; and a weighted average expected life of the option of five
years.

         For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information is as follows:

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31
                                                              -------------------------------------
                                                                  2001         2000        1999
                                                              -------------------------------------
<S>                                                            <C>          <C>          <C>
             Pro forma net loss                                $(17,643)    $(27,500)    $(53,278)
                                                              =====================================

             Pro forma basic and diluted net loss per share    $   (.63)    $  (1.09)    $  (2.76)
                                                              =====================================
</TABLE>

7. INCOME TAXES

         There was no income tax expense for the years ended December 31, 2001
and 2000. Income tax expense of $900 was reported for the year ended December
31, 1999.


                                       35
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


7. INCOME TAXES (CONTINUED)

         The effective tax rate differs from the statutory tax rate primarily as
a result of the following:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                  -------------------------------------
                                                                       2001         2000        1999
                                                                  -------------------------------------
<S>                                                                 <C>          <C>          <C>
            Income taxes at statutory rate .....................    $ (3,050)    $ (6,518)    $(14,959)
            State taxes, net of federal benefit ................        (353)        (731)      (1,705)
            Foreign taxes ......................................          --           --           --
            Change in valuation allowance ......................       3,353        7,195       17,494
            Other ..............................................          50           54           70
                                                                  -------------------------------------
            Income tax expense .................................    $     --     $     --     $    900
                                                                  =====================================
</TABLE>


         Deferred income tax assets and liabilities result from temporary
differences between the carrying values of assets and liabilities for financial
statement and income tax purposes. Significant components of our net deferred
tax assets are as follows:

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                  -------------------------------------
                                                                      2001         2000         1999
                                                                  -------------------------------------
<S>                                                                 <C>          <C>          <C>
         Deferred tax assets:
           Accrued liabilities .................................    $    872     $  1,219     $  1,591
           Stock option compensation expense ...................          --           --        3,120
           Liabilities .........................................         179          139          113
           Tax over book amortization ..........................         (83)        (196)        (295)
           Book over tax depreciation ..........................         171          171          171
           Income tax credits ..................................         478          478          478
           Net operating loss carryforward .....................      51,455       44,133       34,211
                                                                  -------------------------------------
         Total deferred tax assets before valuation allowance ..      53,072       45,944       39,389
         Less valuation allowance ..............................     (50,372)     (43,244)     (36,689)
                                                                  -------------------------------------
         Net deferred tax assets ...............................    $  2,700     $  2,700     $  2,700
                                                                  =====================================
</TABLE>

         SFAS No. 109, "Accounting for Income Taxes," requires the consideration
of a valuation allowance for deferred tax assets if it is "more likely than not"
that benefits of deferred tax assets will not be realized. We believe it is more
likely than not that the net deferred tax assets of $2,700 at December 31, 2001
will be realized. However, the amount of the deferred tax assets considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced.

         At December 31, 2001, we had net operating loss (NOL) carryforwards of
$128,634 that are available to offset taxable income through 2021. These
carryforwards are subject to the limitations of Internal Revenue Code Section
382. This section provides limitations on the availability of net operating
losses to offset current taxable income if significant ownership changes have
occurred for federal tax purposes. Included in the NOL is approximately $29,700
related to stock option exercises. These deductions currently have a full
valuation allowance, and when realized for financial statement purposes, they
will not result in a reduction in income tax expense. Rather, the benefit will
be recorded as an increase to additional paid-in capital.

         Federal income taxes were not paid in 2001, 2000, or 1999.


                                       36
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


8. EMPLOYEE BENEFIT PLAN

         We have a voluntary defined contribution plan under Section 401(k) of
the Internal Revenue Code that covers substantially all U.S. employees. We also
have voluntary defined contribution plans that cover substantially all
employees. Contributions to the latter are limited to the employer's
discretionary annual contribution.

9. CONTINGENCIES

         We are engaged in certain legal proceedings and claims arising in the
ordinary course of our business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against us cannot
be determined at this time. However, in the opinion of management, the facts
known at the present time do not indicate that such litigation will have a
material effect on our financial position.

10. SEGMENT INFORMATION

         We have two reportable segments, consisting of Products and Services
and Advanced Technology. Our Products and Services segment markets a range of
solutions providing risk-free, personalized access control across any public
network. Our Advanced Technology Division is a self-funded organization whose
mission is to develop new technologies and products that meet the emerging needs
of both the Department of Defense (DoD) and the commercial sector. As a result,
we continue to innovate, providing state-of-the-market products for
organizations of all types and sizes. Cash, investments, deferred tax assets,
general and administrative expenses, and stock option compensation costs cannot
be readily identified to the two business segments; therefore, they are
presented separately in a corporate segment.

         We evaluate segment performance based on gross profit. Resources are
allocated based on contractual requirements, as the Advanced Technology segment
is reimbursed on a cost-plus basis from the various agencies of the U.S.
government. The accounting policies of the reportable segments are the same as
those described in Note 1, "Summary of Significant Accounting Policies." Revenue
is recognized at time of shipment or recognized ratably over the service period
for the Products and Services segment. For Advanced Technology, contract revenue
is recognized on the basis of costs incurred for the government contracts
serviced by Advanced Technology, and intersegment transfers are recorded at
cost; there are no intercompany profits or losses recorded on intersegment
transfers.

         Our reportable segments are business units that offer distinct products
and services to very different customer groups. The reportable segments are each
managed separately because they require different managerial skill sets and are
focused toward different markets.


                                       37
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


10. SEGMENT INFORMATION (CONTINUED)

         Significant components of our segments are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------------------------------------
                                                 Products and    Advanced
                                                   Services     Technology
                                                   Segment        Segment       Corporate       Total
---------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>            <C>
Revenues from external customers ............    $   48,353     $    4,114     $       --     $   52,467
Depreciation expense ........................         2,306             97             30          2,433
Segment gross profit ........................        42,573          1,314             --         43,887
Segment operating loss ......................        (3,881)        (1,733)        (4,226)        (9,840)
Interest income .............................            --             --            870            870
Segment assets ..............................        20,257            760         23,816         44,833
Expenditures for long-lived assets ..........         3,358             19             35          3,412
---------------------------------------------------------------------------------------------------------


<CAPTION>
YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------------------------------------------------------------
                                                 Products and    Advanced
                                                   Services     Technology
                                                   Segment        Segment       Corporate       Total
---------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>            <C>
Revenues from external customers ............    $   34,649     $    4,471     $       --     $   39,120
Depreciation expense ........................         1,826            168             27          2,021
Segment gross profit ........................        25,793          1,433             --         27,226
Segment operating loss ......................       (14,776)        (2,203)        (4,502)       (21,481)
Interest income .............................            --             --          2,311          2,311
Segment assets ..............................        14,791          1,079         29,101         44,971
Expenditures for long-lived assets ..........         3,799             12             47          3,858
---------------------------------------------------------------------------------------------------------


<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------------------------------
                                                 Products and    Advanced
                                                   Services     Technology
                                                   Segment        Segment       Corporate       Total
---------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>            <C>
Revenues from external customers ............    $   22,546     $    4,567     $       --     $   27,113
Depreciation expense ........................         1,300            152             20          1,472
Segment gross profit ........................         7,719            613             --          8,332
Segment operating loss ......................       (27,769)        (4,587)       (12,014)       (44,370)
Interest income .............................            --             --            363            363
Segment assets ..............................        13,170          1,014         11,645         25,829
Expenditures for long-lived assets ..........         1,963             42             29          2,034
---------------------------------------------------------------------------------------------------------
</TABLE>


                                       38
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


10. SEGMENT INFORMATION (CONTINUED)

         International sales accounted for 25%, 19%, and 11% of total revenue
for the years 2001, 2000, and 1999, respectively. Major foreign markets for our
products include Europe and the Pacific Rim. In each country, we have
independent channel partners that are responsible for marketing, selling, and
supporting our products to resellers and end users within their defined
territories.

         The following table summarizes information about our international and
domestic sales and operations:

                                                    YEAR ENDED DECEMBER 31
                                            ------------------------------------
                                                2001         2000         1999
            --------------------------------------------------------------------
            Revenues:
               United States sales ........   $39,192      $31,844      $24,198
               International sales ........    13,275        7,276        2,915
                                            ------------------------------------
                                              $52,467      $39,120      $27,113
                                            ====================================


11. PROFESSIONAL SERVICES

         In March 2000, we sold our Professional Services group to Guardent,
Inc. for net proceeds of $4,296. We have included the gain on this transaction
of $1,617 in other income.

12. LETTER OF CREDIT

         We have a $98 letter of credit agreement with a bank securing certain
sales-leaseback obligations discussed in Note 4, "Leases." This letter of credit
will expire on October 1, 2002. We also have a $380 letter of credit agreement
with a bank securing rental space for our San Jose office. This letter of credit
automatically renews for a one year period each year through March 31, 2008.

13. SUBSEQUENT EVENTS (UNAUDITED)

         On February 23, 2002, we completed our acquisition of the assets of the
Gauntlet(TM) firewall and VPN business from Network Associates Inc.. As a result
of the acquisition, we expect to be the worldwide leader in application-layer
firewalls. The purchase price was 300,354 shares of common stock valued at $5
million. The value of the common shares was determined based on the average
market price of our common shares over the period including the five days before
the terms of the acquisition were agreed to and announced. The transaction will
be accounted for as a purchase in accordance with FASB Statement No. 141,
"Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangible Assets", as described in Note 1, "Summary of Significant Accounting
Policies."


                                       39
<PAGE>


                          SECURE COMPUTING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


14. SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                             -----------------------------------------------------------
                                                MARCH 31       JUNE 30      SEPTEMBER 30    DECEMBER 31
                                             -----------------------------------------------------------
<S>                                             <C>           <C>            <C>             <C>
2001
Net revenue ................................    $ 11,243      $ 12,565       $ 13,494        $ 15,165
Gross profit ...............................       8,655        10,449         11,449          13,334
Net loss ...................................      (4,491)       (3,189)        (1,536)            246
Net loss per share - basic and diluted .....       (0.16)        (0.11)         (0.05)           0.01

2000
Net revenue ................................    $  7,512      $  8,822       $ 10,615        $ 12,171
Gross profit ...............................       4,668         6,139          7,576           8,843
Net loss ...................................      (6,483)       (5,745)        (4,875)         (2,067)*
Net loss per share - basic and diluted .....       (0.27)        (0.23)         (0.19)          (0.08)*
</TABLE>


         *The quarter ended December 31, 2000, includes a $1,617 gain, or $0.06
per share, related to the sale of our Professional Services group to Guardent,
Inc. as described in Note 13. Net loss before the effect of the gain was
$(3,684), or $(0.14) per share.


                                       40
<PAGE>


REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Secure Computing Corporation

We have audited the accompanying consolidated balance sheets of Secure Computing
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Secure
Computing Corporation at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.


                                        /s/ Ernst & Young LLP

Minneapolis, Minnesota
January 18, 2002


                                       41

<PAGE>


         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                  SECURE COMPUTING CORPORATION

Date: March 26, 2002        By /s/ John McNulty
                            -------------------
                            John McNulty
                            Chairman and Chief Executive Officer

POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John McNulty and Timothy Steinkopf or
either of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and re-substitution, for him or her and in his or her
name, place and stead, in any and all capacities to sign any and all amendments
to this Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto the attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that the attorneys-in-fact and agents, or either of them, or
their, his or her substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on March 26, 2002.

Signature                           Title
---------                           -----

   /s/ John McNulty                 Chairman and Chief Executive Officer
--------------------------------    (Principal Executive Officer)
John McNulty

   /s/ Timothy P. McGurran          President and Chief Operating Officer
--------------------------------
Timothy P. McGurran

   /s/ Timothy J. Steinkopf         Senior Vice President and Chief Financial
--------------------------------    Officer (Principal Financial and Accounting
Timothy J. Steinkopf                Officer)

   /s/ Robert J. Frankenberg        Director
--------------------------------
Robert J. Frankenberg

   /s/ James F. Jordan              Director
--------------------------------
James F. Jordan

   /s/ Stephen M. Puricelli         Director
--------------------------------
Stephen M. Puricelli

   /s/ Eric P. Rundquist            Director
--------------------------------
Eric P. Rundquist

   /s/ Alexander Zakupowsky, Jr.    Director
--------------------------------
Alexander Zakupowsky, Jr.


                                       42
<PAGE>


                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                              Additions
                                             Balance at      Charged to
                                             Beginning        Costs and          Less            Balance at
Description                                   of Year         Expenses        Deductions        End of Year
-----------                                  --------         --------        ----------        -----------
<S>                                        <C>              <C>              <C>               <C>
YEAR ENDED DECEMBER 31, 2001:
  Sales return allowance .............     $    904,000     $     31,000     $   (353,000)     $    582,000
  Allowance for doubtful accounts ....          871,000          399,000         (448,000)          822,000
                                          ------------------------------------------------------------------
      Total ..........................     $  1,775,000     $    430,000     $   (801,000)     $  1,404,000
                                          ==================================================================

YEAR ENDED DECEMBER 31, 2000:
  Sales return allowance .............     $    710,000     $    270,000     $    (76,000)     $    904,000
  Allowance for doubtful accounts ....          710,000          347,000         (186,000)          871,000
                                          ------------------------------------------------------------------
      Total ..........................     $  1,420,000     $    617,000     $   (262,000)     $  1,775,000
                                          ==================================================================

YEAR ENDED DECEMBER 31, 1999:
  Sales return allowance .............     $    527,000     $    513,000     $   (330,000)     $    710,000
  Allowance for doubtful accounts ....          900,000          634,000         (824,000)          710,000
                                          ------------------------------------------------------------------
      Total ..........................     $  1,427,000     $  1,147,000     $ (1,154,000)     $  1,420,000
                                          ==================================================================
</TABLE>


                                       43