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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, 2000

                                       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: (800) 379-4944

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

        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, 2001 was $274,640,567 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, 2001, the Registrant had 27,811,703 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, 2001 for the year ended December 31, 2000 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...........23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................23

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..........................................................23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................24

ITEM 11. EXECUTIVE COMPENSATION...............................................24

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......24

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................24

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....25


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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.

         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) exchanges in the world. We have always worked closely
     with these customers, which include major corporations and agencies of the
     United States government, to deliver the utmost in secure access control
     and innovative new features. When our customers buy a Secure Computing
     solution, they are getting the benefit of these relationships and
     experience that no other commercial security vendor can match. We are one
     of the foremost information security companies in the world, with over 20
     years in the industry. Over the years, we invented many of the technologies
     and standards that now underlie information security. In a very literal
     sense, the original basis for securing transactions across computers and
     networks was born 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
     users access business systems, easily, safely, and privately. In answer to
     this challenge, we deliver risk-free, personalized e-business access
     control. 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. Based on the user's identity,
     our products assign a user a role that determines the user's access rights,
     gives the user the entitlement it needs to do business, and logs the user's
     activity. Flexibility in access control is critical, and therefore we give
     our customers the means to personalize access rights and roles as they
     choose. Moreover, businesses no longer have the increased administrative
     burden and infrastructure costs of replicating data for multiple user
     types. 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 e-business relationships. Formerly,
     we were known 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 get the combined value of our access control
     solutions along with "best of breed" products from suppliers such as
     Baltimore, Cisco, Citrix, Checkpoint, Entrust, Ericsson, Intel, Rainbow,
     and so on. Through strategic partnerships with companies such as
     Hewlett-Packard, EDS, and 3Com, our customers get innovative, comprehensive
     solutions. In addition, our reseller partners, including JAWZ, CPS, Protect
     Data, Siosistemi, 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, including:

*    Payment processing, order transmission, supply-chain transaction
     processing, etc.;

*    Remote access from the home to office computer systems and applications;


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*    Branch office access to main office computer systems and applications;

*    E-mail, videoconferencing, data sharing, and other collaborative
     applications;

*    Electronic software distribution; and

*    Mobile computing.

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 fund 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 2000
FBI/Computer Security Institute study found that 70% of information security
professionals surveyed had experienced serious unauthorized use of their
computer systems during the previous year, including theft of secrets, financial
fraud, outsider penetration of security perimeters, denial of service, and
sabotage of data or networks.

         Security has become an issue at the forefront of e-business as nearly
every week stories of security lapses and breaches have made news. While
outsider attacks receive the most publicity, insider threats are a growing
concern. Industry analysts estimate that in-house security breaches account for
over 70% of attacks on corporate computer networks and cause $1 billion in
damage each year to U.S. businesses. Remote employees, partners, customers, and
others who are already inside your 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 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. Equally important to our strategy
is regulating outbound (employee) Internet access control by filtering and
blocking Web sites that are not authorized for employee use. Protecting employee
productivity and limiting organizational liability by managing Internet access
is a bottom-line issue, just as is enabling safe, private e-business.

         Our goal is to help organizations maximize Internet productivity with
the strongest network 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.


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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. But
all of these advantages come with one major caveat: the risk of opening your
company's doors for unlimited business opportunity, while at the same time
making sure your confidential company resources are accessed and used exactly,
and only, in the manner you intend them to be. 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
risk-free, 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 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)and SafeWord Plus(TM)

         In an e-business site, the goal is to make it easy to allow an
unlimited number of users safely into the organization's extranet. To scale to
this kind of environment, it is necessary to authenticate users at the first
point of contact with the network. Secure Computing's authentication solution
family, SafeWord, provides AAA (authentication, authorization, and
accountability) assurance. SafeWord authenticates and authorizes access to
networks, hosts, and applications while accounting for all actions. The SafeWord
family of solutions works and interoperates with a wide variety of industry
authentication methods, including hardware tokens, software tokens on personal
computers, mobile phones and personal digital assistants (PDAs), and passwords.

         Built on the foundation of AAA, SafeWord Plus provides access control
solutions in the Public Key Infrastructure (PKI) arena, by integrating with
market-leading certificate authority solutions. SafeWord Plus includes a Virtual
Smart Card server for organizations that have not deployed smart card readers
but need to support smart card-enabled applications with all of the safety and
benefits of smart cards. For companies that have chosen to deploy and work with
digital certificates, SafeWord Plus interoperates with certificates from
prominent third-party vendors such as Entrust, Baltimore, and Netegrity. We've
found that customers often want a hybrid of authentication solutions, and
therefore, SafeWord Plus supports the use of just about every authenticator
method - from hardware and software tokens to biometrics. SafeWord Plus also
incorporates extensive manageability advancements - such as a Web
self-enrollment screen that allows administrators to set up accounts so users
can enroll themselves, with all the proper entitlements and privileges engaged.

         E-business solutions are increasingly based on Web access to business
information systems. For this reason, SafeWord includes a variety of Web Access
Control Agents for such market-leading Web servers as Microsoft, iPlanet, and
Apache. In addition, SafeWord includes access control agents for virtual private
network (VPN) environments including Citrix and any RADIUS standard VPN products
from vendors such as Nortel, Checkpoint, Alcatel, and Cisco. The SafeWord
Authenticator system development kit (SDK) provides a complete package of tools
that can be used to easily construct access control agents for custom and
proprietary applications. SafeWord agents enable authentication, authorization,
and access activity logging for accountability.

*    Sidewinder(TM)

         Sidewinder is the industry's most secure and scalable VPN gateway and
application firewall. It differs from other solutions because it is built upon
the highly secure and optimized SecureOS(TM) operating system, based on Secure
Computing's patented Type Enforcement(TM) technology. Sidewinder is easily
managed whether stand-alone or in clusters for larger installations. Its
management console promotes easy administration and push-button configuration
whether administered locally or remotely. Sidewinder addresses critical Internet
security threats, providing a level of protection that competing products cannot
match. The System Administration, Networking, and Security Institute (SANS), a
cooperative research organization dealing with information security issues,
released a list in 2000 of the top 10 Internet security threats faced by most
enterprises today. Providing protection at the application level, Sidewinder
addresses each and all of these vulnerabilities.

         Sidewinder is designed for maximum performance and scalability.
Multiple Sidewinder firewalls can be clustered together, providing load
balancing and high availability. In addition, Sidewinder is the first enterprise
firewall to commercially


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integrate and dynamically configure the Intel(R) Internet Exchange(TM) (IX)
architecture using the Intel Policy Accelerator 100 card, increasing throughput
and performance by offloading traffic filtering from the main processors to the
specialized PA-100 hardware.

*    SmartFilter(TM)

         SmartFilter protects employee productivity by regulating access to Web
sites on the Internet using a network-based universal resource locator (URL)
filtering approach. The SmartFilter application provides easy-to-use
administration and policy management features. The SmartFilter control list is a
database of millions of URLs that represent inappropriate Web sites and that are
categorized by type of site such as pornography, sports, online gaming, etc.
SmartFilter works in conjunction with market-leading proxy servers such as
Microsoft and with caching servers such as Network Appliances and CacheFlow.

         SmartFilter lets organizations select from 30 predefined categories of
URLs to be filtered, but also provides flexibility by allowing administrators to
add their own customized categories of restricted URLs. URL filtering can be set
to block the users, to coach them, and to permit them to access the Web site at
a different time or at a slower response rate, thereby conserving network
capacity. Policies provide the ability to block by file type, personal pages,
time of day, day of week, search engine words and phrases, and URLs defined as
IP addresses. Administrators can use the comprehensive policies that come with
SmartFilter, or they can create their own policies. SmartFilter is available
with Wavecrest Computing's Cyfin(R) Reporter for SmartFilter. This scalable,
easy-to-use application lets organizations audit and analyze outbound Web usage
activity, providing both detailed and summary management reports.

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
implementation services, training services, and support and maintenance
services.

*    Network and Security Services

         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-commerce assessment and implementation recommendation; and

         *    Executive security awareness/status briefings.

         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 around the world for customers and partners. These
services help our customers and partners configure, integrate, and maintain our
products as part of a comprehensive e-business solution.


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*    SecureSupport(TM)

         We have enhanced our SecureSupport services significantly in the past
year, tailoring our support process to meet the needs of our many different
users. SecureSupport has a team of experts that provide customer support via
e-mail, the Web, or phone. 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.

         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 product FAQs, a searchable knowledge base, 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. When necessary, 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 U.S. government,
including the Defense Advanced Research Projects Agency (DARPA), the National
Security Agency (NSA), and the Department of Energy (DOE). 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 (DD) 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 U.S. 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 U.S. 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.

SALES

         We sell our products and services through both indirect and direct
channels, using a worldwide sales organization of approximately 72 individuals
as of March 15, 2001. For 2000, sales to major end users comprised 60% of total
product sales, while indirect channel sales comprised the remaining 40%.
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 conflicts and allow the customer to decide how best to acquire
our products. In this model, our direct sales teams work closely with our
channel partners to ensure that the customers are more than satisfied. Whether
the customer buys our product or service from a Secure Computing salesperson or
from a channel partner salesperson, both salespeople are compensated for the
same deal. As a software vendor, our goal is to make sure that our applications
are successfully implemented by our customers.


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

         International sales accounted for 19% of total revenue during 2000.
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)                                              2000              1999                1998
----------------------------------------------------------------------------------------------------------
<S>                                                       <C>                <C>                 <C>
REVENUES:
   United States Products and Services sales...           $ 27,373           $ 19,631           $ 36,522
   International Products and Services sales...              7,276              2,915             14,978
   Advanced Technology contracts...............              4,471              4,567              9,942

                                                     -----------------------------------------------------
                                                          $ 39,120           $ 27,113           $ 61,442
                                                     =====================================================
</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. As of
March 15, 2001, we had approximately 38 marketing employees.

         We use comprehensive targeted marketing programs to generate sales
leads and brand awareness. Programs include:

*    Direct marketing;

*    Web marketing;

*    Advertising;

*    Seminars;

*    Trade shows; and

*    Ongoing customer, channel, and partner communications programs.

         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, providing white papers, newsletters, and technical notes. Several of our
senior technical staff contribute articles to industry periodicals, 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 their products 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
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 e-business access control products is intensely
competitive and characterized by rapid technological change. While we are early
to market, we believe that competition in this market is likely to persist and
to intensify as a result of


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increasing demand for e-business 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.;

*    Netegrity Inc.;

*    Network Associates, Inc.;

*    RSA Security, Inc.;

*    Symantec Corporation; and

*    Websense, Inc.

         In the future, we may also face competition from these and other
parties that develop or acquire e-business 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 e-business 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 substantial 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, 2001 was approximately $3.7 million, compared to $3.4 million as of February
29, 2000. 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, 2001, approximately $2.4 million of our government
contract backlog was funded, compared to $3.0 million as of February 29, 2000.

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 computerss,
computer peripherals, memory disk drives, and storage devices).


                                       8
<PAGE>


         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 79 engineering
employees at March 15, 2001, 18 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 IP Security Option (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 DOE, 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 23 patents and have 15 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, U.S. 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.

         We have received or applied for trademark protection in the United
States for our Secure Computing, SafeWord, SecureOS, SecureSupport, Sidewinder,
SmartFilter, 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


                                       9
<PAGE>


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, 2001, Secure Computing had approximately 353 mployees.
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, 2001 are as
follows:

      DIRECTORS         AGE       POSITION WITH SECURE COMPUTING CORPORATION
---------------------  -----  --------------------------------------------------
John McNulty            54    Chief Executive Officer and Chairman of the Board
Timothy McGurran        38    President and Chief Operating Officer
Carr Biggerstaff        45    Senior Vice President of Marketing, Business
                              Development, and Strategic Planning
Timothy J. Steinkopf    39    Vice President and Chief Financial Officer

         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.
McGrrran 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.

         CARR BIGGERSTAFF has been the Senior Vice President of Marketing,
Business Development, and Strategic Planning since July 6, 1999. From 1995 to
1997, Mr. Biggerstaff was Chief Information Officer and Vice President of
Strategic Programs at Genesys Telecommunications Laboratories. He has been the
senior Information Technology executive for both services and manufacturing
companies, a consulting manager with Arthur Andersen, the manager for emerging
technologies in the Enterprise Server Group at Intel, and the vice president of
a sales and marketing agency.

         TIMOTHY J. STEINKOPF is our 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 on March 5, 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.

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

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 ARE EXPERIENCING OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY.
We have incurred losses in the past. For example, for the quarter ended December
31, 2000, we had an operating loss of $3.9 million, and for the 12 months ended
December 31, 2000, we had an operating loss of $21.5 million. We expect to
continue to incur losses for at least the next three quarters. We may continue
to incur losses thereafter. If these losses continue, our stock price may
decline, which could cause you to lose part or all of your investment.

         IF OTHER SOURCES OF FINANCING ARE NOT AVAILABLE, WE MAY NOT HAVE
SUFFICIENT CASH TO SATISFY WORKING CAPITAL REQUIREMENTS. On January 26, 2000 and
June 30, 2000, we entered into agreements with Elliott International, L.P.
(formerly known as Westgate International, L.P.) that allowed us to raise
capital by selling preferred stock to Elliott International, L.P. and/or its
sister fund, Elliott Associates. As of


                                       10
<PAGE>


the date of this report, we have sold all of the stock that we had the right to
sell under those agreements. We believe, however, that our current cash balances
are sufficient to satisfy our working capital requirements through the fourth
quarter of 2001, when we expect to become cash flow positive. We may need to
obtain additional financing at that time or sooner if our plans change or if we
expend cash sooner than anticipated.

         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.;

*    Network Associates, Inc.;

*    RSA Security, Inc.;

*    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, 3Com Corporation, Cisco Systems,
Inc., 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.

         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.


                                       11
<PAGE>


         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 LINE IS NOT DIVERSIFIED, 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.
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;

*    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 changes, mix of products sold;

*    Changes in product pricing and development of our direct and indirect
     distribution channels; and

*    Costs incurred when anticipated sales do not occur.

         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


                                       12
<PAGE>


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.

         UNDER THE TERMS OF OUR FINANCINGS, WE MAY BE REQUIRED TO MAKE
COMPENSATORY PAYMENTS WHICH WOULD MATERIALLY AFFECT OUR CASH POSITION AND
BUSINESS. Under the terms of the agreement with the holders of common stock
issued upon conversion of our Series C preferred stock, we are subject to a
number of ongoing obligations. For example, our stock must be quoted on the
NASDAQ stock market or listed on the New York Stock Exchange or the American
Stock Exchange. Additionally, we must maintain the effectiveness of the
registration statement covering the resale of the common stock issued upon
conversion of the Series C preferred stock. If we fail to satisfy our ongoing
obligations, we are subject to compensatory payments. The potential compensatory
payments generally consist of a cash payment equal to 1.5% per month of the
stated value of the Series C preferred stock and/or a downward adjustment to the
conversion price of the Series C preferred stock. For example, in September
1999, one of our holders of Series C preferred stock claimed that we were not in
compliance with our obligations. We issued 42,100 shares of common stock in full
satisfaction of this claim. The risk to us is that if the holders of any of the
common stock issued upon conversion of the Series C preferred stock are
successful in imposing such compensatory payments, our cash could be depleted,
and/or our stockholders could be diluted by the issuance of additional stock.

         In addition, we may also be required to make compensatory payments
which would materially affect our cash position and business under the terms of
our Series F preferred stock financing. Under the terms of the agreements with
Elliott International and Elliott Associates, we are subject to a number of
ongoing obligations. For example, our stock must be quoted on the NASDAQ stock
market and the registration statements covering the resale of the common stock
issued or issuable upon conversion of the preferred stock must be effective. If
we fail to satisfy our ongoing obligations, we are subject to compensatory
payments. The potential compensatory payments generally consist of a cash
payment equal to approximately 1% of the purchase price of the preferred stock
for the first 30 days that we fail to satisfy our obligations and 2% for each
30-day period thereafter. The risk to us is that if a stockholder is successful
in imposing such compensatory payments, our cash could be depleted.

         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 23% of our
products and services revenue in 2000. 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 respecting 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 1999, 11% of our total sales came from international sales. For fiscal year
2000, 19% 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;

*    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 13,000 square feet of
office space in San Jose, California. As of April 1, 2001, we will be moving to
approximately 11,000 square feet of new office space in San Jose, California.
The annual rent for the new facility is approximately $650,000. 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 $847,000. We
have a research facility located in Concord, California, that occupies
approximately 23,000 square feet at an annual cost of $388,000. We occupy these
premises under leases expiring at various times through the year 2006. 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 $164,000. We also have
foreign offices in London, England; Sydney, Australia; Munich, Germany; Paris,
France; Singapore; and Hong Kong, with an annual cost of approximately $224,000.

ITEM 3. LEGAL PROCEEDINGS

         On April 2, 9, 12, 14 and 20, 1999, purported class action complaints
were filed in the United States District Court for the Northern District of
California by Myron Goldstein, Herbert Silverberg, William Preiner, Charles
McInnis, and George H. Rosenquist and Melvin Freedenberg, respectively, against
the Company, and certain of its officers and directors. Each complaint alleges
that defendants made false and misleading statements about the Company's
business condition and prospects during a purported class period of November 10,
1998 - March 31, 1999, and asserts claims for violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Each complaint
seeks damages of an unspecified amount. By stipulated Order dated August 19,
1999, the Court consolidated these actions, appointed lead plaintiffs, and
approved the retention of lead counsel. On August 18, 2000, plaintiffs served an
First Amended Complaint. Defendants' motion to dismiss that Complaint is now
pending.

         There has been no discovery to date, and no trial is scheduled in any
of these actions. We believe that we have meritorious defenses to these actions
and intend to defend them vigorously. However, if we do not obtain a favorable
resolution of the claims set forth in the actions, it could have a material
adverse effect on our business, results of operations, and financial condition.
We are currently unable to reasonably estimate the size or impact of such
material adverse effect.

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, 2000.


                                       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, 2001, there were approximately 246 registered holders. 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 13,000 beneficial
owners. The low price and high price of our common stock during the last eight
quarters are as follows:

--------------------------------------------------------------------------------
                                                      Low Price     High Price
--------------------------------------------------------------------------------
1999
Quarter ended March 31, 1999.....................       $9.94          $29.00
Quarter ended June 30, 1999......................       $2.25           $6.75
Quarter ended September 30, 1999.................       $2.31           $4.75
Quarter ended December 31, 1999..................       $2.56          $14.38
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------


         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.

SALE OF SECURITIES

         In February 2000, we sold 8,750 shares of Series E preferred stock to
Elliott International. In June 2000, we sold an additional 8,750 shares of the
Series E preferred stock to Elliott International.

         As of December 31, 2000 all outstanding shares of the Series E
preferred stock had been converted into 1,596,618 shares of common stock.

         In June 2000, we entered into a Put and Call Agreement with Elliott
International that provides for the sale of up to 15,250 shares of Series F
preferred stock to Elliott International at $1,000 per share. In August 2000,
Elliott International assigned, and 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 Series preferred stock. In December 2000, we sold to each of
Elliott International and Elliott Associates an additional 5,000 shares of the
Series F preferred stock.

         As of December 31, 2000 7,550 shares of the Series F preferred stock
had been converted to into 516,584 shares of common stock, leaving 7,700
outstanding shares of Series E preferred shares.

         The Series F preferred stock is convertible at the election of the
holder into shares of common stock. Each share of Series F preferred stock has a
face value of $1,000 and is convertible, at the election of the holder, into
that number of shares of our common stock equal to $1,000 divided by the
conversion price. The conversion price is equal to the lower of (i) an amount
equal to 20% above the average closing price of our common stock for a five day
trading period before the date that notice was given to sell


                                       16
<PAGE>


the Series F preferred stock (or, if lower in the event of a put by us, 20%
above the average closing price of our common stock for a five day trading
period after the date that notice is given to sell the Series F preferred
stock); and (ii) an amount equal to the average of the two lowest daily trading
prices for the 12 trading days before the day of conversion.

         The conversion price of the Series F preferred stock is subject to
modification and adjustment, for example, in connection with the stock splits,
distributions and certain issuances of securities below the then existing
conversion price.

         The Series F preferred stock is also subject to mandatory conversion
into common stock four months after the registration statement covering the
resale of the common stock issuable upon conversion of the Series F preferred
stock becomes effective. Mandatory conversion will be deferred, however, under
certain circumstances.

         Additionally, the holders of the Series F preferred stock are not
obligated to convert the Series F preferred stock into common stock unless all
conditions are satisfied.

         As of March 15, 2001 an additional 7,606 shares of the Series F
preferred stock had been converted into 1,040,178 shares of common stock,
leaving outstanding 94 shares of Series F preferred stock.

ITEM 6. SELECTED FINANCIAL DATA

         The consolidated statement of operations data set forth below for the
fiscal years ended December 31, 2000, 1999, and 1998, and the consolidated
balance sheet data at December 31, 2000 and 1999, 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, 1997 and 1996, and the consolidated balance sheet data at
December 31, 1998, 1997, and 1996, 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)
                                                         2000         1999*           1998            1997           1996
                                                   -----------------------------------------------------------------------
<S>                                                   <C>           <C>            <C>             <C>            <C>
STATEMENT OF OPERATIONS DATA:

  Revenue:
     Products and services..................         $ 34,649      $ 22,546       $ 51,500        $ 33,203       $ 23,290
     Advanced Technology contracts .........            4,471         4,567          9,942          13,773         16,972
                                                   -----------------------------------------------------------------------
         Total revenue .....................           39,120        27,113         61,442          46,976         40,262
  Gross profit .............................           27,226         8,332         41,290          28,210         21,465
  Acquisition costs ........................               --            --             --              --         13,069
  Operating loss............................          (21,481)      (44,370)        (4,933)         (5,734)       (26,473)
  Net loss .................................          (19,170)      (44,907)        (3,262)         (4,251)       (25,094)
  Net loss per share:
                  Basic and diluted ........            (0.76)        (2.32)         (0.20)          (0.27)         (1.76)

BALANCE SHEET DATA:

   Working capital .........................         $ 21,517      $  7,297       $ 34,017        $ 17,175       $ 18,886
   Total assets ............................           44,971        25,829         54,348          31,054         37,775
   Long-term debt, less current
       portion and redeemable
       convertible preferred stock .........               --            --             --              --             --
   Stockholders' equity ....................           30,626        15,277         43,053          24,800         26,232
</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, 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.

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
                                               -------------------------------------------
                                                      2000           1999*          1998
                                               -------------------------------------------
<S>                                                  <C>            <C>            <C>
         Revenue:
               Products and Services                  88.6%          83.2%          83.8%
               Advanced Technology contracts          11.4           16.8           16.2
                                               -------------------------------------------
               Total revenue                         100.0          100.0          100.0
         Cost of revenue                              30.4           69.3           32.8
                                               -------------------------------------------
               Gross profit                           69.6           30.7           67.2
         Operating expenses:
                 Selling and marketing                79.7          109.6           38.8
                 Research and development             33.3           40.5           12.2
                 General and administrative           11.5           26.8            8.1
                 Stock option expense                   --           17.5            3.5
                 Restructure expense                    --             --           12.7
                                               -------------------------------------------
               Total operating expenses              124.5          194.4           75.3
                                               -------------------------------------------
               Operating loss                        (54.9)        (163.7)          (8.1)
                 Interest and other income             5.9            1.3            0.8
                                               -------------------------------------------
                 Loss before income taxes            (49.0)        (162.4)          (7.3)
                 Income tax benefit (expense)           --           (3.3)           2.0
                                               -------------------------------------------
              Net loss                               (49.0)%       (165.7)%         (5.3)%
                                               ===========================================
</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. These expenses
relate to rationalizing our product line, refocusing on e-commerce products, and
streamlining our executive management structure. 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, 2000 AND 1999.

         REVENUE. Our revenue increased 44.3% to $39,120,000 in 2000, up from
$27,113,000 in 1999. Products and Services revenue was $34,649,000, 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. We expect 2001 revenue from Products and Services
to grow 45% to 50% over 2000. Advanced Technology contract revenue was
$4,471,000, 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. We expect 2001 revenue from Advanced Technology contracts to remain
at levels comparable to 2000.

         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. We believe that aggregate gross margin will ramp up until stabilizing at
approximately 80% as products and services revenues increase.

         SELLING AND MARKETING. Selling and marketing expense increased 5.0% to
$31,187,000 in 2000, up from $29,705,000 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
$31,187,000 in 2000, up from $25,658,000 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. We expect selling and marketing expense levels to increase on
an actual dollar basis but to continue to decline as a percent of revenue for
the full year 2001 when compared to 2000, as we strengthen our presence in
Europe and the Pacific Rim while supporting new product launches.

         RESEARCH AND DEVELOPMENT. Research and development expense increased
18.5% to $13,018,000 in 2000, up from $10,983,000 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 $13,018,000 in
2000, up from $10,702,000 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 product development, including our Distributed Secure
Architecture product line. For the full year


                                       19
<PAGE>


2001, we expect research and development expenses to increase on an actual
dollar basis but to continue to decline as a percent of revenue when compared
2000.

         GENERAL AND ADMINISTRATIVE. General and administrative expense
decreased 38.1% to $4,502,000 in 2000, down from $7,274,000 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 $4,502,000 in
2000, down from $5,473,000 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. We expect general and
administrative expense levels as a percent of revenue to decline for the full
year 2001, while the dollar levels will increase slightly compared to 2000.

         INTEREST AND OTHER INCOME. Net interest and other income was $2,311,000
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, which total $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.

COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998

         REVENUE. Our revenue decreased 55.9% to $27,113,000 in 1999, down from
$61,442,000 in 1998. Products and Services revenue was $22,546,000, a decrease
of 56.2% over 1998, and reflects delays in purchasing decisions based on "Year
2000" concerns and lengthening of sales cycles. Advanced Technology contract
revenue was $4,567,000, a decrease of 54.1% from 1998, which reflects a reduced
focus on government contract business that does not complement our Products and
Services offerings.

         GROSS PROFIT. Gross profit as a percentage of revenue decreased from
67.2% in 1998 to 30.7% in 1999. Excluding significant charges related to
discontinued products, total gross profit as a percentage of revenue decreased
from 67.2% in 1998 to 48.1% of revenue in 1999. The decrease resulted primarily
from reduced volumes and relatively fixed manufacturing and amortization costs.

         SELLING AND MARKETING. Selling and marketing expense increased 24.7% to
$29,705,000 in 1999, up from $23,821,000 in 1998. As a percentage of revenue,
selling and marketing expense was 109.6% for the year compared to 38.8% in 1998.

         Excluding significant charges resulting from discontinued product
activities and severance pay associated with the streamlining of our management
structure, selling and marketing expense increased 7.7% to $25,658,000 in 1999,
up from $23,821,000 in 1998. As a percentage of revenue, selling and marketing
expense was 94.6% for the year compared to 38.8% in 1998. The increased spending
levels resulted primarily from increased discretionary marketing efforts.

         RESEARCH AND DEVELOPMENT. Research and development expense increased
46.9% to $10,983,000 in 1999, up from $7,477,000 in 1998. As a percentage of
revenue, research and development expense was 40.5% for the year compared to
12.2% in 1998.

         Excluding significant charges mainly for employee relocation expense,
research and development expense increased 43.1% to $10,702,000 in 1999, up from
$7,477,000 in 1998. As a percentage of revenue, research and development expense
was 39.5% for the year compared to 12.2% in 1998. The increased spending levels
resulted primarily from increased investment in our next generation flagship
products.


                                       20
<PAGE>

         GENERAL AND ADMINISTRATIVE. General and administrative expense
increased 46.5% to $7,274,000 in 1999, up from $4,965,000 in 1998. As a
percentage of revenue, general and administrative expense was 26.8% for the year
compared to 8.1% in 1998.

         Excluding significant charges mainly for severance pay associated with
the streamlining of our management structure and litigation settlements, general
and administrative expense increased 10.2% to $5,473,000 in 1999, up from
$4,965,000 in 1998. As a percentage of revenue, general and administrative
expense was 20.2% for the year compared to 8.1% in 1998. The increased spending
levels resulted primarily from duplicative executive compensation during our
chief executive officer transition period and increased legal fees related to
legal proceedings.

         STOCK OPTION COMPENSATION EXPENSE. The stock option compensation
expense in 1999 and 1998 reflects vesting by a certain portion of
performance-based options triggered by stock price targets being met.

         RESTRUCTURE COSTS. In the first quarter of 1998, we announced plans to
implement a restructuring plan designed to facilitate further integration of
acquired businesses and recorded a pretax expense of $7.8 million to account for
these actions, which include costs of lease terminations, streamlining our
product offerings, and reducing our cost structure to increase operational
efficiency. The plan resulted in the separation of some employees worldwide and
the closing of certain facilities.

         INTEREST AND OTHER INCOME. Net interest and other income was $363,000
in 1999, a decrease from $474,000 in 1998. The decrease reflects lower average
cash and investment balances in 1999 as compared to 1998.

         INCOME TAX BENEFIT. We recognized income tax expense in 1999 of
$900,000 compared to an income tax benefit of $1,197,000 in 1998. The expense is
a result of decreasing the amount of our deferred tax assets based on reduced
projected taxable income. We believe it is more likely than not that deferred
tax assets, which total $2.7 million at December 31, 1999, 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 $85.5 million at December 31, 1999. Of these carryforwards, $15.4
million relates to stock option exercises. As these deductions are realized, the
benefit will not reduce income tax expense; rather, it will be recorded as
additional paid-in capital. Of the remaining benefit associated with the
carryforwards, approximately $63.1 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 increased by
approximately $17 million from 1999 to 2000. The increase resulted primarily
from the gross proceeds of $32,750,000 from four preferred stock sales offset by
the use of cash to fund operations and purchase capital equipment. As of
December 31, 2000, we had working capital of $21.5 million. We anticipate using
available cash to fund growth in operations, invest in capital equipment,
acquire businesses, and license technology or products related to our line of
business.

         Capital additions were $3.6 million, $2.3 million, and $2.0 million for
the years ended December 31, 2000, 1999, and 1998, 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 through
the fourth quarter of 2001, at which time we expect to be cash flow positive.

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.


                                       21
<PAGE>


FORWARD-LOOKING STATEMENTS

         Certain statements made above, which are summarized below, 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 identified below:

*    WE EXPECT 2001 REVENUE FROM PRODUCTS AND SERVICES TO GROW 45% TO 50%
     OVER 2000. We may be unable to meet this expectation for a variety of
     reasons, including general market conditions for our products and services,
     delays, or difficulties in the development, inability to obtain market
     acceptance of our new products, and introduction of products by
     competitors.

*    WE EXPECT 2001 REVENUE FROM ADVANCED TECHNOLOGY CONTRACTS TO REMAIN AT
     LEVELS COMPARABLE TO 2000. Meeting this expectation depends on our ability
     to maintain the current government contract revenues, which might not occur
     for a variety of reasons, including an inability to staff engineers to its
     current contract requirements or customer delays or cancellations of
     contract awards.

*    WE BELIEVE THAT AGGREGATE GROSS MARGIN WILL RAMP UP UNTIL STABILIZING AT
     APPROXIMATELY 80% AS PRODUCTS AND SERVICES REVENUES INCREASE. Meeting this
     expectation depends upon our ability to achieve a higher level of Products
     and Services revenue. We may be unable to meet this expectation for a
     variety of reasons, including general market conditions for our products
     and services, delays or difficulties in the development, inability to
     obtain market acceptance of our new products, and introduction of products
     by competitors.

*    WE EXPECT SELLING AND MARKETING EXPENSE LEVELS TO INCREASE ON AN ACTUAL
     DOLLAR BASIS BUT TO CONTINUE TO DECLINE AS A PERCENT OF REVENUE FOR THE
     FULL YEAR 2001 WHEN COMPARED TO 2000, AS WE STRENGTHEN OUR PRESENCE IN
     EUROPE AND THE PACIFIC RIM WHILE SUPPORTING NEW PRODUCT LAUNCHES. This
     expectation depends on us maintaining the current anticipated level of
     selling and marketing expenses, which may not occur due to unexpected
     increases in such costs or because of a need to accelerate a full-scale
     product marketing and branding campaign or decreased products and services
     revenue resulting in lower selling expense. Fluctuations in revenue from
     quarter to quarter will likely have an increasingly significant impact on
     our results of operations. Additionally, meeting this expectation depends
     upon our ability to control costs and achieve a higher level of revenue.
     This expectation may not occur for a variety of reasons, including general
     market conditions for our products and services, development and acceptance
     of our new products, and introduction of products by competitors.

*    FOR THE FULL YEAR 200,1 WE EXPECT RESEARCH AND DEVELOPMENT EXPENSES TO
     INCREASE ON AN ACTUAL DOLLAR BASIS BUT TO CONTINUE TO DECLINE AS A PERCENT
     OF REVENUE WHEN COMPARED TO 2000. This expectation depends on us
     maintaining the current anticipated level of product development, which may
     not occur due to unexpected increases in such costs or because of a need to
     accelerate or begin new product development. Fluctuations in revenue from
     quarter to quarter will likely have an increasingly significant impact on
     our results of operations. Additionally, meeting this expectation depends
     upon our ability to control costs and achieve a higher level of revenue.
     This expectation may not occur for a variety of reasons, including general
     market conditions for our products and services, development and acceptance
     of our new products, and introduction of products by competitors.

*    WE EXPECT GENERAL AND ADMINISTRATIVE EXPENSE LEVELS AS A PERCENT OF REVENUE
     TO DECLINE FOR THE FULL YEAR 2001, WHILE THE DOLLAR LEVELS WILL INCREASE
     SLIGHTLY COMPARED TO 2000. This expectation depends on us to maintain the
     current anticipated level of spending, which may not occur due to
     unexpected increases in such costs.

*    WE BELIEVE IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS, WHICH TOTAL
     $2.7 MILLION AT DECEMBER 31, 2000, WILL BE REALIZED. This expectation
     depends primarily on our estimates of future taxable 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 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. WE BELIEVE THAT WE HAVE
     SUFFICIENT FINANCIAL RESOURCES AVAILABLE TO FUND OUR CURRENT WORKING
     CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS THROUGH THE FOURTH QUARTER OF
     2000, AT WHICH TIME WE EXPECT TO BE CASH FLOW POSITIVE. Several factors may
     affect the availability of sufficient cash resources to fund our product
     development and marketing and sales plans through the fourth quarter of
     2000, including:

          *    OUR ABILITY TO GENERATE REVENUE AS CURRENTLY EXPECTED;

          *    UNEXPECTED EXPENSES;


                                       22
<PAGE>


          *    THE NEED FOR ADDITIONAL FUNDS TO REACT TO CHANGES IN THE
               MARKETPLACE;

          *    UNEXPECTED INCREASES IN PERSONNEL COSTS;

          *    UNEXPECTED INCREASES IN SELLING AND MARKETING EXPENSES; OR

          *    CURRENTLY UNPLANNED ACQUISITIONS.

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.


                                       23
<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) Reporting," in the Registrant's Proxy
Statement to be filed on or about April 9, 2001. 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 9, 2001, under the headings "Election of Directors - Committees of the
Board of Directors and Meeting Attendance," "Executive Compensation," "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 9, 2001.

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 9, 2001.


                                       24
<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, 2000 and 1999
               Consolidated Statements of Operations for the years ended
                    December 31, 2000, 1999, and 1998
               Consolidated Statement of Stockholders' Equity for the years
                    ended December 31, 2000, 1999, and 1998
               Consolidated Statements of Cash Flows for the years ended
                    December 31, 2000, 1999, and 1998
               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, 2000.

(c) EXHIBITS:

       The following exhibits are filed as part of this Annual Report on Form
10-K for the fiscal year ended December 31, 2000:

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, 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           Registration Rights Agreement dated June 30, 1998. (4)
4.3           Warrant to Purchase Shares of Common Stock dated June 30, 1998.(5)
4.4           Amended and Restated Rights Agreement dated October 22, 1998.(6)
4.5           Amended and Restated 1995 Omnibus Stock Plan. (7)
4.6           Common Stock Investment Agreement between Manchester Securities
              Corporation and Secure Computing Corporation dated as of October
              4, 1999. (8)
4.7           Warrant to purchase common stock dated October 5, 1999. (9)
4.8           Preferred Stock Investment Agreement between Westgate
              International, L.P. and Secure Computing Corporation dated
              December 17, 1999. (10)
4.9           Put and Call Agreement between Westgate International, L.P. and
              Secure Computing Corporation dated January 26, 2000. (11)
4.10          Put and Call Agreement between Westgate International, L.P. and
              Secure Computing Corporation dated June 30, 2000. (12)


                                       25
<PAGE>



10.1          Registration Rights Agreement between Manchester Securities
              Corporation and Secure Computing Corporation dated as of October
              4, 1999. (13)
10.2          Registration Rights Agreement between Westgate International, L.P.
              and Secure Computing Corporation dated December 17, 1999. (14)
10.3          Registration Rights Agreement between Westgate International, L.P.
              and Secure Computing Corporation dated June 30, 2000. (16)
23.1          Consent of Ernst & Young LLP.

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

(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 Exhibit 10.2 to Secure
              Computing's Form 8-K filed on July 15, 1998.

(5)           Incorporated herein by reference to Exhibit 10.3 to Secure
              Computing's Form 8-K filed on July 15, 1998.

(6)           Incorporated herein by reference to Exhibit 1 to Secure
              Computing's Form 8-K filed on November 9, 1998.

(7)           Incorporated herein by reference to Exhibit 4.7 to Secure
              Computing's Registration Statement on Form S-8 dated February 5,
              1999.

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

(9)           Incorporated herein by reference to the Exhibit 10.2 to Secure
              Computing's Current Report on Form 8-K filed on October 8, 1999.

(10)          Incorporated herein by reference to Exhibit 10.1 to Secure
              Computing's Form 8-K filed on February 9, 2000.

(11)          Incorporated herein by reference to Exhibit 10.2 to Secure
              Computing's Form 8-K filed on February 9, 2000.

(12)          Incorporated herein by reference to Exhibit 4.2 to Secure
              Computing's Registration Statement on Form S-3 filed on August 4,
              2000.

(13)          Incorporated herein by reference to Exhibit 10.3 to Secure
              Computing's Current Report on Form 8-K filed on October 8, 1999.

(14)          Incorporated herein by reference to Exhibit 10.3 to Secure
              Computing's Form 8-K filed on February 9, 2000.

(15)          Incorporated herein by reference to Exhibit 10.4 to Secure
              Computing's Form 8-K filed on February 9, 2000.

(16)          Incorporated herein by reference to Exhibit 4.2 to Secure
              Computing's Registration Statement on Form S-3 filed on August 4,
              2000.


                                       26
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                DECEMBER 31, DECEMBER 31,
                              ASSETS                                                2000         1999
                                                                                 ---------    ---------
<S>                                                                              <C>          <C>
CURRENT ASSETS
            Cash and cash equivalents ........................................   $  12,496    $   3,678
            Investments ......................................................      13,831        5,212
            Accounts receivable, (net of allowance for doubtful
            accounts of 2000 -- $871; 1999 -- $710) ..........................       6,762        5,417
            Deferred income taxes ............................................         690          720
            Inventories ......................................................         630          828
            Other current assets .............................................       1,453        1,994
                                                                                 ---------    ---------
              Total current assets ...........................................      35,862       17,849

PROPERTY AND EQUIPMENT
            Equipment ........................................................      10,907        8,698
            Furniture and fixtures ...........................................       2,141        2,102
            Leasehold improvements ...........................................       1,242        1,061
                                                                                 ---------    ---------
                                                                                    14,290       11,861
            Accumulated depreciation .........................................      (8,632)      (7,646)
                                                                                 ---------    ---------
                                                                                     5,658        4,215
INTANGIBLE ASSETS (net of accumulated amortization of 2000 -- $1,266;
1999 -- $706) ................................................................       1,279        1,611
DEFERRED INCOME TAXES ........................................................       2,010        1,980
OTHER ASSETS .................................................................         162          174
                                                                                 ---------    ---------
            TOTAL ASSETS .....................................................   $  44,971    $  25,829
                                                                                 =========    =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
            Accounts payable .................................................   $   2,950    $   3,198
            Accrued payroll ..................................................       3,767        2,208
            Other accrued expenses ...........................................       1,378        1,364
            Deferred revenue .................................................       6,250        3,782
                                                                                 ---------    ---------
              Total current liabilities ......................................      14,345       10,552

STOCKHOLDERS' EQUITY
            Convertible preferred stock, par value $.01 per share:
              Authorized -- 2,000,000 shares; issued and outstanding shares -
              December 31, 2000 - 7,700 and December 31, 1999 - 5,706 ........          --           --

            Common stock, par value $.01 per share:
              Authorized - 50,000,000 shares; issued and outstanding shares --
              December 31, 2000 - 26,675,230 and
              December 31, 1999 - 23,022,884 .................................         267          230
            Additional paid-in capital .......................................     141,484      106,832
            Accumulated deficit ..............................................    (110,717)     (91,547)
            Accumulated other comprehensive loss .............................        (408)        (238)
                                                                                 ---------    ---------
              Total stockholders' equity .....................................      30,626       15,277
                                                                                 ---------    ---------
              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .....................   $  44,971    $  25,829
                                                                                 =========    =========
</TABLE>

                             SEE ACCOMPANYING NOTES.


                                       27
<PAGE>


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


<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31
                                                 --------------------------------
                                                    2000       1999        1998
                                                 --------------------------------
<S>                                              <C>         <C>         <C>
REVENUE
    Products and Services ....................   $ 34,649    $ 22,546    $ 51,500
    Advanced Technology contracts ............      4,471       4,567       9,942
                                                 --------------------------------
                                                   39,120      27,113      61,442
COST OF REVENUE ..............................     11,894      18,781      20,152
                                                 --------------------------------
GROSS PROFIT .................................     27,226       8,332      41,290

OPERATING EXPENSES
    Selling and marketing ....................     31,187      29,705      23,821
    Research and development .................     13,018      10,983       7,477
    General and administrative ...............      4,502       7,274       4,965
    Stock option expense .....................         --       4,740       2,160
    Restructure costs ........................         --          --       7,800
                                                 --------------------------------
                                                   48,707      52,702      46,223
                                                 --------------------------------
OPERATING LOSS ...............................    (21,481)    (44,370)     (4,933)
    Interest and other income ................      2,311         363         474
                                                 --------------------------------
    Loss before income tax expense (benefit) .    (19,170)    (44,007)     (4,459)
    Income tax expense (benefit) .............         --         900      (1,197)
                                                 --------------------------------
NET LOSS .....................................   $(19,170)   $(44,907)   $ (3,262)
                                                 ================================

NET LOSS PER SHARE -- BASIC AND DILUTED ......   $  (0.76)   $  (2.32)   $  (0.20)

WEIGHTED AVERAGE SHARES OUTSTANDING--
     BASIC AND DILUTED .......................     25,163      19,323      16,106
</TABLE>

                             SEE ACCOMPANYING NOTES.



                                       28
<PAGE>

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

<TABLE>
<CAPTION>
                                                               PREFERRED STOCK                  COMMON STOCK
                                                       -------------------------------  -----------------------------
                                                           SHARES           AMOUNT          SHARES         AMOUNT
                                                       ---------------  --------------  --------------  -------------
<S>                                                                       <C>             <C>            <C>
 BALANCE, December 31, 1997 ..........................         --         $     --        15,762,820     $    158

     Comprehensive loss:

          Net loss for the year ......................         --               --                --           --

          Foreign currency translation adjustment ....         --               --                --           --

     Total comprehensive loss ........................

     Exercise of incentive stock options .............         --               --           687,995            6

     Employee stock purchase plan activity ...........         --               --            95,172            1

     Compensation expense on options .................         --               --                --           --

     Preferred stock issued ..........................     16,000               --                --           --
                                                       ---------------  --------------  --------------  -------------
 BALANCE, December 31, 1998 ..........................     16,000               --        16,545,987          165

     Comprehensive loss:

          Net loss for the year ......................         --               --                --           --

          Foreign currency translation adjustment ....         --               --                --           --

     Total comprehensive loss ........................

     Exercise of incentive stock options .............         --               --           643,205            7

     Employee stock purchase plan activity ...........         --               --           417,166            4

     Conversion of preferred stock ...................    (17,794)              --         5,416,526           54

     Compensation expense on options .................         --               --                --           --

     Preferred stock issued ..........................      7,500               --                --           --
                                                       ---------------  --------------  --------------  -------------
 BALANCE, December 31, 1999 ..........................      5,706               --        23,022,884          230

     Comprehensive loss:

          Net loss for the year.......................         --               --                --           --

          Foreign currency translation adjustment ....         --               --                --           --

     Total comprehensive loss ........................

     Exercise of incentive stock options .............         --               --           469,013            5

     Employee stock purchase plan activity ...........         --               --            40,369            1

     Conversion of preferred stock ...................    (30,756)              --         2,706,477           27

     Conversions of warrants .........................         --               --           436,487            4

     Compensation expense on options .................         --               --                --           --

     Preferred stock issued ..........................     32,750               --                --           --
                                                       ---------------  --------------  --------------  -------------
 BALANCE, December 31, 2000 ..........................      7,700         $     --        26,675,230        $ 267
                                                       ===============  ==============  ==============  =============
</TABLE>

[WIDE TABLE CONTINUED FROM ABOVE]

<TABLE>
<CAPTION>
                                                                          ACCUMULATED
                                                                            OTHER                          TOTAL
                                                          ADDITIONAL     COMPREHENSIVE    ACCUMULATED   STOCKHOLDERS'
                                                        PAID-IN CAPITAL      LOSS           DEFICIT        EQUITY
                                                       ----------------- ---------------  ------------ ---------------
<S>                                                         <C>             <C>          <C>              <C>
 BALANCE, December 31, 1997 ..........................      $ 68,131        $ (111)      $  (43,378)      $ 24,800

     Comprehensive loss:

          Net loss for the year ......................            --            --           (3,262)        (3,262)

          Foreign currency translation adjustment ....            --           (91)              --            (91)
                                                                                                          --------
     Total comprehensive loss ........................                                                      (3,353)

     Exercise of incentive stock options .............         3,295            --               --          3,301

     Employee stock purchase plan activity ...........           799            --               --            800

     Compensation expense on options .................         2,160            --               --          2,160

     Preferred stock issued ..........................        15,345                                        15,345
                                                       ----------------- ---------------  ------------ ---------------
 BALANCE, December 31, 1998 ..........................        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 .............         4,103            --               --          4,110

     Employee stock purchase plan activity ...........         1,171            --               --          1,175

     Conversion of preferred stock ...................           (54)           --               --             --

     Compensation expense on options .................         4,740            --               --          4,740

     Preferred stock issued ..........................         7,142                                         7,142
                                                       ----------------- ---------------  ------------ ---------------
 BALANCE, December 31, 1999 ..........................       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 .............         2,231            --               --          2,236

     Employee stock purchase plan activity ...........           590            --               --            591

     Conversion of preferred stock ...................           (27)           --               --             --

     Conversions of warrants .........................            (4)           --               --             --

     Compensation expense on options .................           548            --               --            548

     Preferred stock issued ..........................        31,314            --               --         31,314
                                                       ----------------- ---------------  ------------ ---------------
 BALANCE, December 31, 2000 ..........................      $141,484        $ (408)      $ (110,717)       $30,626
                                                       ================= ===============  ============ ===============
</TABLE>

                             SEE ACCOMPANYING NOTES.

                                       29
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31
                                                                             ---------------------------------
                                                                                2000        1999        1998
                                                                             ---------------------------------
<S>                                                                           <C>         <C>         <C>
OPERATING ACTIVITIES

            Net loss ......................................................   $(19,170)   $(44,907)   $ (3,262)

            Adjustments to reconcile net loss to net cash used in operating
            activities:

               Proceeds from the sale of Professional Services ............      4,296          --          --

               Depreciation ...............................................      2,021       1,472       1,533

               Loss on disposals of property and equipment ................         21         362       1,724

               Loss on disposals of intangible assets .....................         --         402         268

               Amortization ...............................................        560         557         325

               Deferred income tax ........................................         --         900      (1,197)

               Stock option expense .......................................         --       4,740       2,160

            Changes in operating assets and liabilities:

               Accounts receivable ........................................     (1,540)     14,295      (6,159)

               Inventories ................................................        198       1,533      (1,238)

               Other current assets .......................................        541        (956)        722

               Accounts payable ...........................................       (248)       (622)      1,645

               Accrued liabilities and reserves ...........................     (1,823)     (1,350)      2,491

               Deferred revenue ...........................................      2,468       1,229         738
                                                                             ---------------------------------
                Net cash used in operating activities .....................    (12,676)    (22,345)       (250)

INVESTING ACTIVITIES

               Purchases of investments ...................................    (16,544)         --     (10,886)

               Proceeds from sales of investments .........................      7,925       5,674          --

               Purchase of property and equipment .........................     (3,642)     (2,255)     (1,994)

               (Increase) decrease in intangibles and other assets ........       (216)        221      (1,842)
                                                                             ---------------------------------
                Net cash provided by (used in) investing activities .......    (12,477)      3,640     (14,722)

FINANCING ACTIVITIES

               Proceeds from issuance of preferred stock ..................     31,314       7,142      15,345

               Proceeds from issuance of common stock .....................      2,827       5,285       4,101

               Proceeds from sales-leaseback transaction ..................         --          --         729
                                                                             ---------------------------------
                Net cash provided by financing activities .................     34,141      12,427      20,175

EFFECT OF FOREIGN CURRENCY TRANSLATION ....................................       (170)        (36)        (91)
                                                                             ---------------------------------

               Net increase (decrease) in cash and cash equivalents .......      8,818      (6,314)      5,112

               Cash and cash equivalents, beginning of year ...............      3,678       9,992       4,880
                                                                             ---------------------------------
               Cash and cash equivalents, end of year .....................   $ 12,496    $  3,678    $  9,992
                                                                             =================================
</TABLE>

                             SEE ACCOMPANYING NOTES.

                                       30
<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

PRODUCTS AND SERVICES

         We recognize product revenues at the time of shipment in instances
where we have evidence of a contract, the fee charged is fixed and determinable,
and collection is probable. We have entered into customer support and
maintenance agreements with various customers. We recognize the related revenues
either ratably as the obligations are fulfilled or upon completion of
performance.

         Our customers are not permitted to return product for net credit.
However, revenue generated through traditional channels with a right of return
for stock balancing and rotations is reduced by a reserve for estimated returns.
These estimated reserves are made by our management based on historical
experience and are subject to change.

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.

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.


                                       31
<PAGE>


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


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 three 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.

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.

         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 $503 and $894 at December 31, 2000 and 1999,
respectively. Amortization expense was $533, $918, and $366 for the years ended
December 31, 2000, 1999, and 1998, respectively.


                                       32
<PAGE>


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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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, as
the effect of outstanding options, warrants, and preferred stock is
antidilutive.

COMPREHENSIVE LOSS

         Our comprehensive loss for the years ended December 31, 2000, 1999, and
1998, was $(19,340), $(44,934), and $(3,353), 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 STANDARD

         In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivatives and Similar Financial Instruments and Hedging Activities." The
Statement is effective for the year ending December 31, 2001. Because of our
minimal use of derivatives, we do not believe adoption will have a significant
effect on earnings or our financial position.

2. INVESTMENTS

         At December 31, 2000, and 1999, 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 14% and 13% of accounts receivable were due from the
United States government at December 31, 2000 and 1999. Unbilled accounts
receivable from all customers were $369 and $408 at December 31, 2000 and 1999,
respectively.


                                       33
<PAGE>


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

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:

<TABLE>
<CAPTION>
                           FUTURE LEASE                                 NET FUTURE LEASE
                            OBLIGATIONS             SUBLEASES              OBLIGATIONS
                       ---------------------------------------------- ----------------------
<S>                            <C>                      <C>                    <C>
                  2001         $      2,255             $       (94)           $      2,161
                  2002                2,298                    (101)                  2,197
                  2003                1,986                    (103)                  1,883
                  2004                1,852                    (110)                  1,742
                  2005                1,881                    (112)                  1,769
            Thereafter                2,344                     (93)                  2,251
                       --------------------- ------------------------ ----------------------
                               $     12,616             $      (613)           $     12,003
                       ===================== ======================== ======================
</TABLE>


         Rent expense including executory costs was $2,569, $2,459, and $1,865
for the years ended December 31, 2000, 1999, and 1998, respectively.

         In addition, in February 1998, we entered into a sales-leaseback
agreement pertaining to certain previously acquired computer equipment and
software. Proceeds from the sale were $729, which approximated the assets'
carrying value. In February 2000, we renewed this lease for an additional twelve
months, expiring March 31, 2001, with monthly rental payments of $32. In
September 1999, we entered into an additional sales-leaseback agreement for
additional computer equipment and software expiring September 30, 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 addition, 42,100 shares of Common Stock
were issued to one of the investors in full satisfaction of a claim against us
for failing to maintain the effectiveness of a registration statement covering
the resale of the Common Stock issued upon the conversion of the Series C 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, 2000, 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.


                                       34
<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, 2000 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,
2000 7,550 shares of the Series F Stock were converted to 516,584 shares of our
Common Stock at an average price of $14.63 per share, leaving 7,700 outstanding
preferred shares. As of February 15, 2001 an additional 7,606 shares of the
Series F Stock had been converted into 1,040,178 shares of Common Stock, leaving
94 outstanding preferred shares.

         Under the terms of the agreement with the holders of Common Stock
issued upon conversion of our Series C Preferred Stock ("Series C Stock"), we
are subject to a number of ongoing obligations. For example, our Common Stock
must be quoted on the NASDAQ stock market, or listed on the New York Stock
Exchange or the American Stock Exchange. Additionally, we must maintain the
effectiveness of the registration statement covering the resale of the Common
Stock issued upon conversion of the Series C Stock. If we fail to satisfy our
ongoing obligations we are subject to compensatory payments. The potential
compensatory payments generally consists of a cash payment equal to 1.5% per
month of the stated value of the Series C Stock and/or a downward adjustment to
the conversion price of the Series C Stock. In September 1999, one of our
holders of Series C Stock claimed that we were not in compliance with our
obligations. We issued 42,100 shares of Common Stock in full satisfaction of
this claim. The risk to us is that if the holders of any of the Common Stock
issued upon conversion of the Series C Stock are successful in imposing such
compensatory payments, our cash could be depleted and/or our stockholders could
be diluted by the issuance of additional stock.

         In addition, we may also be required to make compensatory payments
which would materially affect our cash position and business under the terms our
Series F Stock financing. Under the terms of the agreements with Elliott
International and Elliott Associates, we are subject to a number of ongoing
obligations. For example, our stock must be quoted on the NASDAQ stock market
and the registration statements covering the resale of the Common Stock issued
or issuable upon conversion of the Series F Stock must be effective. If we fail
to satisfy our ongoing obligations we are subject to compensatory payments. The
potential compensatory payments generally consist of a cash payment equal to
approximately 1% of the purchase price of the Series F Stock for the first 30
days that we fail to satisfy our obligations and 2% for each 30-day period
thereafter. The risk to us is that if a stockholder is successful in imposing
such compensatory payments, our cash could be depleted.

   WARRANTS

         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.


                                       35
<PAGE>


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

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 annually over 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.

         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, 1997.....................          131,915          3,898,260        $  6.24
     Shares authorized .............................        2,500,000                 --             --
     Granted .......................................       (1,896,307)         1,896,307          10.41
     Exercised .....................................               --           (687,995)          4.86
     Canceled ......................................          859,380           (859,380)          7.91
                                                     ----------------------------------------
   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
                                                     ========================================
</TABLE>


                                       36
<PAGE>


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

6. STOCK OPTIONS (CONTINUED)

         The following table summarizes information about the stock options
outstanding at December 31, 2000:

<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                294,527         6.9 years            $ 2.25              145,577        $  1.77
$ 3.03 - $ 6.05              1,931,044         8.4 years              3.71              709,954           3.88
$ 6.05 - $ 9.08                978,148         7.7 years              6.79              485,819           6.63
$ 9.08 - $12.10              1,902,338         9.0 years             10.16              352,019           9.91
$12.10 - $15.13                183,501         9.1 years             13.50                9,301          12.96
$15.13 - $18.15                323,049         8.8 years             16.86               45,723          17.70
$18.15 - $21.18                 23,250         7.3 years             20.21                7,333          18.93
$21.18 - $24.20                153,400         9.6 years             22.50                   --             --
$24.20 - $27.23                 19,000         8.2 years             25.89                5,331          25.94
                          -----------------                                        --------------
$  .01 - $27.23              5,808,257         8.5 years            $ 7.94            1,761,057        $  6.21
                          =================                                        ==============
</TABLE>


         Options outstanding under the Stock Plan expire at various dates from
2001 to 2010. The number of options exercisable as of December 31, 2000, 1999,
and 1998, was 1,761,057, 1,062,353, and 1,483,950, at weighted average exercise
prices of $6.21, $7.13, and $6.47, respectively. The weighted average fair value
of options granted and the weighted average remaining contractual life of
options granted during 2000, 1999, and 1998 are $7.94, $5.70, and $8.09 and 8.5,
8.1, and 8.4 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, 2000. For the years ended December 31, 1999, and 1998, we
recognized $4,740, and $2,160, respectively, 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.


                                       37
<PAGE>

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

6. STOCK OPTIONS (CONTINUED)

         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 2000, 1999,
and 1998, respectively: a risk-free interest rate of 6.0%; volatility factors of
the expected market price of our Common Stock of 1.17, 1.27, and 1.00; 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
                                                       ----------------------------------------
                                                           2000          1999         1998
                                                       ------------- ------------ -------------
<S>                                                    <C>           <C>             <C>
         Pro forma net loss                            $ (27,500)    $ (53,278)      $(10,739)
                                                       ============= ============ =============
         Pro forma basic and diluted loss per share    $   (1.09)    $   (2.76)      $  (0.67)
                                                       ============= ============ =============
</TABLE>

7. INCOME TAXES

         There was no income tax expense for the year ended December 31, 2000.
Income tax expense of $900 and a net tax benefit of $1,197 were reported for the
years ended December 31, 1999 and 1998, respectively.

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

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31
                                                      ----------------------------------------------------
                                                            2000             1999             1998
                                                      ----------------------------------------------------
<S>                                                          <C>             <C>               <C>
         Income taxes at statutory rate ..............       $  (6,518)      $  (14,959)       $  (1,516)
         State taxes, net of federal benefit..........            (731)          (1,705)            (150)
         Foreign taxes ...............................              --               --               --
         Change in valuation allowance ...............           7,195           17,494              440
         Other .......................................              54               70               29
                                                      ----------------------------------------------------
         Income tax expense (benefit).................       $      --       $      900        $  (1,197)
                                                      ====================================================
</TABLE>


                                       38
<PAGE>


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

7. INCOME TAXES (CONTINUED)

         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
                                                               -------------------------------------------------
                                                                       2000            1999             1998
                                                               -------------------------------------------------
<S>                                                                 <C>             <C>              <C>
         Deferred tax assets:
           Accrued liabilities ...............................      $    1,219      $    1,591       $      465
           Stock option compensation expense .................              --           3,120            1,224
           Liabilities .......................................             139             113              172
           Tax over book amortization ........................            (196)           (295)            (463)
           Book over tax depreciation ........................             171             171              171
           Income tax credits ................................             478             478              478
           Net operating loss carryforward ...................          44,133          34,211           17,754
                                                               -------------------------------------------------
         Total deferred tax assets before valuation allowance           45,944          39,389           19,801
         Less valuation allowance ............................         (43,244)        (36,689)         (16,201)
                                                               -------------------------------------------------
         Net deferred tax assets..............................      $    2,700      $    2,700       $    3,600
                                                               =================================================
</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, 2000
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, 2000, we had net operating loss (NOL) carryforwards of
$110,300 that are available to offset taxable income through 2015. 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 $21,700
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 2000, 1999, or 1998.

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.


                                       39
<PAGE>


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

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. RESTRUCTURING

         Early in 1998, we announced plans to implement a restructuring plan
designed to facilitate further integration of acquired businesses and recorded a
pretax expense of $7,800 to account for these actions, which included costs of
lease terminations, streamlining our product offerings, and reducing our cost
structure to increase operational efficiency. The plan resulted in the
separation of some employees worldwide and the closing of three North American
facilities.

         Early in 1999, the restructure reserve was fully utilized. Asset
impairment and restructuring costs were as follows:

<TABLE>
<CAPTION>
                                                   TOTAL              CASH               WRITE-
COSTS RELATED TO                                  CHARGES           PAYMENTS             DOWNS
--------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>                <C>
Compensation costs for severance and
       other termination benefits .......        $    1,333        $     1,333        $        --

Consulting and legal costs...............               739                739                 --

Write-off of property, plant, and
       equipment ........................             1,764                 --              1,764

Write-off of other assets ...............               761                 --                761

Lease termination costs .................               853                853                 --

Facility reconfigurations ...............               328                328                 --

Employee relocations ....................               474                474                 --

Canceled contracts ......................               536                300                236

Additional travel .......................               196                196                 --

Other charges ...........................               816                816                 --
                                            ------------------------------------------------------
     Total costs ........................        $    7,800        $     5,039        $     2,761
                                            ======================================================
</TABLE>


                                       40
<PAGE>


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

11. 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 and/or when performance of services is
complete 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.


                                       41
<PAGE>

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

11. SEGMENT INFORMATION (CONTINUED)

         Significant components of our segments are as follows:

<TABLE>
<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
  --------------------------------------------------------------------------------------------------------------------------

<CAPTION>
  YEAR ENDED DECEMBER 31, 1998
  --------------------------------------------------------------------------------------------------------------------------
                                                       Products and      Advanced
                                                         Services       Technology
                                                         Segment         Segment          Corporate            Total
  --------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>               <C>                <C>
  Revenues from external customers ...............     $     51,500   $      9,942      $        --        $     61,442
  Restructuring charge ...........................               --             --            7,800               7,800
  Depreciation expense ...........................            1,241            273               19               1,533
  Segment gross profit  ..........................           37,174          3,130               --              40,304
  Segment operating income (loss) ................           10,689           (697)         (14,925)             (4,933)
  Interest income ................................               --             --              474                 474
  Segment assets .................................           27,594          2,227           24,527              54,348
  Expenditures for long-lived assets .............            3,193            137              506               3,836
  --------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       42
<PAGE>


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

11.  SEGMENT INFORMATION (CONTINUED)

         International sales accounted for 19%, 11%, and 24% of total revenue
for the years 2000, 1999, and 1998, 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:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31
                                           ----------------------------------------
                                              2000             1999          1998
        ---------------------------------------------------------------------------
<S>                                            <C>           <C>           <C>
        Revenues:
           United States sales ...........     $31,844       $24,198       $46,464
           International sales ...........       7,276         2,915        14,978
                                           ----------------------------------------
                                               $39,120       $27,113       $61,442
                                           ========================================
</TABLE>

12. RELATED PARTY TRANSACTIONS

         In 1998, we relocated several key employees to California. To mitigate
cost of living differences, we provided interest-free loans totaling $481 to
these employees. In 1999, these loans were forgiven over a three-year period,
effective as of the date of relocation, and we reimbursed the employees for the
tax liabilities incurred as a result of the loan forgiveness.

13. 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 $1,622 in other income.

14. LETTER OF CREDIT

         We have a $195 letter of credit agreement with a bank securing certain
sales-leaseback obligations discussed in Note 4, "Leases." This letter of credit
will be reduced to $98 on October 1, 2001 and will expire on October 1, 2002.



                                       43
<PAGE>

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

15.   SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                             QUARTER ENDED
                                ------------------------------------------------------------------
                                    MARCH 31          JUNE 30         SEPTEMBER 30     DECEMBER 31
                                ------------------------------------------------------------------
<S>                                   <C>               <C>              <C>             <C>
  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)*


  1999

  Net revenue ...............       $  8,230         $   5,510          $  6,475        $  6,898
  Gross profit ..............          4,022            (2,117)            2,594           3,833
  Net loss ..................         (9,734)          (19,672)           (7,906)         (7,595)
  Net loss per share -
   basic and diluted .........         (0.58)            (1.11)            (0.38)          (0.34)
</TABLE>

* The quarter ended December 31, 2000, includes a $1,617 gain, or $.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.


                                       44
<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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, 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 22, 2001



                                       45
<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 30, 2001       By /s/ John McNulty
                            -------------------
                            John McNulty
                            Chairman and Chief Executive Officer

         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 30, 2001.

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         Vice President and Chief Financial
------------------------------------     Officer (Principal Financial and
Timothy J. Steinkopf                     Accounting 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.


                                       46
<PAGE>



                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

                  YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998

<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, 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
                                          ==============================================================

YEAR ENDED DECEMBER 31, 1998:
  Sales return allowance ................             --        527,000             --         527,000
  Allowance for doubtful accounts .......        417,000      1,152,000       (669,000)        900,000
                                          --------------------------------------------------------------
      Total .............................    $   417,000    $ 1,679,000    $  (669,000)    $ 1,427,000
                                          ==============================================================
</TABLE>






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