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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2007

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



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SECURE COMPUTING CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-1637226                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)



|                                         |  |           
|---------------------------------------- |  | ----------
|4810 Harwood Road, San Jose, CA          |  | 95124     
|(Address of principal executive offices) |  | (Zip code)

(408) 979-6100

Registrants telephone number, including area code

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



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Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark if the Registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x

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 whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerate filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes ̈No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date: Common Stock, $.01 par
value  66,859,156 issued and outstanding as of October 31, 2007.



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##### Table of Contents

SECURE COMPUTING CORPORATION

INDEX



|                              |  |                                                                                                                                    |  |         
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                    |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                   
|                              |  |                                                                                                                                   
|Item 1                        |  | Condensed Consolidated Financial Statements:                                                                                       |  |         
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006                                   |  | 3       
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 30, 2007 and 2006 |  | 4       
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2007 and 2006                  |  | 5       
|                              |  |                                                                                                                                   
|                              |  | Notes to the Condensed Consolidated Financial Statements (Unaudited)                                                               |  | 6-13    
|                              |  |                                                                                                                                   
|Item 2                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                              |  | 14-22   
|                              |  |                                                                                                                                   
|Item 3                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                         |  | 22      
|                              |  |                                                                                                                                   
|Item 4                        |  | Controls and Procedures                                                                                                            |  | 22-23   
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                   
|                              |  |                                                                                                                                   
|Item 1                        |  | Legal Proceedings                                                                                                                  |  | 24      
|                              |  |                                                                                                                                   
|Item 2                        |  | Changes in Securities                                                                                                              |  | 24      
|                              |  |                                                                                                                                   
|Item 3                        |  | Defaults upon Senior Securities                                                                                                    |  | 24      
|                              |  |                                                                                                                                   
|Item 4                        |  | Submission of Matters to a Vote of Security Holders                                                                                |  | 24      
|                              |  |                                                                                                                                   
|Item 5                        |  | Other Information                                                                                                                  |  | 24      
|                              |  |                                                                                                                                   
|Item 6                        |  | Exhibits and Reports on Form 8-K                                                                                                   |  | 24-26   
|                              |  |                                                                                                                                   
|                              |  | Signatures                                                                                                                         |  | 27      



2



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##### Table of Contents

PART IFINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                                                        |  |                              |          |   |                            |   |          |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | -------------------------- | - | -------- | -
|                                                                                                                        |  | September 30,2007(Unaudited) |          |   | December 31,2006(See Note) |  
|ASSETS                                                                                                                  |  |                              |          |   |                            |   |          |  
|Current assets                                                                                                          |  |                              |          |   |                            |   |          |  
|Cash and cash equivalents                                                                                               |  | $                            | 10,170   |   |                            | $ | 8,249    |  
|Restricted cash                                                                                                         |  |                              | 496      |   |                            |   | 457      |  
|Accounts receivable, net                                                                                                |  |                              | 60,029   |   |                            |   | 63,636   |  
|Inventory, net                                                                                                          |  |                              | 5,369    |   |                            |   | 4,078    |  
|Other current assets                                                                                                    |  |                              | 15,943   |   |                            |   | 13,948   |  
|                                                                                                                        |  |                              |          |   |                            |   |          |  
|Total current assets                                                                                                    |  |                              | 92,007   |   |                            |   | 90,368   |  
|Property and equipment, net                                                                                             |  |                              | 17,751   |   |                            |   | 14,300   |  
|Goodwill                                                                                                                |  |                              | 530,744  |   |                            |   | 533,659  |  
|Intangibles, net                                                                                                        |  |                              | 65,672   |   |                            |   | 78,388   |  
|Other assets                                                                                                            |  |                              | 9,619    |   |                            |   | 7,413    |  
|                                                                                                                        |  |                              |          |   |                            |   |          |  
|Total assets                                                                                                            |  | $                            | 715,793  |   |                            | $ | 724,128  |  
|                                                                                                                        |  |                              |          |   |                            |   |          |  
|                                                                                                                        |  |                             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                    |  |                              |          |   |                            |   |          |  
|Current liabilities                                                                                                     |  |                              |          |   |                            |   |          |  
|Accounts payable                                                                                                        |  | $                            | 12,295   |   |                            | $ | 12,442   |  
|Accrued payroll                                                                                                         |  |                              | 10,593   |   |                            |   | 12,035   |  
|Accrued expenses                                                                                                        |  |                              | 8,415    |   |                            |   | 6,365    |  
|Acquisition reserves                                                                                                    |  |                              | 1,207    |   |                            |   | 1,418    |  
|Deferred revenue                                                                                                        |  |                              | 94,461   |   |                            |   | 86,612   |  
|                                                                                                                        |  |                              |          |   |                            |   |          |  
|Total current liabilities                                                                                               |  |                              | 126,971  |   |                            |   | 118,872  |  
|Acquisition reserves, net of current portion                                                                            |  |                              | 1,019    |   |                            |   | 1,591    |  
|Deferred revenue, net of current portion                                                                                |  |                              | 59,289   |   |                            |   | 35,671   |  
|Deferred tax liability                                                                                                  |  |                              | 10,082   |   |                            |   | 7,672    |  
|Debt, net of fees                                                                                                       |  |                              | 53,371   |   |                            |   | 85,023   |  
|Other liabilities                                                                                                       |  |                              | 95       |   |                            |   |         |  
|                                                                                                                        |  |                              |          |   |                            |   |          |  
|Total liabilities                                                                                                       |  |                              | 250,827  |   |                            |   | 248,829  |  
|Convertible preferred stock, par value $.01 per share:                                                                  |  |                              |          |   |                            |   |          |  
|Authorized  2,000,000; issued and outstanding  700,000 at September 30, 2007 and December 31, 2006                    |  |                              | 68,339   |   |                            |   | 65,558   |  
|Stockholders equity                                                                                                    |  |                              |          |   |                            |   |          |  
|Common stock, par value $.01 per share:                                                                                 |  |                              |          |   |                            |   |          |  
|Authorized  100,000,000; issued and outstanding  66,783,090 at September 30, 2007 and 65,008,509 at December 31, 2006 |  |                              | 669      |   |                            |   | 651      |  
|Additional paid-in capital                                                                                              |  |                              | 558,303  |   |                            |   | 538,616  |  
|Accumulated deficit                                                                                                     |  |                              | (161,605 | ) |                            |   | (127,249 | )
|Accumulated other comprehensive loss                                                                                    |  |                              | (740     | ) |                            |   | (2,277   | )
|                                                                                                                        |  |                              |          |   |                            |   |          |  
|Total stockholders equity                                                                                              |  |                              | 396,627  |   |                            |   | 409,741  |  
|                                                                                                                        |  |                              |          |   |                            |   |          |  
|Total liabilities and stockholders equity                                                                              |  | $                            | 715,793  |   |                            | $ | 724,128  |  
|                                                                                                                        |  |                              |          |   |                            |   |          |  

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|NOTE: | The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements.
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to
the condensed consolidated financial statements.



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##### Table of Contents

SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited, in thousands, except per share amounts)



|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                      |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2007                            |         |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|Revenues:                                             |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Products                                              |  | $                               | 31,006  |   |                                | $ | 27,884 |      |  | $ | 91,899  |   |  | $ | 81,586  |  
|Services                                              |  |                                 | 18,992  |   |                                |   | 15,625 |      |  |   | 54,901  |   |  |   | 43,286  |  
|Other (See Note)                                      |  |                                 | 10,020  |   |                                |   | 239    |      |  |   | 24,638  |   |  |   | 239     |  
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                        |  |                                 | 60,018  |   |                                |   | 43,748 |      |  |   | 171,438 |   |  |   | 125,111 |  
|                                                      |  |                                 |         |  
|Cost of revenues:                                     |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Products                                              |  |                                 | 9,570   |   |                                |   | 7,658  |      |  |   | 28,127  |   |  |   | 22,534  |  
|Services                                              |  |                                 | 4,020   |   |                                |   | 2,989  |      |  |   | 12,151  |   |  |   | 7,993   |  
|Other (See Note)                                      |  |                                 | 1,446   |   |                                |   | 89     |      |  |   | 3,934   |   |  |   | 89      |  
|Amortization of purchased intangibles                 |  |                                 | 1,924   |   |                                |   | 1,049  |      |  |   | 5,905   |   |  |   | 3,025   |  
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total cost of revenues                                |  |                                 | 16,960  |   |                                |   | 11,785 |      |  |   | 50,117  |   |  |   | 33,641  |  
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                          |  |                                 | 43,058  |   |                                |   | 31,963 |      |  |   | 121,321 |   |  |   | 91,470  |  
|                                                      |  |                                 |         |  
|Operating expenses:                                   |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Selling and marketing                                 |  |                                 | 29,692  |   |                                |   | 23,703 |      |  |   | 87,794  |   |  |   | 57,328  |  
|Research and development                              |  |                                 | 11,207  |   |                                |   | 8,828  |      |  |   | 32,932  |   |  |   | 23,554  |  
|General and administrative                            |  |                                 | 4,310   |   |                                |   | 3,469  |      |  |   | 11,702  |   |  |   | 9,386   |  
|Amortization of purchased intangibles                 |  |                                 | 2,712   |   |                                |   | 2,310  |      |  |   | 8,265   |   |  |   | 6,990   |  
|Litigation settlement                                 |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   | 2,500   |  
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                              |  |                                 | 47,921  |   |                                |   | 38,310 |      |  |   | 140,693 |   |  |   | 99,758  |  
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating loss                                        |  |                                 | (4,863  | ) |                                |   | (6,347 | )    |  |   | (19,372 | ) |  |   | (8,288  | )
|Other (expense)/income                                |  |                                 | (1,576  | ) |                                |   | 501    |      |  |   | (5,593  | ) |  |   | 2,402   |  
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss before taxes                                     |  |                                 | (6,439  | ) |                                |   | (5,846 | )    |  |   | (24,965 | ) |  |   | (5,886  | )
|Income tax (expense)/benefit                          |  |                                 | (3,613  | ) |                                |   | (1,445 | )    |  |   | (6,610  | ) |  |   | 5,911   |  
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net (loss)/income                                     |  |                                 | (10,052 | ) |                                |   | (7,291 | )    |  |   | (31,575 | ) |  |   | 25      |  
|Preferred stock accretion                             |  |                                 | (943    | ) |                                |   | (903   | )    |  |   | (2,781  | ) |  |   | (2,653  | )
|Charge from beneficial conversion of preferred stock  |  |                                 |        |   |                                |   |       |      |  |   |        |   |  |   | (12,603 | )
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss applicable to common shareholders            |  | $                               | (10,995 | ) |                                | $ | (8,194 | )    |  | $ | (34,356 | ) |  | $ | (15,231 | )
|                                                      |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per share                      |  | $                               | (0.17   | ) |                                | $ | (0.14  | )    |  | $ | (0.52   | ) |  | $ | (0.28   | )
|Weighted average shares outstandingbasic and diluted |  |                                 | 66,268  |   |                                |   | 57,378 |      |  |   | 65,772  |   |  |   | 54,417  |  

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|NOTE: | For certain multiple-element arrangements we are unable to establish vendor specific objective evidence (VSOE) of fair value for the undelivered bundled elements and
therefore are unable to allocate the value of the arrangement between Products and Services Revenue and have reported these revenues and corresponding cost of revenues as Other.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to the condensed consolidated financial statements.



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SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited, in thousands)



|                                                                                         |  |                                |         |   |      |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                         |  | Nine Months EndedSeptember 30, |        
|                                                                                         |  | 2007                           |         |   | 2006 |  
|Operating activities                                                                     |  |                                |         |   |      |   |          |  
|Net (loss)/income                                                                        |  | $                              | (31,575 | ) |      | $ | 25       |  
|Adjustments to reconcile net (loss)/income to net cash provided by operating activities: |  |                                |         |   |      |   |          |  
|Depreciation                                                                             |  |                                | 5,327   |   |      |   | 2,970    |  
|Amortization of intangible assets                                                        |  |                                | 14,768  |   |      |   | 10,331   |  
|Loss on disposals of property and equipment and intangible assets                        |  |                                | 160     |   |      |   | 995      |  
|Amortization of debt fees                                                                |  |                                | 348     |   |      |   | 37       |  
|Deferred income taxes                                                                    |  |                                | 3,701   |   |      |   | (6,093   | )
|Share-based compensation                                                                 |  |                                | 12,361  |   |      |   | 7,019    |  
|Changes in operating assets and liabilities, excluding effects of acquisitions:          |  |                                |         |   |      |   |          |  
|Accounts receivable                                                                      |  |                                | 4,007   |   |      |   | (1,149   | )
|Inventories                                                                              |  |                                | (1,291  | ) |      |   | (324     | )
|Other current assets                                                                     |  |                                | (2,103  | ) |      |   | 1,032    |  
|Accounts payable                                                                         |  |                                | 272     |   |      |   | 6,516    |  
|Accrued payroll                                                                          |  |                                | (1,440  | ) |      |   | 1,771    |  
|Accrued expenses                                                                         |  |                                | 2,281   |   |      |   | (3,504   | )
|Acquisition reserves                                                                     |  |                                | (867    | ) |      |   | (10,371  | )
|Deferred revenue                                                                         |  |                                | 31,487  |   |      |   | 16,753   |  
|                                                                                         |  |                                |         |   |      |   |          |  
|Net cash provided by operating activities                                                |  |                                | 37,436  |   |      |   | 26,008   |  
|                                                                                         |  |                               
|Investing activities                                                                     |  |                                |         |   |      |   |          |  
|Purchase of property and equipment, net                                                  |  |                                | (8,896  | ) |      |   | (8,368   | )
|(Increase)/decrease in intangibles and other assets                                      |  |                                | (3,400  | ) |      |   | 734      |  
|(Purchases)/sales of investments, net                                                    |  |                                | (8      | ) |      |   | 31,041   |  
|Cash paid for business acquisitions, net of cash acquired                                |  |                                |        |   |      |   | (256,747 | )
|                                                                                         |  |                                |         |   |      |   |          |  
|Net cash used for investing activities                                                   |  |                                | (12,304 | ) |      |   | (233,340 | )
|                                                                                         |  |                               
|Financing activities                                                                     |  |                                |         |   |      |   |          |  
|Repayments of term debt                                                                  |  |                                | (32,000 | ) |      |   |         |  
|Proceeds from term debt, net of fees                                                     |  |                                |        |   |      |   | 86,868   |  
|Proceeds from issuance of common stock                                                   |  |                                | 7,344   |   |      |   | 7,317    |  
|Proceeds from revolving debt                                                             |  |                                |        |   |      |   | 2,000    |  
|Proceeds from issuance of preferred stock and warrant, net of fees                       |  |                                |        |   |      |   | 69,945   |  
|                                                                                         |  |                                |         |   |      |   |          |  
|Net cash (used for)/provided by financing activities                                     |  |                                | (24,656 | ) |      |   | 166,130  |  
|                                                                                         |  |                               
|Effect of exchange rates                                                                 |  |                                | 1,445   |   |      |   | (927     | )
|                                                                                         |  |                                |         |   |      |   |          |  
|Net increase/(decrease) in cash and cash equivalents                                     |  |                                | 1,921   |   |      |   | (42,129  | )
|Cash and cash equivalents, beginning of period                                           |  |                                | 8,249   |   |      |   | 50,039   |  
|                                                                                         |  |                                |         |   |      |   |          |  
|Cash and cash equivalents, end of period                                                 |  | $                              | 10,170  |   |      | $ | 7,910    |  
|                                                                                         |  |                                |         |   |      |   |          |  
|                                                                                         |  |                               
|Supplemental Cash Flow Disclosure                                                        |  |                                |         |   |      |   |          |  
|Interest paid                                                                            |  | $                              | 5,011   |   |      |   |         |  
|Release of deferred tax asset valuation allowance as a reduction to goodwill             |  | $                              | 1,367   |   |      | $ | 9,520    |  
|Common stock issued for purchase of CyberGuard Corporation                               |  |                                |        |   |      | $ | 188,476  |  
|Common stock issued for purchase of CipherTrust, Inc.                                    |  |                                |        |   |      | $ | 68,100   |  

See accompanying notes to the condensed consolidated financial statements.



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##### Table of Contents

SECURE COMPUTING CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization

Secure Computing is a global leader in enterprise gateway security. Founded in 1989, we have been securing the connections between people and information
for nearly 20 years. We use our broad expertise in security technology to develop enterprise gateway security solutions that allow organizations to exchange critical information safely with their customers, partners and employees using trusted
connections. Specializing in delivering enterprise-class solutions that secure Web, email, and network connectivity, we are proud to be the global security solutions provider to some of the most mission-critical network environments in the world.

2. Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements have been prepared by us without audit and reflect all adjustments (consisting of normal and recurring adjustments and accruals) which are, in our opinion, necessary to present a
fair statement of the results for the interim periods presented. The consolidated financial statements include our accounts and those of our subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The
statements have been prepared in accordance with the instructions for Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission, and, as permitted omit certain information and footnote disclosures necessary to present
the statements in accordance with U.S. generally accepted accounting principles. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. The December 31,
2006 Condensed Consolidated Balance Sheet is derived from our audited Consolidated Balance Sheet as of December 31, 2006. These condensed financial statements should be read in conjunction with the Consolidated Financial Statements and
footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission.

3. Summary of Significant Accounting Policies

Revenue Recognition

We derive our revenue primarily from two sources: (i) sales of products, including hardware, subscriptions, software licenses, and royalties and
(ii) sales of services, including maintenance arrangements to provide upgrades and customer support, professional services, and contracted development work. We recognize revenue in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as modified by SOP 98-9. Revenue from products is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collection is probable.
Subscription-based contracts are generally for 12, 24 or 36 months in duration. Subscription revenue along with maintenance revenue for providing product upgrades and customer support are deferred and recognized ratably over the service period
beginning with the month the subscription or service begins.

When arrangements contain multiple elements and vendor specific objective
evidence (VSOE) of fair value exists for all undelivered elements, we recognize revenue for the delivered elements using the residual method. For arrangements containing multiple elements where VSOE of fair value does not exist for all undelivered
elements, we defer revenue for the delivered and undelivered elements and then recognize revenue on all elements over the service period. In instances where an entire arrangement is deferred due to lack of VSOE of fair value on an undelivered
element, the revenue recognized over the service period is identified as other revenue on the Condensed Consolidated Statement of Operations. We also identify costs (primarily hardware component costs) that are directly associated with product
revenues that have been deferred due to lack of VSOE of fair value on an undelivered element. We defer these costs at the time of shipment and recognize them as cost of sales in proportion to the product revenue as it is recognized over the service
period. These costs are identified as other cost of revenues on the Condensed Consolidated Statement of Operations.

We sell our products
either directly to an end-user, or indirectly through our channel of resellers and distributors (our channel partners). When selling through our channel we require our channel partners to provide evidence of end-user sell-through. If we
are unable to obtain end-user sell-through evidence at the time we fulfill the order from a channel partner, we do not recognize revenue until the channel partner supplies end-user sell-through information, the product has been shipped, and all
other criteria of SOP 97-2 have been met, with the exception of sales to our distributors who stock our SnapGear product line. We recognize revenue, net of estimated returns, upon shipment of our SnapGear product line as we have sufficient return
history to establish a reserve and we are not able to receive end-user sell-through evidence due to the high-volume sales of this low-price point product.



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3. Summary of Significant Accounting Policies (continued)



Income Taxes

We account for income taxes under Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS No. 109 requires the consideration of a valuation
allowance for deferred tax assets if it is more likely than not that some component or all of the benefits of deferred tax assets will not be realized.

We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109 on January 1,
2007. FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date, January 1, 2007, we did not have a material
liability under FIN 48 for unrecognized tax benefits. As a result of the implementation of FIN 48 we have recognized no material adjustment in the liability for unrecognized income tax benefits or in the related impact to our effective tax rate. Our
continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

Our company, along with
our subsidiaries, is subject to U.S. Federal income tax as well as income tax of multiple state jurisdictions. Generally, tax years from 2004 through the present remain open under the statue of limitations. However, due to net operating loss
carryforwards (NOL) from prior periods, the Internal Revenue Service (IRS) could potentially review the losses related to NOL-generating years back to 1989. Our company, along with our subsidiaries, is also subject to income tax in several foreign
jurisdictions which have open tax years varying by jurisdiction back to 2000.

Recently Issued Accounting Standards

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159
allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is
elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2007. We do not anticipate a material impact upon adoption of SFAS No. 159.

In September 2006, the FASB
issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands
disclosures about the use of fair value measurements. SFAS No. 157 is intended to increase consistency and comparability among fair value estimates used in financial reporting. As such, SFAS No. 157 applies to all other accounting
pronouncements that require or permit fair value measurements, except for the measurement of share-based payments. SFAS No. 157 does not apply to accounting standards that require or permit measurements that are similar to, but not intended to
represent fair value. Fair value, as defined in SFAS No. 157, is the price to sell an asset or transfer a liability and therefore represents an exit price, not an entry price. The exit price is the price in the principal market in which the
reporting entity would transact. Further, that price is not adjusted for transaction costs. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 will
be applied prospectively as of the beginning of the fiscal year in which it is initially applied. We are currently assessing the impact of adoption of SFAS No. 157.

4. Acquisition of CipherTrust

On
August 31, 2006, we acquired 100% of the outstanding common shares of CipherTrust, Inc., a privately-held company. CipherTrusts products provide innovative layered security solutions to stop inbound messaging threats such as spam,
viruses, intrusions and phishing, and protect against outbound policy and compliance violations associated with sensitive data leakage. CipherTrusts product line included IronMail®,
powered by TrustedSource, IronIM, IronMail Edge, IronNet, and RADAR. As a result of the acquisition we have positioned ourselves as a leader in the Messaging Gateway Security market. In addition to protecting corporate
network infrastructures, our combined solutions address the fast-growing Web and Messaging Gateway Security needs.



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4. Acquisition of CipherTrust (continued)



The aggregate purchase price was $270.1 million consisting of $188.1 million in cash, the issuance of 10.0 million
shares of common stock valued at $68.1 million, the conversion of outstanding CipherTrust stock options into options to purchase 2.5 million shares of our common stock with a fair value of $7.8 million, and direct costs of the acquisition of
$6.1 million. The value of the common shares issued was determined based on the average market price of our common shares over the period including two days before and two days after the date that the terms of the acquisition were agreed to and
announced. We financed $90.0 million of the CipherTrust acquisition through debt financing obtained from a syndicate of banks led by Citigroup and UBS Investment Bank. See Note 6 for details on the debt financing. As part of the terms of the
acquisition, we may issue a $10.0 million note to former CipherTrust shareholders that is subject to the attainment of certain performance conditions to be met by September 30, 2007. We are currently evaluating the results of the performance
conditions and any contingent consideration earned will be recorded as goodwill.

The acquisition was accounted for under the purchase
method of accounting, and accordingly, the assets and liabilities acquired were recorded at their estimated fair values at the effective date of the acquisition and the results of operations have been included in the unaudited condensed consolidated
statements of operations since the acquisition date. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite lived tradenames recorded as a result of the acquisition will be subject to an
annual impairment test and will not be amortized. The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):



|                                                                    |  |        |  |                      |          |  
|------------------------------------------------------------------- |  | ------ |  | -------------------- | -------- | -
|                                                                    |  |        |  | As ofAugust 31, 2006 |         
|Cash paid, net of cash acquired                                     |  |        |  | $                    | (187,647 | )
|Current assets                                                      |  |        |  |                      | 11,676   |  
|Property and equipment                                              |  |        |  |                      | 1,429    |  
|Other long-term and indefinite lived assets                         |  |        |  |                      | 8,153    |  
|Goodwill                                                            |  |        |  |                      | 232,674  |  
|Intangible assets subject to amortization:                          |  |        |  |                      |          |  
|Customer relationships (60 month useful life)                       |  | 14,298 |  |                      |          |  
|Developed technology (48 month useful life)                         |  | 22,303 |  |                      |          |  
|                                                                    |  |        |  |                      |          |  
|                                                                    |  |        |  |                      | 36,601   |  
|                                                                    |  |        |  |                      |          |  
|Total assets acquired                                               |  |        |  |                      | 102,886  |  
|Current liabilities                                                 |  |        |  |                      | 6,306    |  
|Acquisition reserve                                                 |  |        |  |                      | 7,345    |  
|Revenue deferred from ongoing contractual obligations at fair value |  |        |  |                      | 10,687   |  
|Deferred tax liability  long-term                                  |  |        |  |                      | 2,663    |  
|                                                                    |  |        |  |                      |          |  
|Fair value of assets and liabilities assumed and accrued, net       |  |        |  | $                    | 75,885   |  
|                                                                    |  |        |  |                      |          |  

We accrued approximately $7.3 million in acquisition related expenses, which included legal and
accounting fees, bankers fees, severance costs and other related costs, of which $118,000 remains as an accrual as of September 30, 2007.

The following table presents our consolidated results of operations on an unaudited pro forma basis as if the acquisition had taken place at the beginning of the periods presented (in thousands, except per share
amounts):



|                                           |  |                                      |         |   |                                     |   |         |  
|------------------------------------------ |  | ------------------------------------ | ------- | - | ----------------------------------- | - | ------- | -
|                                           |  | Three Months EndedSeptember 30, 2006 |         |   | Nine Months EndedSeptember 30, 2006 |  
|Total revenues                             |  | $                                    | 50,728  |   |                                     | $ | 160,161 |  
|Net loss applicable to common shareholders |  | $                                    | (13,081 | ) |                                     | $ | (29,790 | )
|Basic and diluted loss per share           |  | $                                    | (0.20   | ) |                                     | $ | (0.47   | )

The unaudited pro forma data gives effect to actual operating results prior to the acquisition and
adjustments to reflect interest income foregone, increased intangible amortization and interest expense for debt assumed. No effect has been given to cost reductions or operating synergies in this presentation. As a result, the unaudited pro forma
results of operations are for comparative purposes only and are not necessarily indicative of the results that would have been obtained if the acquisition had occurred as of the beginning of the periods presented or that may occur in the future.



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5. Acquisition of CyberGuard

On January 12, 2006, we acquired 100% of the outstanding common shares of CyberGuard Corporation. CyberGuard provided network security solutions designed to protect enterprises that use the Internet for
electronic commerce and secure communication. CyberGuards products included firewall, VPN (Virtual Private Network), secure content management and security management technologies. This acquisition strengthens our position as one of the market
leaders in Network Gateway Security and strengthens our position in the Web Gateway Security space. Additionally, we now have a larger presence in the Global 5000 enterprise markets as well as the U.S. Federal Government.

The aggregate purchase price was $310.7 million consisting of 16.3 million shares of common stock valued at $188.5 million, $2.73 in cash issued for
each outstanding share of CyberGuard common stock valued at $88.9 million, the conversion of outstanding CyberGuard stock options into options to purchase 3.0 million shares of our common stock with a value of $29.3 million and direct costs of
the acquisition of $4.0 million. The value of the common shares issued was determined based on the average market price of our common shares over the period including two days before and two days after the date that the terms of the acquisition were
agreed to and announced. We financed $70.0 million of the CyberGuard acquisition through the issuance of preferred equity securities. See Note 7 for details on the equity financing.

The following table presents our consolidated results of operations on an unaudited pro forma basis as if the acquisition had taken place at the
beginning of the period presented (in thousands, except per share amounts):



|                                           |  |                                      |         |  
|------------------------------------------ |  | ------------------------------------ | ------- | -
|                                           |  | Nine Months Ended September 30, 2006 |        
|Total revenues                             |  | $                                    | 126,888 |  
|Net income                                 |  | $                                    | 46      |  
|Net loss applicable to common shareholders |  | $                                    | (2,607  | )
|Basic and diluted loss per share           |  | $                                    | (0.05   | )

The unaudited pro forma data gives effect to actual operating results prior to the acquisition and
adjustments to reflect interest income foregone, increased intangible amortization, and income taxes. No effect has been given to cost reductions or operating synergies in this presentation. As a result, the unaudited pro forma results of operations
are for comparative purposes only and are not necessarily indicative of the results that would have been obtained if the acquisition had occurred as of the beginning of the period presented or that may occur in the future.

6. Debt

Debt consisted of the following at the dates
indicated (in thousands):



|                                                           |  |                         |        |   |                        |   |        |  
|---------------------------------------------------------- |  | ----------------------- | ------ | - | ---------------------- | - | ------ | -
|                                                           |  | As ofSeptember 30, 2007 |        |   | As ofDecember 31, 2006 |  
|Secured term loan, due August 31, 2013                     |  | $                       | 56,000 |   |                        | $ | 88,000 |  
|Deferred financing fees, amortized through August 31, 2013 |  |                         | (2,629 | ) |                        |   | (2,977 | )
|                                                           |  |                         |        |   |                        |   |        |  
|Total debt, net of fees                                    |  | $                       | 53,371 |   |                        | $ | 85,023 |  
|                                                           |  |                         |        |   |                        |   |        |  

Senior Secured Credit Facility

On August 31, 2006, we entered into a senior secured credit facility with a syndicate of banks led by Citigroup and UBS Investment Bank. The credit
facility provides for a $90.0 million term loan facility, a $20.0 million revolving credit facility, and a swingline loan sub-facility. The proceeds from this transaction were used to finance a portion of the CipherTrust acquisition as noted in Note
4 above. The term loan matures on August 31, 2013 and is payable in 27 scheduled quarterly installments of $225,000, which began in December 2006 with a final payment of $83.9 million due at maturity. Interest is payable quarterly on the term
loan at the London Interbank Offered Rate (LIBOR) +3.25%. The interest rate on the term loan may be adjusted quarterly based on our Leverage Ratio and range from LIBOR +3.25% to LIBOR +3.00%. The interest rate in effect as of
September 30, 2007 was 8.36%. Including amortization of deferred financing fees, we incurred $1.6 million and $5.5 million of interest expense in the three and nine months ended September 30, 2007, respectively and none in the same periods
of 2006.

The obligations under the senior secured credit facility are guaranteed by us and are secured by a perfected security interest in
substantially all of our assets. Financing fees of $3.1 million incurred in connection with the credit facility were deferred and are included as a reduction to our long-term debt. These fees are being amortized to interest expense over the term of
the term loan using the effective interest rate method.



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6. Debt (continued)



Debt Covenants

The credit facility agreement
contains various covenants including limitations on additional indebtedness, capital expenditures, restricted payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition, the credit facility requires us to comply
with certain quarterly financial covenants including maintaining leverage and interest coverage ratios and capital expenditure limitations. We are in compliance with all covenants as of September 30, 2007.

Derivative Instrument

On September 29,
2006, we entered into a 3-month LIBOR interest rate cap agreement to cap the interest rate at 5.5% on $60.0 million, or approximately 67% of the aggregate term loan. The notional amount of the agreement decreases $10.0 million each quarter which
began March 30, 2007. As of September 30, 2007, the notional amount of the agreement is $30.0 million, or approximately 54% of the aggregate term loan balance. The agreement terminates on June 30, 2008. The interest rate cap agreement
is designated as a cash flow hedge and is reflected at fair value in our Condensed Consolidated Balance Sheet. The related gains or losses on this contract are deferred in stockholders equity as a component of other comprehensive loss.
Deferred gains and losses are amortized as an adjustment to expense over the same period in which the related items being hedged are recognized in income. However, to the extent that this contract is not considered to be perfectly effective in
offsetting the change in the value of the item being hedged, any change in fair value relating to the ineffective portion of this contract will be immediately recognized in income. The unrealized gain on the interest rate cap agreement is $1,000 on
our Condensed Consolidated Balance Sheet as of September 30, 2007.

7. Equity Financing

On January 12, 2006, we received from Warburg Pincus Private Equity IX, L.P., a global private equity fund, $70.0 million in gross proceeds from the
issuance of 700,000 shares of Series A preferred stock (the preferred stock), a warrant to acquire 1.0 million shares of our common stock that vested on that date and an election of a member to our Board of Directors. Based on a quoted market
price, as of January 12, 2006 and the fair value of the warrant as determined using the Black-Scholes model, we valued the preferred stock at $62.0 million and the warrant at $8.0 million. The proceeds from this transaction were used to finance
most of the cash portion of the CyberGuard acquisition as noted in note 5 above.

On August 31, 2006, the conversion price for the
preferred stock was adjusted from the original price of $13.51 to $12.75 per share in accordance with an anti-dilution provision that became effective due to the CipherTrust acquisition. Holders of our preferred stock will be entitled to receive
benefits not available to holders of our common stock. These benefits include, but are not limited to, the following: beginning in July 2010, shares of preferred stock will be entitled to receive semi-annual dividends, which may be paid in cash or
added to the preferred stock liquidation preference equal to 5% of the preferred stock liquidation preference per year and each share of preferred stock has an initial liquidation preference of $100 which accretes daily at an annual rate of 5%,
compounded semi-annually, until July 2010.

On August 31, 2006, the exercise price for the warrant was adjusted from the original
price of $14.74 to $13.85 per share also in accordance with an anti-dilution provision that became effective due to the CipherTrust acquisition. The warrant expires on January 12, 2013. When the market price of our common stock is above their
exercise price, the warrant becomes dilutive and 1.0 million shares are immediately included in the computation of diluted earnings per share using the treasury stock method.

The preferred stock was initially reflected on our financial statements at $62.0 million, which is a discount of $8.0 million from its initial
liquidation value of $70.0 million due to the fair value of the warrant on the effective date. The liquidation value of the preferred stock accretes daily at an annual rate of 5%, compounded semi-annually. This accretion is recorded as a reduction
of earnings attributable to common shareholders ratably for a period of 54 months after date of issuance.

We incurred a beneficial
conversion charge of $12.6 million, which was recorded as a reduction in earnings attributable to common shareholders in the first quarter 2006, upon the issuance of the preferred stock since the effective conversion price, after adjusting for the
value of the warrants, was less than market price on date of issuance on January 12, 2006. However, in August 2005 when the terms of the preferred stock issuance to Warburg Pincus in the Securities Purchase Agreement were negotiated, the
average market price of the common stock was, in fact, less than the conversion price.



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8. Comprehensive Loss

During the three months ended September 30, 2007, total comprehensive loss amounted to $10.1 million compared to $7.3 million for the same period in 2006. During the nine months ended September 30, 2007,
total comprehensive loss amounted to $30.0 million compared to $868,000 for the same period in 2006. The components of our comprehensive loss are net (loss)/income, foreign currency translation adjustments, and the change in the fair market value of
our investments and interest rate hedge. Results of operations were translated using average exchange rates throughout the period. Translation gains or losses are accumulated as a separate component of stockholders equity and included in
comprehensive loss.

9. Contingencies

On June 5, 2006, Finjan Software, Ltd. filed a complaint entitled Finjan Software, Ltd. v. Secure Computing Corporation in the United States District Court for the District of Delaware against Secure Computing Corporation, CyberGuard
Corporation, and Webwasher AG. The complaint alleged that Secure Computing and its named subsidiaries infringe U.S. Patent No. 6,092,194 (194 Patent) based on the manufacture, use, and sale of the Webwasher Secure Content
Management suite, CyberGuard TSP, and IronMail. On April 10, 2007, Finjan amended its Complaint to allege that Secure Computing and its named subsidiaries infringe U.S. Patent No. 6,804,780 (780 Patent) and U.S. Patent
No. 7,058,822 (822 Patent) based on the manufacture, use, and sale of the Webwasher Secure Content Management suite. Secure Computing denies infringing any valid claims of the 194 Patent, the 780 Patent, or the
822 Patent. The answer and counterclaims to Finjans amended complaint was filed on April 20, 2007. In its counterclaims, Secure Computing alleges that Finjan infringes two Secure Computing patentsU.S. Patent No. 6,357,010
and U.S. Patent No. 7,185,361. Discovery continues with an estimated trial date in March, 2008.

On May 4, 2007, Secure Computing
filed a complaint in the United States District Court for the district of Minnesota against Finjan Software Ltd. and Finjan Software, Inc. In its complaint, Secure Computing asserts that Finjans load-balancing security solutions, including but
not limited to Finjans Vital Security Load Balancer NG-5300, infringe U.S. Patent No. 7,171,681. On May 24, 2007 Secure Computing filed an amended complaint adding additional claims that Finjan is in violation of §43(a) of the
Lanham Act, the Minnesota Deceptive Trade Practices Act, and Minnesotas common law, for unfair competition and false advertising. The complaint seeks, among other things, unspecified monetary damages arising from Finjans unauthorized use
of Secure Computings patented technology and for Finjans continued and willful false and/or misleading statements in advertising. The matter has been transferred to the United States District Court for the district of Delaware.

On January 19, 2007, Rosenbaum Capital, LLC. filed a putative securities class action complaint in the United States District Court
for the Northern District of California against Secure Computing and certain directors and officers of the company. The alleged plaintiff class includes persons who acquired our stock between May 4, 2006 through July 11, 2006. The
complaint alleges generally that defendants made false and misleading statements about our business condition and prospects for the fiscal quarter ended June 30, 2006, in violation of Section 10(b) and 20(a) of the Securities Exchange Act
of 1934 and SEC Rule 10b-5. The complaint seeks unspecified monetary damages. The matter is pending.

On September 21, 2007, Diane
Josifovich filed a complaint against Secure Computing in the Superior Court of New Jersey, Somerset County. The complaint alleges that Secure Computing breached its contract with Ms. Josifovich with respect to payment for commission sales.
Related to this allegation, the complaint also alleges claims of promissory estoppel, equitable estoppel, misrepresentation, and breach of the covenant of good faith and fair dealing. The complaint also alleges that Secure Computing retaliated
against Ms. Josifovich and created a hostile work environment on the basis of Ms. Josifovichs gender. The complaint seeks unspecified monetary damages. The matter is pending. We intend to vigorously defend all claims against us.

From time to time we may be engaged in certain other 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 consolidated financial position or results of operation.

10. Income Taxes

During the three months ended September 30, 2007, we recorded income tax expense of $3.6 million. The $3.6 million income tax expense consists of
$2.4 million of non-cash U.S. tax expense associated with the need to provide additional tax expense for valuation allowance on net operating losses. $875,000 tax expense for various foreign income taxes and $338,000 for United States Federal and
State regular income tax expense. This is compared with an income tax expense of $1.4 million in the same period of 2006. The $1.4 million of income tax expense was related to current income tax components such as the utilization of net operating
losses, alternative minimum income tax, and state and foreign income taxes.



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10. Income Taxes (continued)



During the nine months ended September 30, 2007, we recorded income tax expense of $6.6 million. The $6.6 million
income tax expense consists of $2.4 million of non-cash U.S. tax expense associated with the need to provide additional tax expense for valuation allowance on net operating losses, $2.4 million tax expense for various foreign taxes, $1.4 million of
non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired net operating losses where the benefit of the release is offset to goodwill, and $440,000 for United States Federal and State regular
income tax expense. This is compared with an income tax benefit of $5.9 million in the same period of 2006. Of this $5.9 million income tax benefit, a non-cash benefit of $7.3 million was related to the reversal of the previously recorded tax
valuation allowance on our non-acquired net operating losses as we had determined it to be more likely than not that a portion of our existing deferred tax assets would be realized; the remainder of the income tax expense was related to current
income tax components such as the utilization of net operating losses, alternative minimum income tax, and state and foreign income taxes.

In accordance with SFAS No. 109, we have assessed the likelihood that the net deferred tax assets will be realized. SFAS No. 109, Accounting for Income Taxes, requires the consideration of a valuation allowance in all
circumstances, if the conclusion is not more likely than not a valuation allowance is required. We have a net deferred tax liability recorded in our consolidated balance sheet that consists primarily of indefinite lived intangible assets which
cannot be used to realize additional reversing deferred tax assets. In accordance with SFAS No. 109, our remaining non-current deferred tax liabilities are netted with our non-current deferred tax assets and are presented as a single amount in
our consolidated balance sheet. We have determined that the deferred tax assets, above the amount of non-current deferred tax liabilities netted with the deferred tax assets, are not more likely than not to be realized and as such a full valuation
allowance has been placed on this remaining amount.

11. Related Party Transaction

In February 2005, we made a strategic investment in a privately-held technology company of $2.7 million. In July 2007, we made an additional $500,000
investment. As a result of this $3.2 million investment, we have a 15% ownership stake in this company. This investment is reported in other assets on our Condensed Consolidated Balance Sheets and is evaluated for impairment annually.

Two of our board members, one of whom is a board member of the investee, are individual investors of the investee. Due to their involvement with the
investee, these two board members recused themselves from our decisions to make the investments.

12. Segment Information

We view our operations and manage our business as one segment called enterprise security solutions. Major foreign markets for our products and services
include Europe, Japan, China, the Pacific Rim, and Latin America. In each market, we have independent channel partners who are responsible for marketing, selling and supporting our products and services to resellers and end-users within their
defined territories. International sales accounted for 31% and 32% of total revenue for the three months ended September 30, 2007 and 2006, respectively and 34% and 40% for the nine months ended September 30, 2007 and 2006, respectively.
The following table summarizes our domestic and international revenue (in thousands):



|              |  |                                 |        |                                |   |        |  |      |         |  |   |        
|------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|              |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|              |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|Revenues:     |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Domestic      |  | $                               | 41,660 |                                | $ | 29,753 |  | $    | 113,257 |  | $ | 74,872 
|International |  |                                 | 18,358 |                                |   | 13,995 |  |      | 58,181  |  |   | 50,239 
|              |  |                                 |        |                                |   |        |  |      |         |  |   |        
|              |  | $                               | 60,018 |                                | $ | 43,748 |  | $    | 171,438 |  | $ | 125,111
|              |  |                                 |        |                                |   |        |  |      |         |  |   |        



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13. Share-Based Compensation

Description of Plans

Under our 2002 Stock Incentive Plan (2002 Plan), we are permitted to grant incentive and
non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights and other similar types of stock awards, such as phantom stock rights, to our employees and non-employee directors. There were a total of
8.5 million shares authorized under the 2002 Plan at September 30, 2007. All options granted under the 2002 Plan through September 30, 2007 have exercise prices equal to the fair market value of our stock on the date of grant. Options
granted under the 2002 Plan have ten-year terms and typically vest 25% after the first year and then monthly over the following three years. In 2006, we granted restricted stock awards under the 2002 Plan primarily to certain executive officers and
non-employee directors. In addition to issuing stock options, during the first quarter of 2007 we began issuing restricted stock awards and restricted stock units for employees at all job levels. Restricted stock awards granted under the 2002 Plan
typically vest 25% after the first year and then quarterly over the following three years. Outstanding awards that were originally granted under several predecessor plans also remain in effect in accordance with their terms.

The N2H2 Stock Option Plans, the CyberGuard Stock Option Plans, and the Secure Computing 2000 Stock Plan (formerly the CipherTrust 2000 Stock Option
Plan) which were assumed in connection with our acquisitions, are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2006 as filed with Securities and Exchange Commission.

We have an employee stock purchase plan (ESPP), which enables employees to contribute up to 10% of their compensation toward the purchase of our common
stock at the end of the participation period at a purchase price equal to 85% of the lower of the fair market value of the common stock on the first or last day of the participation period.

Share-Based Compensation Expense

A summary
of the share-based compensation expense that we recorded in accordance with SFAS No. 123(R) for stock options, restricted stock awards and shares purchased under our ESPP for the periods shown is as follows (in thousands, except per share
amounts):



|                                           |  |                                 |       |                                |   |       |  |      |        |  |   |      
|------------------------------------------ |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | -----
|                                           |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                           |  | 2007                            |       | 2006                           |   | 2007  |  | 2006
|Cost of product revenues                   |  | $                               | 57    |                                | $ | 109   |  | $    | 268    |  | $ | 262  
|Cost of service revenues                   |  |                                 | 220   |                                |   | 170   |  |      | 613    |  |   | 439  
|Selling and marketing                      |  |                                 | 2,490 |                                |   | 1,863 |  |      | 6,907  |  |   | 3,333
|Research and development                   |  |                                 | 838   |                                |   | 706   |  |      | 2,773  |  |   | 1,625
|General and administrative                 |  |                                 | 699   |                                |   | 488   |  |      | 1,800  |  |   | 1,360
|                                           |  |                                 |       |                                |   |       |  |      |        |  |   |      
|Increase of loss before taxes              |  | $                               | 4,304 |                                | $ | 3,336 |  | $    | 12,361 |  | $ | 7,019
|                                           |  |                                 |       |                                |   |       |  |      |        |  |   |      
|Effect on basic and diluted loss per share |  | $                               | 0.06  |                                | $ | 0.06  |  | $    | 0.19   |  | $ | 0.13 

As of September 30, 2007, there was $32.1 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a
weighted average period of 2.7 years.



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##### Table of Contents

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

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

The following discussion contains certain
forward-looking statements, 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. The risks and uncertainties are summarized in the
forward-looking statements below and in the other documents that we file with the Securities Exchange Commission, such as our Annual Report on Form 10-K for the year ended December 31, 2006. These forward-looking statements reflect our view
only as of the date of this report. We cannot guarantee future results, levels of activity, performance, or achievement. We do not undertake any obligation to update or correct any forward-looking statements.

EXECUTIVE OVERVIEW

We are a leading provider of
enterprise gateway security solutions. Our best-of-breed portfolio of Gateway Security solutions provides Web Gateway, Messaging Gateway, and Network Gateway Security, as well as Identity and Access Management that are further differentiated by the
proactive protection provided by TrustedSource (global intelligence).

Our specialized solutions are designed to meet customers needs
to balance security and accessibility, and to help them create trusted environments both inside and outside their organizations. Each of our products provides a complete solution in and of itself, and they also integrate with each other for a more
comprehensive, unified, and centrally managed solution. We have developed a vision for comprehensive security on the enterprise gateway that embodies the following core design principles: appliance-based delivery; application and content awareness;
centralized policy, management and reporting; bi-directional protection; proactive protection; user management and education; performance; and resiliency.

We continue to execute on our strategy to significantly increase our presence in the industry and
to define and become the leader in the enterprise gateway security market. We believe that our acquisitions of CyberGuard and CipherTrust in 2006 have laid a strong foundation for our future success. During the first quarter of 2007 we completed the
development that merged the acquired CyberGuard Firewall/VPN technologies (TSP and Classic) with our Sidewinder G2® Security Appliance resulting in our next generation Network Gateway
Security appliance called Sidewinder 7.0. During the second quarter of 2007 we expanded our reseller channel through a new channel partner program that rewards partners that register and secure sales opportunities in strategic target market
segments. In addition, we integrated our CipherTrust acquired TrustedSource technology into our CyberGuard acquired SnapGear® firewall/VPN appliance for small and medium-sized businesses
(SMB) and remote offices resulting in an industry leading, next generation SMB Network Security Appliance. We also released a newly enhanced version of our award-winning web filtering solution, SmartFilter® 4.2 with acquired TrustedSource technology which marks our fourth product integration with TrustedSource, our global reputation system. In the third quarter of 2007 we completed development and released Webwasher
6.6. In addition, we completed development on IronMail 6.7 and will be providing that product to our customers in the fourth quarter. With these releases, all current version appliances for our Web, Messaging, and Network Gateway products are
consolidated to a common set of appliance platforms.

Our Gateway Security revenue represented 86% of total revenue for the three months
ended September 30, 2007, a 36% or $13.6 million increase over the same period of 2006. The increase was driven by the acquired CipherTrust products which contributed $12.2 million to the quarter and sustained demand for Gateway Security
solutions. Our Identity and Access Management revenue represented 14% of total revenue for the three months ended September 30, 2007, a 47% or $2.7 million increase over the same period of 2006. This increase was primarily driven by sustained
demand for high assurance solutions.

Our Gateway Security revenue represented 85% of total revenue for the nine months ended
September 30, 2007, a 39% or $40.7 million increase over the same period of 2006. The increase was driven by the acquired CipherTrust products which contributed $33.0 million year-to-date and sustained demand for Gateway Security solutions.
This increase was slightly offset by a $3.1 million decline in sales of our Bess and Sentian product lines which were discontinued in 2006. Our Identity and Access Management revenue represented 15% of total revenue for the nine months ended
September 30, 2007, a 29% or $5.6 million increase over the same period of 2006. This increase was primarily driven by sustained demand for high assurance solutions.

Our customers operate some of the largest and most sensitive networks and applications in the world. Over half of the Fortune 50 and Fortune 500 are part of our more than 20,000 global customers in 106 countries,
supported by a worldwide network of more than 2,300 partners. Our customers are from the following industries: banking, financial services, healthcare, telecommunications, manufacturing, public utilities, schools and federal, state and local
governments. We also have close relationships with the largest agencies in the U.S. government.



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International sales accounted for 31% and 34% of total revenue during the three months and nine months
ended September 30, 2007, respectively. Major foreign markets for our products include Europe, Japan, China, the Pacific Rim and Latin America. In each market, we have independent channel partners responsible for marketing, selling and
supporting our products to resellers and end users.

Each of our individual products competes with a different group of competitors and
products. In this highly competitive market, characterized by rapid technological change, our customers purchasing decisions are based heavily upon the quality of the security our products provide, the ease of installation and management, and
the scalability and flexibility of our software.

Specific challenges and risks that our product lines face include, but are not limited
to: responding to competitor pricing policies and competitive features; rapid technological change in the network security market; and risk of bugs and other errors in our software.

We incurred a net loss of $10.1 million in the three months ended September 30, 2007 compared to a net loss of $7.3 million in the same period in
2006. For the nine months ended September 30, 2007, we incurred a net loss of $31.6 million, compared to net income of $25,000 for the same period in 2006. The net loss is a result of the acquired and assumed CipherTrust expenses which
currently run higher than the corresponding gross profit generated by the acquired CipherTrust product line, along with additional share-based compensation and amortization of acquired intangible assets due to the acquisition. Until we are able to
establish vendor specific objective evidence (VSOE) on the sales of our Messaging Gateway product line and our revenue outpaces our operating expenses, including share-based compensation and amortization of intangible assets, we expect to generate
net losses going forward. For further explanation of VSOE and our revenue recognition policy please refer to the Critical Accounting Policies and Estimates section below.

As of September 30, 2007, we had $10.7 million in cash, cash equivalents and restricted cash with no outstanding borrowings on our revolving credit
facility. We generated $37.4 million in cash from operations for the nine months ended September 30, 2007 of which $32.0 million was used to pay down our outstanding term loan balance. As of September 30, 2007, the outstanding term loan
balance, net of deferred financing fees, was $53.4 million and we were in compliance with all debt covenants. We expect to continue to generate cash during 2007 as we expect billings to grow at a faster rate than operating expenses.



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##### Table of Contents

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the Condensed Consolidated Statements of Operations of our company expressed as a percentage of revenue:



|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|---------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | -- |  | ---- | -- |  | ---- | --
|                                                     |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |   
|                                                     |  | 2007                            |    |  | 2006                           |    |  | 2007 |    |  | 2006 |   
|Revenues:                                            |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Products                                             |  | 52                              | %  |  | 64                             | %  |  | 54   | %  |  | 65   | % 
|Services                                             |  | 31                              |    |  | 36                             |    |  | 32   |    |  | 35   |   
|Other (See Note)                                     |  | 17                              |    |  |                               |    |  | 14   |    |  |     |   
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Total revenues                                       |  | 100                             |    |  | 100                            |    |  | 100  |    |  | 100  |   
|                                                     |  |                                 |    | 
|Cost of revenues:                                    |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Products                                             |  | 16                              |    |  | 18                             |    |  | 16   |    |  | 18   |   
|Services                                             |  | 7                               |    |  | 7                              |    |  | 7    |    |  | 6    |   
|Other (See Note)                                     |  | 2                               |    |  |                               |    |  | 2    |    |  |     |   
|Amortization of purchased intangibles                |  | 3                               |    |  | 2                              |    |  | 4    |    |  | 3    |   
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Total cost of revenues                               |  | 28                              |    |  | 27                             |    |  | 29   |    |  | 27   |   
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Gross profit                                         |  | 72                              |    |  | 73                             |    |  | 71   |    |  | 73   |   
|                                                     |  |                                 |    | 
|Operating expenses:                                  |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Selling and marketing                                |  | 49                              |    |  | 54                             |    |  | 51   |    |  | 46   |   
|Research and development                             |  | 19                              |    |  | 20                             |    |  | 19   |    |  | 19   |   
|General and administrative                           |  | 7                               |    |  | 8                              |    |  | 7    |    |  | 8    |   
|Amortization of purchased intangibles                |  | 5                               |    |  | 6                              |    |  | 5    |    |  | 6    |   
|Litigation settlement                                |  |                                |    |  |                               |    |  |     |    |  | 1    |   
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Total operating expenses                             |  | 80                              |    |  | 88                             |    |  | 82   |    |  | 80   |   
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Operating loss                                       |  | (8                              | )  |  | (15                            | )  |  | (11  | )  |  | (7   | ) 
|Other (expense)/income                               |  | (3                              | )  |  | 1                              |    |  | (4   | )  |  | 2    |   
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Loss before taxes                                    |  | (11                             | )  |  | (14                            | )  |  | (15  | )  |  | (5   | ) 
|Income tax (expense)/benefit                         |  | (6                              | )  |  | (3                             | )  |  | (4   | )  |  | 5    |   
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Net (loss)/income                                    |  | (17                             | )  |  | (17                            | )  |  | (19  | )  |  | 0    |   
|Preferred stock accretion                            |  | (1                              | )  |  | (2                             | )  |  | (1   | )  |  | (2   | ) 
|Charge from beneficial conversion of preferred stock |  |                                |    |  |                               |    |  |     |    |  | (10  | ) 
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   
|Net loss applicable to common shareholders           |  | (18                             | )% |  | (19                            | )% |  | (20  | )% |  | (12  | )%
|                                                     |  |                                 |    |  |                                |    |  |      |    |  |      |   

---

|NOTE: | For certain multiple-element arrangements we are unable to establish vendor specific objective evidence (VSOE) of fair value for the undelivered bundled elements and are
therefore unable to allocate the value of the arrangement between Products and Services Revenue and have reported these revenues and corresponding cost of revenues as Other.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comparison of Three Months Ended September 30, 2007 and 2006.

Revenues. Our total revenues increased 37% to $60.0 million for the three months ended September 30, 2007 up from $43.7 million in the same period of 2006. Our products revenues increased 11% to $31.0
million for the three months ended September 30, 2007 up from $27.9 million in the same period of 2006. Our services revenues increased 22% to $19.0 million for the three months ended September 30, 2007 up from $15.6 million in the same
period of 2006. Other revenues increased to $10.0 million for the three months ended September 30, 2007 up from $239,000 in the same period of 2006. The $10.0 million or 17% of total revenue and the $239,000 were attributable to multiple
element sales that lacked VSOE in the prior periods and became recognizable in the three months ended September 30, 2007 and September 30, 2006, respectively. This revenue is primarily from our Messaging Gateway product line revenues.
Because we are unable to establish VSOE of fair value on the undelivered elements, the majority of the revenue from those product lines has been deferred and will be recognized as revenue over the service period. The total revenue growth was driven
by a 36% or $13.6 million increase in the Gateway Security solutions revenue which represented 86% of total revenue, was driven by sustained demand, and included an increase of $12.2 million from acquired CipherTrust products, and a 47% or $2.7
million increase in the Identity and Access Management revenue which represented 14% of total revenue.



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Cost of Revenues and Gross Profit.Total cost of revenues increased 44% to $17.0 million in the
three months ended September 30, 2007, up from $11.8 million in the same period of 2006. This increase is the direct result of the increase in both total revenues and the amortization of acquired developed technology related to the CipherTrust
acquisition. Gross profit as a percentage of revenue was 72% for the quarter compared to 73% in the same period of 2006. In the three months ended September 30, 2007, gross profit for products decreased to 69% for the quarter compared to 73% in
the same period of 2006, primarily due to increased sales volume of products containing a hardware component, which have a lower gross profit than our software products. Gross profit for services decreased to 79% for the three months ended
September 30, 2007 compared to 81% in the same period of 2006 primarily due to an increase in customer support headcount and related costs.

Operating Expenses. Operating expenses consist of selling and marketing, research and development, general and administrative expenses, and amortization of purchased intangible assets. Total operating expenses increased 25% to $47.9
million for the three months ended September 30, 2007 up from $38.3 million in the same period of 2006. This increase was driven primarily by increased headcount and related costs and share-based compensation expense as a result of the
CipherTrust acquisition and our initiative to invest in more sales headcount. To a lesser extent, operating expenses increased as a result of inflationary increases in payroll and related costs. As a percentage of revenue, total operating expenses
were 80% for the quarter compared to 88% in the same period of 2006. This improvement was primarily driven by the growth in revenue and gross profit outpacing the increase in operating expense.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, share-based compensation and benefits related to
personnel engaged in selling, marketing, and customer support functions, along with costs related to advertising, promotions, public relations, travel and allocations of corporate costs, which include information technology, facilities and human
resources expenses. Our customer support function, which provides support, training and installation services, is also responsible for supporting our sales representatives and sales engineers throughout the sales cycle by providing them and our
prospective customers with technical assistance and, as such, a portion of these costs are included here. Selling and marketing expenses increased 25% to $29.7 million in the three months ended September 30, 2007 up from $23.7 million in the
same period of 2006. This increase was driven primarily by increased headcount and related costs as a result of the CipherTrust acquisition and our initiative to invest in more sales headcount and discretionary marketing. To a lesser extent selling
and marketing expense increased as a result of inflationary increases in payroll and related costs and share-based compensation costs. As a percentage of revenue, selling and marketing expense was 49% for the quarter compared to 54% in the same
period of 2006. This improvement was primarily driven by the growth in revenue and gross profit outpacing the increase in selling and marketing expense.

Research and Development.Research and development expenses consist primarily of salaries, share-based compensation and benefits for our product development and advanced technology personnel and allocations of
corporate costs, which include information technology, facilities and human resources expenses. Research and development expenses increased 27% to $11.2 million in the three months ended September 30, 2007 up from $8.8 million in the same
period of 2006. This increase was primarily driven by increased headcount and related costs as a result of the CipherTrust acquisition and to a lesser extent inflationary increases in payroll and related costs, share-based compensation costs, and
increases in allocated corporate costs. As a percentage of revenue, research and development expenses were 19% for the three months ended September 30, 2007 compared to 20% in the same period of 2006. This improvement was primarily driven by
the growth in revenue and gross profit outpacing the increase in research and development expense.

General and Administrative.
General and administrative expenses consist primarily of salaries, share-based compensation, benefits and related expenses for our executive, finance and legal personnel, directors and officers insurance and allocations of corporate costs, which
include information technology, facilities and human resources expenses. General and administrative expenses increased 24% to $4.3 million in the three months ended September 30, 2007 up from $3.5 million in the same period of 2006. This
increase was driven primarily by increased share-based compensation costs and an increase in legal fees associated with defending the three complaints described in Note 9 of the Notes to the Condensed Consolidated Financial Statements. As a
percentage of revenue, general and administrative expenses were 7% for the three months ended September 30, 2007 compared to 8% in the same period of 2006. This improvement was primarily driven by the growth in revenue and gross profit
outpacing the increase in general and administrative expense.

Amortization of Purchased Intangible Assets. Amortization of
purchased intangible assets consists of the amortization of tradenames and customer lists acquired in the CipherTrust and CyberGuard acquisitions, described in Note 4 and 5 of the Notes to the Condensed Consolidated Financial Statements,
respectively. Amortization of these acquired tradenames and customer lists was $2.7 million in the three months ended September 30, 2007 compared to $2.3 million, in the same period of 2006. This increase was a result of the additional
intangibles acquired in the CipherTrust acquisition.



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Share-Based Compensation Expense. Share-based compensation expense related to stock options,
restricted stock awards and shares purchased under our employee stock purchase plan (ESPP) under SFAS No. 123(R) was allocated as follows for the periods indicated (in thousands):



|                                       |  |                                 |       |      |   |      
|-------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                       |  | Three Months EndedSeptember 30,
|                                       |  | 2007                            |       | 2006
|Cost of product revenues               |  | $                               | 57    |      | $ | 109  
|Cost of service revenues               |  |                                 | 220   |      |   | 170  
|Selling and marketing                  |  |                                 | 2,490 |      |   | 1,863
|Research and development               |  |                                 | 838   |      |   | 706  
|General and administrative             |  |                                 | 699   |      |   | 488  
|                                       |  |                                 |       |      |   |      
|Total share-based compensation expense |  | $                               | 4,304 |      | $ | 3,336
|                                       |  |                                 |       |      |   |      

The increase in share-based compensation expense is due to increased headcount and the addition of
management level employees in selling and marketing and research and development. In 2006, we granted restricted stock awards under the 2002 Plan primarily to certain executive officers. In addition to issuing stock options, during the first quarter
of 2007 we began issuing restricted stock awards and/or restricted stock units for employees at all job levels. Restricted stock awards granted under the 2002 Plan typically vest 25% after the first year and then quarterly over the following three
years.

Other (Expense)/Income.Other expense was $1.6 million in the three months ended September 30, 2007, compared to other
income of $501,000 in the same period of 2006. The increase in other expense is primarily a result of interest expense incurred for debt assumed for the CipherTrust acquisition and a decrease in interest income on a lower average cash balance.

Income Taxes.During the three months ended September 30, 2007, we recorded income tax expense of $3.6 million. The $3.6
million income tax expense consists of $2.4 million of non-cash U.S. tax expense associated with the need to provide additional tax expense for valuation allowance on net operating losses. $875,000 tax expense for various foreign income taxes and
$338,000 for United States Federal and State regular income tax expense. This is compared with an income tax expense of $1.4 million in the same period of 2006. The $1.4 million of income tax expense was related to current income tax components such
as the utilization of net operating losses, alternative minimum income tax, and state and foreign income taxes.

In accordance with SFAS
No. 109, we have assessed the likelihood that the net deferred tax assets will be realized. SFAS No. 109, Accounting for Income Taxes, requires the consideration of a valuation allowance in all circumstances, if the conclusion
is not more likely than not a valuation allowance is required. We have a net deferred tax liability recorded in our consolidated balance sheet that consists primarily of indefinite lived intangible assets which cannot be used to realize additional
reversing deferred tax assets. In accordance with SFAS No. 109, our remaining non-current deferred tax liabilities are netted with our non-current deferred tax assets and are presented as a single amount in our consolidated balance sheet. We
have determined that the deferred tax assets, above the amount of non-current deferred tax liabilities netted with the deferred tax assets, are not more likely than not to be realized and as such a full valuation allowance has been placed on this
remaining amount.

Estimates were used in the determination of our provision for income taxes, current income taxes payable, as well as in
our deferred tax asset and liability analysis. These estimates take into account current tax laws and our interpretation of these current tax laws within the various taxing jurisdictions within which we operate. Changes in the tax laws or our
interpretation of tax laws and the resolution of future audits could impact our provision for income taxes.

Comparison of Nine Months Ended
September 30, 2007 and 2006.

Revenues. Our total revenues increased 37% to $171.4 million for the nine months ended
September 30, 2007 up from $125.1 million in the same period of 2006. Our products revenues increased 13% to $91.9 million for the nine months ended September 30, 2007 up from $81.6 million in the same period of 2006. Our services revenues
increased 27% to $54.9 million for the nine months ended September 30, 2007 up from $43.3 million in the same period of 2006. Other revenues increased to $24.6 million for the nine months ended September 30, 2007 up from $239,000 in the
same period of 2006. The $24.6 million or 14% of total revenue and the $239,000 were attributable to multiple element sales that lacked VSOE in the prior periods and became recognizable in the nine months ended September 30, 2007 and
September 30, 2006, respectively. This revenue is primarily from our Messaging Gateway product line revenues. Because we are unable to establish VSOE of fair value on undelivered elements, the majority of the revenue from those product lines
has been deferred and will be recognized as revenue over the service period. The total revenue growth was driven by a 39% or $40.7 million increase in the Gateway



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##### Table of Contents

Security solutions revenue which represented 85% of total revenue, was driven by sustained demand, and included an increase of $33.0 million from acquired
CipherTrust products, and a 29% or $5.6 million increase in the Identity and Access Management revenue which represented 15% of total revenue.

Cost of Revenues and Gross Profit.Total cost of revenues increased 49% to $50.1 million in the nine months ended September 30, 2007, up from $33.6 million in the same period of 2006. This increase is the direct result of the
increase in both total revenues and the amortization of acquired developed technology related to the CipherTrust acquisition. Gross profit as a percentage of revenue was 71% for the nine months compared to 73% in the same period of 2006. In the nine
months ended September 30, 2007, gross profit for products decreased to 69% compared to 72% in the same period of 2006, primarily due to increased sales volume of products containing a hardware component, which have a lower gross profit than
our software products. Gross profit for services decreased to 78% for the nine months ended September 30, 2007 compared to 82% in the same period of 2006 primarily due to an increase in customer support headcount and related costs.

Operating Expenses. Operating expenses consist of selling and marketing, research and development, general and administrative expenses, and
amortization of purchased intangible assets, along with a non-recurring litigation settlement cost in 2006. Total operating expenses increased 41% to $140.7 million for the nine months ended September 30, 2007 up from $99.8 million in the same
period of 2006. This increase was driven primarily by increased headcount and related costs, share-based compensation and intangible amortization expense as a result of the CipherTrust acquisition and our initiative to invest in more sales headcount
and in discretionary marketing. To a lesser extent, operating expenses increased as a result of inflationary increases in payroll and related costs. As a percentage of revenue, total operating expenses were 82% for the nine months ended
September 30, 2007 compared to 80% in the same period of 2006. This increase was primarily driven by an increase in selling and marketing expense as a percentage of revenue offset by a decrease in litigation settlement expense as a percentage
of revenue.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, share-based
compensation and benefits related to personnel engaged in selling, marketing, and customer support functions, along with costs related to advertising, promotions, public relations, travel and allocations of corporate costs, which include information
technology, facilities and human resources expenses. Our customer support function, which provides support, training and installation services, is also responsible for supporting our sales representatives and sales engineers throughout the sales
cycle by providing them and our prospective customers with technical assistance and, as such, a portion of these costs are included here. Selling and marketing expenses increased 53% to $87.8 million in the nine months ended September 30, 2007
up from $57.3 million in the same period of 2006. This increase was driven primarily by increased headcount and related costs as a result of the CipherTrust acquisition, increased commission expense on increased billings and our initiative to invest
in more sales headcount and discretionary marketing. To a lesser extent selling and marketing expense increased as a result of inflationary increases in payroll and related costs and share-based compensation costs. As a percentage of revenue,
selling and marketing expense was 51% for the nine months compared to 46% in the same period of 2006. This increase was primarily driven by the increase in share-based compensation costs and an increase in headcount and marketing as noted above.

Research and Development.Research and development expenses consist primarily of salaries, share-based compensation and benefits
for our product development and advanced technology personnel and allocations of corporate costs, which include information technology, facilities and human resources expenses. Research and development expenses increased 40% to $32.9 million in the
nine months ended September 30, 2007 up from $23.6 million in the same period of 2006. This increase was primarily driven by increased headcount and related costs as a result of the CipherTrust acquisition and to a lesser extent inflationary
increases in payroll and related costs, share-based compensation costs, and increases in allocated corporate costs. As a percentage of revenue, research and development expenses were 19% for the nine months ended September 30, 2007 and 2006.

General and Administrative. General and administrative expenses consist primarily of salaries, share-based compensation, benefits
and related expenses for our executive, finance and legal personnel, directors and officers insurance and allocations of corporate costs, which include information technology, facilities and human resources expenses. General and administrative
expenses increased 25% to $11.7 million in the nine months ended September 30, 2007 up from $9.4 million in the same period of 2006. This increase was driven primarily by increased share-based compensation costs as a result of the CipherTrust
acquisition and an increase in legal fees associated with defending the three complaints described in Note 9 of the Notes to the Condensed Consolidated Financial Statements. As a percentage of revenue, general and administrative expenses were 7% for
the nine months ended September 30, 2007 compared to 8% in the same period of 2006.

Amortization of Purchased Intangible
Assets. Amortization of purchased intangible assets consists of the amortization of tradenames and customer lists acquired in the CipherTrust and CyberGuard acquisitions, described in Note 4 and 5 of the Notes to the Condensed Consolidated
Financial Statements, respectively. Amortization of these acquired tradenames and customer lists was $8.3 million in the nine months ended September 30, 2007 compared to $7.0 million, in the same period of 2006. This increase was a result of
the additional intangibles acquired in the CipherTrust acquisition.



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##### Table of Contents

Share-Based Compensation Expense. Share-based compensation expense related to stock options,
restricted stock awards and shares purchased under our employee stock purchase plan (ESPP) under SFAS No. 123(R) was allocated as follows for the periods indicated (in thousands):



|                                       |  |                                |        |      |   |      
|-------------------------------------- |  | ------------------------------ | ------ | ---- | - | -----
|                                       |  | Nine Months EndedSeptember 30,
|                                       |  | 2007                           |        | 2006
|Cost of product revenues               |  | $                              | 268    |      | $ | 262  
|Cost of service revenues               |  |                                | 613    |      |   | 439  
|Selling and marketing                  |  |                                | 6,907  |      |   | 3,333
|Research and development               |  |                                | 2,773  |      |   | 1,625
|General and administrative             |  |                                | 1,800  |      |   | 1,360
|                                       |  |                                |        |      |   |      
|Total share-based compensation expense |  | $                              | 12,361 |      | $ | 7,019
|                                       |  |                                |        |      |   |      

The increase in share-based compensation expense is due to increased headcount and the addition of
management level employees in selling and marketing and research and development. In 2006, we granted restricted stock awards and/or restricted stock units under the 2002 Plan primarily to certain executive officers. In addition to issuing stock
options, during the first quarter of 2007 we began issuing restricted stock awards for employees at all job levels. Restricted stock awards granted under the 2002 Plan typically vest 25% after the first year and then quarterly over the following
three years.

Litigation Settlement.The litigation settlement expense of $2.5 million in the nine months ended
September 30, 2006 pertained to a charge related to litigation brought by the landlord of our former Concord, CA office. This expense represented a judgment in favor of the plaintiff for $1.1 million and additional costs of $1.4 million we
incurred related to damages. The settlement was paid in July 2006.

Other (Expense)/Income.Other expense was $5.6 million in the
nine months ended September 30, 2007, compared to other income of $2.4 million in the same period of 2006. The increase in other expense is primarily a result of interest expense incurred for debt assumed for the CipherTrust acquisition and a
decrease in interest income on a lower average cash balance.

Income Taxes.During the nine months ended September 30, 2007, we
recorded income tax expense of $6.6 million. The $6.6 million income tax expense consists of $2.4 million of non-cash U.S. tax expense associated with the need to provide additional tax expense for valuation allowance on net operating losses, $2.4
million tax expense for various foreign taxes, $1.4 million of non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired net operating losses where the benefit of the release is offset to
goodwill, and $440,000 for United States Federal and State regular income tax expense. This is compared with an income tax benefit of $5.9 million in the same period of 2006. Of this $5.9 million income tax benefit, a non-cash benefit of $7.3
million was related to the reversal of the previously recorded tax valuation allowance on our non-acquired net operating losses as we had determined it to be more likely than not that a portion of our existing deferred tax assets would be realized;
the remainder of the income tax expense was related to current income tax components such as the utilization of net operating losses, alternative minimum income tax, and state and foreign income taxes.

In accordance with SFAS No. 109, we have assessed the likelihood that the net deferred tax assets will be realized. SFAS No. 109,
Accounting for Income Taxes, requires the consideration of a valuation allowance in all circumstances, if the conclusion is not more likely than not a valuation allowance is required. We have a net deferred tax liability recorded in our
consolidated balance sheet that consists primarily of indefinite lived intangible assets which cannot be used to realize additional reversing deferred tax assets. In accordance with SFAS No. 109, our remaining non-current deferred tax
liabilities are netted with our non-current deferred tax assets and are presented as a single amount in our consolidated balance sheet. We have determined that the deferred tax assets, above the amount of non-current deferred tax liabilities netted
with the deferred tax assets, are not more likely than not to be realized and as such a full valuation allowance has been placed on this remaining amount.

Estimates were used in the determination of our provision for income taxes, current income taxes payable, as well as in our deferred tax asset and liability analysis. These estimates take into account current tax laws
and our interpretation of these current tax laws within the various taxing jurisdictions within which we operate. Changes in the tax laws or our interpretation of tax laws and the resolution of future audits could impact our provision for income
taxes.



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LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents increased by $2.0 million from $8.2 million at December 31, 2006 to $10.2 million at September 30, 2007. For the nine months ended September 30, 2007 we generated $37.4
million from operating activities and $7.3 million from the exercise of stock options and the sale of common stock through our ESPP, which we used to make $32.0 million in principal payments on our term debt and $8.9 million in capital purchases.

Net cash provided by operating activities of $37.4 million for the nine months ended September 30, 2007 was comprised primarily of
$36.7 million in non-cash related expenses, $31.5 million increase in deferred revenue, $2.3 million increase in accrued liabilities and $4.0 million decrease in accounts receivable, offset by a net loss of $31.6 million, $1.4 million decrease in
accrued payroll, $2.1 increase in other current assets, $867,000 decrease in accrued acquisition reserves and $1.3 million increase in inventory. Terms for cash collections received from customers and cash payments made to vendors were consistent
with normal business practices.

Net cash used for investing activities of $12.3 million during the nine months ended September 30,
2007 consisted mainly of $8.9 million for capital additions, which were primarily for computer equipment and technology upgrades and customer evaluation appliances and $1.2 million for capitalized software and patents.

Net cash used for financing activities of $24.7 million for the nine months ended September 30, 2007 consisted primarily of principal payments made
on our term debt of $32.0 million offset by $7.3 million in proceeds related to the exercise of stock options and the sale of common stock through our ESPP.

We anticipate using available cash to fund growth in operations, invest in capital equipment and leasehold improvements, acquire businesses, license technology or products related to our current line of business, and
make additional payments on our term debt. We expect to spend another $3.0 million during the remainder of 2007 on capital expenditures, mainly for computer equipment, technology upgrades and leasehold improvements.

We believe that we have sufficient financial resources available to fund our current working capital and capital expenditure requirements for at least
the next twelve months. In addition to the cash on hand we have a $20.0 million revolving credit facility available pursuant to a credit facility agreement with a syndicate of banks led by Citigroup and UBS Investment Bank which was signed in August
2006. We intend to utilize the funds available through the credit facility for general working capital and ongoing corporate purposes as deemed necessary. At September 30, 2007, we have no outstanding borrowings on this credit facility.

Our credit facility agreement contains various covenants including limitations on additional indebtedness, capital expenditures,
restricted payments, the incurrence of liens, transactions with affiliates and sales of assets. In addition, the credit facility requires us to comply with certain financial covenants on a quarterly basis, including maintaining leverage and interest
coverage ratios and capital expenditure limitations. We are in compliance with all covenants as of September 30, 2007.

CRITICAL ACCOUNTING
POLICIES AND ESTIMATES

Our discussion of the financial condition and results of operations are based upon the consolidated financial
statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements. Management regularly reviews its estimates and assumptions, which are based on historical factors and other
factors that are believed to be relevant under the circumstances. Actual results may differ from these estimates under different assumptions, estimates, or conditions. We believe that the estimates, assumptions and judgments involved in the
accounting policies described in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2006 have the greatest potential impact on our
financial statements, so we consider them to be our critical accounting policies and estimates. Except as discussed in Revenue Recognition and Income Taxes below, we believe that during the nine months ended
September 30, 2007 there were no significant changes to those critical policies and estimates.

Revenue Recognition. We derive
our revenue primarily from two sources: (i) sales of products, including hardware, subscriptions, software licenses, and royalties and (ii) sales of services, including maintenance arrangements to provide upgrades and customer support,
professional services, and contracted development work. We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as modified by SOP 98-9. Revenue from products is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collection is probable. Subscription-based contracts are generally for 12, 24 or 36 months in duration. Subscription revenue along with maintenance
revenue for providing product upgrades and customer support are deferred and recognized ratably over the service period beginning with the month the subscription or service begins.



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When arrangements contain multiple elements and vendor specific objective evidence (VSOE) of fair value
exists for all undelivered elements, we recognize revenue for the delivered elements using the residual method. For arrangements containing multiple elements where VSOE of fair value does not exist for all undelivered elements, we defer revenue for
the delivered and undelivered elements and then recognize revenue on all elements over the service period. In instances where an entire arrangement is deferred due to lack of VSOE of fair value on an undelivered element, the revenue recognized over
the service period is identified as other revenue on the Condensed Consolidated Statement of Operations. We also identify costs (primarily hardware component costs) that are directly associated with product revenues that have been deferred due to
lack of VSOE of fair value on an undelivered element and we defer these costs at the time of shipment and recognize them as cost of sales in proportion to the product revenue as it is recognized over the service term. These costs are identified as
other cost of revenues on the Condensed Consolidated Statement of Operations.

We sell our products either directly to an end-user or
indirectly through our channel of resellers and distributors (our channel partners). When selling through our channel we require our channel partners to provide evidence of end-user sell-through. If we are unable to obtain end-user
sell-through evidence at the time we fulfill the order from a channel partner, we do not recognize revenue until the channel partner supplies end-user sell-through information, the product has been shipped, and all other criteria of SOP 97-2 have
been met, with the exception of sales to our distributors who stock our SnapGear product line. We recognize revenue, net of estimated returns, upon shipment of our SnapGear product line as we have sufficient return history to establish a reserve and
we are not able to receive end-user sell-through evidence due to the high-volume sales of this low-price point product.

Income
Taxes. We account for income taxes under Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in our financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and
liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS No. 109 requires the consideration of a valuation allowance for deferred tax assets if it is more likely than not
that some component or all of the benefits of deferred tax assets will not be realized.

We adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109 on January 1, 2007. FIN 48 creates a single model to address uncertainty in tax positions and
clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date, January 1, 2007, we did not have a material liability under FIN 48 for unrecognized tax benefits. As a result of the
implementation of FIN 48 we have recognized no material adjustment in the liability for unrecognized income tax benefits or in the related impact to our effective tax rate. Our continuing practice is to recognize interest and/or penalties related to
income tax matters in income tax expense.

Our company, along with our subsidiaries, is subject to U.S. Federal income tax as well as
income tax of multiple state jurisdictions. Generally, tax years from 2004 through the present remain open under the statue of limitations. However, due to net operating loss carryforwards (NOL) from prior periods, the Internal Revenue Service (IRS)
could potentially review the losses related to NOL-generating years back to 1989. Our company, along with our subsidiaries, is also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction back to
2000.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We are exposed to market risk from changes in the interest rates on certain outstanding debt. As of September 30, 2007, we had $56.0 million of outstanding indebtedness. Of this indebtedness, $26.0 million bears interest at rates that
fluctuate with changes in certain prevailing interest rates.

There have been no other changes to our market risks as noted in our Annual
Report on Form 10-K for the year ended December 31, 2006.



|Item 4. | Controls and Procedures
|------- | -----------------------

Material Weakness in
Internal Control Over Financial Reporting

As described in Item 9A of our Annual Report on Form 10-K for the year ended
December 31, 2006, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway



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Commission (COSO) in Internal Control  Integrated Framework. Managements assessment included an evaluation of the design of our internal control
over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management identified, as of December 31, 2006, a material weakness that existed in the companys internal control
over financial reporting related to the accounting for income taxes. There were ineffective controls relating to the review of our year-end tax provision, including review of the tax technical accounting items where our outside tax consultants
typically provide input. This control deficiency resulted in a material misstatement of various income tax balances that was not prevented or detected by management. As a result, material errors in accounting for income taxes occurred, which were
corrected prior to the issuance of the annual financial statements. Accordingly management has determined this control deficiency constitutes a material weakness.

Because of the material weakness described above, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2006, based on the criteria set forth by COSO
in Internal Control  Integrated Framework. Our independent registered public accounting firm, Ernst & Young LLP, audited managements assessment of the effectiveness of our internal control over financial reporting.
Ernst & Young LLP issued an audit report thereon, which is included in Part IV, Item 15 of our Form 10-K for the year ended December 31, 2006.

Evaluation of Disclosure Controls and Procedures

Management of our company is responsible for
establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of September 30, 2007, an evaluation was performed, under the supervision and
with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that as of September 30, 2007, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed in the Quarterly Report on
Form 10-Q was recorded, processed, summarized and reported within the time period required by the Securities and Exchange Commissions rules and forms and accumulated and communicated to management, including our Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial
Reporting

During the quarter ended September 30, 2007, we ensured that the appropriate levels of review by management and the
involvement of outside tax consultants was in place and occurred in a timely manner.

Notwithstanding the foregoing efforts, we are
continuing to undertake steps to resolve the material weakness over financial reporting related to the accounting for income taxes. We expect to complete our evaluation of the effectiveness of our internal controls over financial reporting,
including with regard to the remediation of this material weakness, as of December 31, 2007. During the quarter ended September 30, 2007, there have been no changes in our internal control over financial reporting that materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

On June 5, 2006, Finjan
Software, Ltd. filed a complaint entitled Finjan Software, Ltd. v. Secure Computing Corporation in the United States District Court for the District of Delaware against Secure Computing Corporation, CyberGuard Corporation, and Webwasher AG. The
complaint alleged that Secure Computing and its named subsidiaries infringe U.S. Patent No. 6,092,194 (194 Patent) based on the manufacture, use, and sale of the Webwasher Secure Content Management suite, CyberGuard TSP, and
IronMail. On April 10, 2007, Finjan amended its Complaint to allege that Secure Computing and its named subsidiaries infringe U.S. Patent No. 6,804,780 (780 Patent) and U.S. Patent No. 7,058,822 (822
Patent) based on the manufacture, use, and sale of the Webwasher Secure Content Management suite. Secure Computing denies infringing any valid claims of the 194 Patent, the 780 Patent, or the 822 Patent. The answer and
counterclaims to Finjans amended complaint was filed on April 20, 2007. In its counterclaims, Secure Computing alleges that Finjan infringes two Secure Computing patents - U.S. Patent No. 6,357,010 and U.S. Patent No. 7,185,361.
Discovery continues with an estimated trial date in March, 2008.

On May 4, 2007, Secure Computing filed a complaint in the United
States District Court for the district of Minnesota against Finjan Software Ltd. and Finjan Software, Inc. In its complaint, Secure Computing asserts that Finjans load-balancing security solutions, including but not limited to Finjans
Vital Security Load Balancer NG-5300, infringe U.S. Patent No. 7,171,681. On May 24, 2007 Secure Computing filed an amended complaint adding additional claims that Finjan is in violation of §43(a) of the Lanham Act, the Minnesota
Deceptive Trade Practices Act, and Minnesotas common law, for unfair competition and false advertising. The complaint seeks, among other things, unspecified monetary damages arising from Finjans unauthorized use of Secure
Computings patented technology and for Finjans continued and willful false and/or misleading statements in advertising. This matter was transferred to the United States District Court for the district of Delaware.

On January 19, 2007, Rosenbaum Capital, LLC. filed a putative securities class action complaint in the United States District Court for the Northern
District of California against Secure Computing and certain directors and officers of the company. The alleged plaintiff class includes persons who acquired our stock between May 4, 2006 through July 11, 2006. The complaint alleges
generally that defendants made false and misleading statements about our business condition and prospects for the fiscal quarter ended June 30, 2006, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC
Rule 10b-5. The complaint seeks unspecified monetary damages. The matter is pending.

On September 21, 2007, Diane Josifovich filed a
complaint against Secure Computing in the Superior Court of New Jersey, Somerset County. The complaint alleges that Secure Computing breached its contract with Ms. Josifovich with respect to payment for commission sales. Related to this
allegation, the complaint also alleges claims of promissory estoppel, equitable estoppel, misrepresentation, and breach of the covenant of good faith and fair dealing. The complaint also alleges that Secure Computing retaliated against
Ms. Josifovich and created a hostile work environment on the basis of Ms. Josifovichs gender. The complaint seeks unspecified monetary damages. The matter is pending. We intend to vigorously defend all claims against us.



|Item 2. | Changes in Securities
|------- | ---------------------

None



|Item 3. | Defaults upon Senior Securities
|------- | -------------------------------

Not applicable



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

None



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------

(a)
Exhibits



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2.1     |  | Agreement and Plan of Merger, dated as of July 28, 2003, among Secure Computing Corporation, Nitro Acquisition Corp., and N2H2, Inc. is incorporated by reference to the corresponding
exhibit to our Registration Statement of Form S-4 (Registration Number 333-107804) filed with the SEC on August 8, 2003.                                                                                                                                                                                                                           
|        | 
|2.2     |  | Agreement and Plan of Merger, dated as of August 17, 2005, by and among Secure Computing Corporation, Bailey Acquisition Corp., and CyberGuard Corporation is incorporated by reference to
Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on August 19, 2005.                                                                                                                                                                                                                                                           
|        | 
|2.3     |  | Agreement and Plan of Merger, dated as of July 11, 2006, by and among Secure Computing Corporation, Peach Acquisition Corp., and CipherTrust, Inc. is incorporated by reference to Exhibit
2.1 to our Current Report on Form 8-K filed with the SEC on July 13, 2006.                                                                                                                                                                                                                                                                     
|        | 
|2.4     |  | First Amendment, dated July 14, 2006, to the Agreement and Plan of Merger, dated as of July 11, 2006, by and among Secure Computing Corporation, Peach Acquisition Corp., and CipherTrust,
Inc. is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on July 18, 2006.                                                                                                                                                                                                                        
|        | 
|2.5     |  | Second Amendment, dated August 1, 2006, to the Agreement and Plan of Merger, dated as of July 11, 2006, by and among Secure Computing Corporation, Peach Acquisition Corp., and
CipherTrust, Inc. is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on August 7, 2006.                                                                                                                                                                                                                     
|        | 
|2.6     |  | Third Amendment, dated August 30, 2006, to the Agreement and Plan of Merger, dated as of July 11, 2006, by and among Secure Computing Corporation, Peach Acquisition Corp., and CipherTrust,
Inc. is incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on September 28, 2006.                                                                                                                                                                                                                
|        | 
|3.1     |  | Restated Certificate of Incorporation, effective March 6, 1996, as amended by the Certificate of Amendment of Certificate of Incorporation effective December 11, 1988, the Certificate
of Designations of Series E 4% Cumulative Preferred Stock effective January 26, 2000; and the Certificate of Designations of Series F 4% Cumulative Convertible Preferred Stock effective June 30, 2000 is incorporated by reference to the
corresponding exhibit to our Amended Quarterly Report on Form 10-Q for the period ended June 30, 2000.
|        | 
|3.2     |  | By-Laws of the Registrant are incorporated by reference to Exhibit 3.3 to our Registration Statement on Form S-1 (Registration Number 33-97838).                                                                                                                                                                                                                                                                                                                                                                                          
|        | 
|3.3     |  | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on
August 19, 2005.                                                                                                                                                                                                                                                                                                                          
|        | 
|4.1     |  | Specimen of common stock certificate is incorporated by reference to the corresponding exhibit to Amendment No. 2 to our Registration Statement on Form S-1 (Registration Number
33-97838).                                                                                                                                                                                                                                                                                                                                               
|        | 
|4.2     |  | Amended and Restated 1995 Omnibus Stock Plan is incorporated by reference to the Exhibit 10.1 to our Current Report on Form 8-K filed on October 8, 1999.                                                                                                                                                                                                                                                                                                                                                                                 
|        | 
|4.3     |  | 2002 Stock Incentive Plan is incorporated by reference to Exhibit 99.1 to our Registration Statement on Form S-8 (Registration Number 333-115583) filed with the SEC on January 19, 2006.                                                                                                                                                                                                                                                                                                                                                 
|        | 
|4.4     |  | CyberGuard Corporation Stock Incentive Plan is incorporated by reference to Exhibit 4.1 to CyberGuard Corporations Registration Statement on Form S-8 (Registration Number 33-88448) filed
with the SEC on January 13, 1995.                                                                                                                                                                                                                                                                                                             
|        | 
|4.5     |  | CyberGuard Corporation Third Amended and Restated Employee Stock Option Plan is incorporated by reference to CyberGuard Corporations Proxy Statement filed on December 13,
2003.                                                                                                                                                                                                                                                                                                                                                         
|        | 
|4.6     |  | Warrant by and among Secure Computing Corporation and Warburg Pincus IX, L.P. is incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on August 19,
2005.                                                                                                                                                                                                                                                                                                                                        
|        | 
|4.7     |  | CipherTrust, Inc. 2000 Stock Option Plan is incorporated by reference to the corresponding exhibit of our Annual Report of Form 10-K for the period ended December 31, 2006.                                                                                                                                                                                                                                                                                                                                                              
|        | 
|10.1    |  | Employment Agreement with John McNulty is incorporated by reference to the corresponding exhibit of our Quarterly Report of Form 10-Q for the period ended March 31, 1999.                                                                                                                                                                                                                                                                                                                                                                
|        | 
|10.2    |  | Employment Agreement with Timothy Steinkopf is incorporated by reference to the corresponding exhibit of our Quarterly Report of Form 10-Q for the period ended June 30,
2001.                                                                                                                                                                                                                                                                                                                                                            
|        | 
|10.3    |  | Employment Agreement with Vince Schiavo is incorporated by reference to Exhibit 10.1 of our Quarterly Report of Form 10-Q for the period ended June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                             



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.4    |  | Employment Agreement with Michael Gallagher is incorporated by reference to the corresponding exhibit of our Annual Report of Form 10-K for the period ended December 31,
2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 
|10.5    |  | Employment Agreement with Mary Budge is incorporated by reference to the corresponding exhibit of our Annual Report of Form 10-K for the period ended December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 
|10.6    |  | Securities Purchase Agreement, dated as of August 17, 2005, by and among Secure Computing Corporation and Warburg Pincus IX, L.P. is incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed with the SEC on August 19, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 
|10.7    |  | Amendment No. 1 to the Securities Purchase Agreement by and among Secure Computing Corporation and Warburg Pincus IX, L.P. dated December 9, 2005 is incorporated by reference to Exhibit
99.1 to our Current Report on Form 8-K filed with the SEC on December 13, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 
|10.8    |  | Form of Indemnification Agreement between the Company, and Cary Davis dated January 31, 2006; Robert J. Frankenberg dated January 31, 2006; James Jordan dated February 1, 2006;
John McNulty dated February 1, 2006; Stephen Puricelli dated January 31, 2006; Eric Rundquist dated January 31, 2006; Richard Scott dated January 31, 2006; and Alexander Zakupowsky, Jr. dated February 1, 2006 is incorporated
by reference to Exhibit 10.6 to our Current Report on Form 8-K filed with the SEC on January 31, 2006. Form of Indemnification Agreement between the company and Daniel Ryan dated August 29, 2007 is included by reference to the corresponding
exhibit of our current report on Form 8-K filed with the SEC on August 30, 2007.
|        | 
|10.10   |  | Employment Agreement with Atri Chatterjee is incorporated by reference to the corresponding exhibit of our Quarterly Report of Form 10-Q for the period ended September 30,
2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|10.11   |  | Employment Agreement with Paul Judge is incorporated by reference to the corresponding exhibit of our Quarterly Report of Form 10-Q for the period ended September 30,
2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 
|10.12   |  | Senior Secured Credit Facilities Commitment Letter, dated as of July 11, 2006, from Citigroup, is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the
SEC on July 13, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 
|10.13   |  | Amended and Restated Senior Secured Credit Facilities Commitment Letter, dated as of July 14, 2006, from Citigroup, is incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed with the SEC on July 18, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 
|10.14   |  | Form of Restricted Stock Award Agreement-Secure Computing Corporation 2002 Stock Incentive Plan is incorporated by reference to the corresponding exhibit of our Annual Report of Form 10-K for
the period ended December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 
|10.15   |  | Employment Agreement with Daniel Ryan is incorporated by reference to the corresponding exhibit of our Current Report of Form 8-K filed with the SEC on August 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 
|31.1    |  | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 
|31.2    |  | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 
|32.1    |  | Certification by Chairman, President and Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 
|32.2    |  | Certification by Senior Vice President and Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

(b) Reports on Form 8-K

On August 30, 2007, we filed a report on Form 8-K pursuant to Item 5.02, Appointment of Principal Officers,
announcing that on August 2, 2007, we appointed Daniel Ryan to the roles of President and Chief Operating Officer.

On
September 18, 2007, we filed a report on Form 8-K pursuant to Item 5.02, Departure of Directors or Principal Officers, announcing that on September 14, 2007, we issued a press release announcing the resignation of Jay
Chaudhry from our Board of Directors due to personal reasons.



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SECURE COMPUTING CORPORATION

SIGNATURES

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

SECURE COMPUTING CORPORATION



|                       |  |     |  |                                                                
|---------------------- |  | --- |  | ---------------------------------------------------------------
|DATE: November 6, 2007 |  | By: |  | /s/ Timothy J. Steinkopf                                       
|                       |  |     |  | Timothy J. Steinkopf                                           
|                       |  |     |  | Senior Vice President of Operations and Chief Financial Officer
|                       |  |     |  | (Duly authorized officer and Principal Financial Officer)      



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