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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A



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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, 2006

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  65,227,735 issued and outstanding as of February 13, 2007.



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SECURE COMPUTING CORPORATION

EXPLANATORY NOTE

This Amendment on Form 10-Q/A amends our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006, as initially filed with the Securities and Exchange Commission (the SEC) on November 9, 2006 and is being filed to properly present the pro forma results in Note 4 to the
consolidated financial statements, Acquisition of CipherTrust, for the three months ended September 30, 2006 and the nine months ended September 30, 2006 and 2005. This Amendment amends only Part I of Form 10-Q, as set
forth herein. Unaffected items have not been repeated in this Amendment. This report still speaks as of the filing date of the Form 10-Q and, except as expressly stated herein, no attempt has been made to update this report to reflect events
occurring subsequent to the date of the initial filing date of the Form 10-Q. All information contained in this Amendment is subject to updating and supplementing, as provided in our periodic reports filed with the Securities and Exchange Commission
subsequent to the date of the filing of the Form 10-Q.

INDEX



|                              |  |                                                                                                                                    |  |     
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  | Page No.                                                                                                                          
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                   
|                              |  |                                                                                                                                   
|Item 1                        |  | Condensed Consolidated Financial Statements:                                                                                       |  |     
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005                                   |  | 3   
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 30, 2006 and 2005 |  | 4   
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2006 and 2005                  |  | 5   
|                              |  |                                                                                                                                   
|                              |  | Notes to the Condensed Consolidated Financial Statements (Unaudited)                                                               |  | 6-18
|                              |  |                                                                                                                                   
|Item 4                        |  | Controls and Procedures                                                                                                            |  | 19  
|                              |  |                                                                                                                                   
|                              |  | Signatures                                                                                                                         |  | 20  



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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, 2006 (Unaudited) |         |   | December 31, 2005 (See Note) |  
|ASSETS                                                                                                                  |  |                                |         |   |                              |   |         |  
|Current assets                                                                                                          |  |                                |         |   |                              |   |         |  
|Cash and cash equivalents                                                                                               |  | $                              | 7,910   |   |                              | $ | 50,039  |  
|Investments                                                                                                             |  |                                | 460     |   |                              |   | 31,140  |  
|Accounts receivable, net                                                                                                |  |                                | 51,733  |   |                              |   | 29,795  |  
|Inventory, net                                                                                                          |  |                                | 4,533   |   |                              |   | 2,174   |  
|Deferred income taxes                                                                                                   |  |                                | 1,887   |   |                              |   | 3,604   |  
|Other current assets                                                                                                    |  |                                | 12,789  |   |                              |   | 4,869   |  
|                                                                                                                        |  |                                |         |   |                              |   |         |  
|Total current assets                                                                                                    |  |                                | 79,312  |   |                              |   | 121,621 |  
|Property and equipment, net                                                                                             |  |                                | 12,871  |   |                              |   | 3,841   |  
|Goodwill                                                                                                                |  |                                | 586,054 |   |                              |   | 39,230  |  
|Intangibles, net                                                                                                        |  |                                | 42,021  |   |                              |   | 1,814   |  
|Deferred income taxes                                                                                                   |  |                                | 15,166  |   |                              |   |        |  
|Other assets                                                                                                            |  |                                | 5,263   |   |                              |   | 5,257   |  
|                                                                                                                        |  |                                |         |   |                              |   |         |  
|Total assets                                                                                                            |  | $                              | 740,687 |   |                              | $ | 171,763 |  
|                                                                                                                        |  |                                |         |   |                              |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                    |  |                                |         |   |                              |   |         |  
|Current liabilities                                                                                                     |  |                                |         |   |                              |   |         |  
|Accounts payable                                                                                                        |  | $                              | 13,628  |   |                              | $ | 2,997   |  
|Accrued payroll                                                                                                         |  |                                | 10,646  |   |                              |   | 4,690   |  
|Other accrued expenses                                                                                                  |  |                                | 7,219   |   |                              |   | 2,377   |  
|Acquisition reserve                                                                                                     |  |                                | 5,251   |   |                              |   | 389     |  
|Deferred revenue                                                                                                        |  |                                | 65,699  |   |                              |   | 29,097  |  
|Current portion of long-term debt and borrowings                                                                        |  |                                | 2,900   |   |                              |   |        |  
|                                                                                                                        |  |                                |         |   |                              |   |         |  
|Total current liabilities                                                                                               |  |                                | 105,343 |   |                              |   | 39,550  |  
|Acquisition reserve, net of current portion                                                                             |  |                                | 1,696   |   |                              |   | 364     |  
|Deferred revenue, net of current portion                                                                                |  |                                | 29,498  |   |                              |   | 9,966   |  
|Deferred tax liability                                                                                                  |  |                                | 19,159  |   |                              |   |        |  
|Debt, net of current portion                                                                                            |  |                                | 86,005  |   |                              |   |        |  
|                                                                                                                        |  |                                |         |   |                              |   |         |  
|Total liabilities                                                                                                       |  |                                | 241,701 |   |                              |   | 49,880  |  
|                                                                                                                        |  |                               
|Convertible preferred stock, par value $.01 per share:                                                                  |  |                                |         |   |                              |   |         |  
|Authorized  2,000,000; issued and outstanding  700,000 at September 30, 2006 and none at December 31,
2005            |  |                                | 64,661  |   |                              |   |        |  
|                                                                                                                        |  |                               
|Stockholders equity                                                                                                    |  |                                |         |   |                              |   |         |  
|Common stock, par value $.01 per share:                                                                                 |  |                                |         |   |                              |   |         |  
|Authorized  100,000,000; issued and outstanding  64,489,321 at September 30, 2006 and 37,021,089 at December 31,
2005 |  |                                | 644     |   |                              |   | 370     |  
|Additional paid-in capital                                                                                              |  |                                | 534,262 |   |                              |   | 205,970 |  
|Accumulated deficit                                                                                                     |  |                                | (98,929 | ) |                              |   | (83,698 | )
|Accumulated other comprehensive loss                                                                                    |  |                                | (1,652  | ) |                              |   | (759    | )
|                                                                                                                        |  |                                |         |   |                              |   |         |  
|Total stockholders equity                                                                                              |  |                                | 434,325 |   |                              |   | 121,883 |  
|                                                                                                                        |  |                                |         |   |                              |   |         |  
|Total liabilities and stockholders equity                                                                              |  | $                              | 740,687 |   |                              | $ | 171,763 |  
|                                                                                                                        |  |                                |         |   |                              |   |         |  



|NOTE: | The balance sheet at December 31, 2005 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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SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited, in thousands,
except per share amounts)



|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|---------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                     |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                     |  | 2006                            |        |   | 2005                           |   |        | 2006 |  |   | 2005    |  
|Revenues:                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Products                                             |  | $                               | 28,068 |   |                                | $ | 19,365 |      |  | $ | 81,770  |   |  | $ | 56,965 |  
|Services                                             |  |                                 | 15,680 |   |                                |   | 7,884  |      |  |   | 43,341  |   |  |   | 21,976 |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total revenues                                       |  |                                 | 43,748 |   |                                |   | 27,249 |      |  |   | 125,111 |   |  |   | 78,941 |  
|                                                     |  |                                 |        |  
|Cost of revenues:                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Products                                             |  |                                 | 7,742  |   |                                |   | 3,726  |      |  |   | 22,618  |   |  |   | 10,659 |  
|Services                                             |  |                                 | 2,994  |   |                                |   | 1,306  |      |  |   | 7,998   |   |  |   | 3,893  |  
|Amortization of purchased intangibles                |  |                                 | 1,049  |   |                                |   |       |      |  |   | 3,025   |   |  |   |       |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Total cost of revenues                               |  |                                 | 11,785 |   |                                |   | 5,032  |      |  |   | 33,641  |   |  |   | 14,552 |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Gross profit                                         |  |                                 | 31,963 |   |                                |   | 22,217 |      |  |   | 91,470  |   |  |   | 64,389 |  
|                                                     |  |                                 |        |  
|Operating expenses:                                  |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Selling and marketing                                |  |                                 | 23,703 |   |                                |   | 10,840 |      |  |   | 57,328  |   |  |   | 31,794 |  
|Research and development                             |  |                                 | 8,828  |   |                                |   | 4,334  |      |  |   | 23,554  |   |  |   | 12,619 |  
|General and administrative                           |  |                                 | 3,469  |   |                                |   | 1,510  |      |  |   | 9,386   |   |  |   | 5,310  |  
|Amortization of purchased intangibles                |  |                                 | 2,310  |   |                                |   | 129    |      |  |   | 6,990   |   |  |   | 395    |  
|Litigation settlement                                |  |                                 |       |   |                                |   |       |      |  |   | 2,500   |   |  |   |       |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|                                                     |  |                                 | 38,310 |   |                                |   | 16,813 |      |  |   | 99,758  |   |  |   | 50,118 |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Operating (loss)/income                              |  |                                 | (6,347 | ) |                                |   | 5,404  |      |  |   | (8,288  | ) |  |   | 14,271 |  
|Other income                                         |  |                                 | 501    |   |                                |   | 552    |      |  |   | 2,402   |   |  |   | 952    |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|(Loss)/income before taxes                           |  |                                 | (5,846 | ) |                                |   | 5,956  |      |  |   | (5,886  | ) |  |   | 15,223 |  
|Income tax (expense)/benefit                         |  |                                 | (1,445 | ) |                                |   | (164   | )    |  |   | 5,911   |   |  |   | (423   | )
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net (loss)/income                                    |  | $                               | (7,291 | ) |                                | $ | 5,792  |      |  | $ | 25      |   |  | $ | 14,800 |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Preferred stock accretion                            |  |                                 | (903   | ) |                                |   |       |      |  |   | (2,653  | ) |  |   |       |  
|Charge from beneficial conversion of preferred stock |  |                                 |       |   |                                |   |       |      |  |   | (12,603 | ) |  |   |       |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Net (loss)/income applicable to common shareholders  |  | $                               | (8,194 | ) |                                | $ | 5,792  |      |  | $ | (15,231 | ) |  | $ | 14,800 |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Basic (loss)/earnings per share                      |  | $                               | (0.14  | ) |                                | $ | 0.16   |      |  | $ | (0.28   | ) |  | $ | 0.41   |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Weighted average shares outstanding - basic          |  |                                 | 57,378 |   |                                |   | 36,573 |      |  |   | 54,417  |   |  |   | 36,157 |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Diluted (loss)/earnings per share                    |  | $                               | (0.14  | ) |                                | $ | 0.15   |      |  | $ | (0.28   | ) |  | $ | 0.40   |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  
|Weighted average shares outstanding - diluted        |  |                                 | 57,378 |   |                                |   | 38,182 |      |  |   | 54,417  |   |  |   | 37,345 |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |        |  

See accompanying notes to the condensed consolidated financial statements.



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SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASHFLOWS

(Unaudited, in thousands)



|                                                                                  |  |                                |          |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |         
|                                                                                  |  | 2006                           |          |   | 2005 |  
|Operating activities                                                              |  |                                |          |   |      |   |         |  
|Net income                                                                        |  | $                              | 25       |   |      | $ | 14,800  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |          |   |      |   |         |  
|Depreciation                                                                      |  |                                | 2,970    |   |      |   | 1,565   |  
|Amortization of intangible assets                                                 |  |                                | 10,331   |   |      |   | 685     |  
|Loss on disposals of property and equipment and intangible assets                 |  |                                | 995      |   |      |   | 486     |  
|Amortization of debt fees                                                         |  |                                | 37       |   |      |   |        |  
|Utilization of acquired NOL                                                       |  |                                | 1,223    |   |      |   |        |  
|Deferred income taxes                                                             |  |                                | (7,316   | ) |      |   |        |  
|Share-based compensation                                                          |  |                                | 7,019    |   |      |   |        |  
|Changes in operating assets and liabilities, excluding effects of acquisitions:   |  |                                |          |   |      |   |         |  
|Accounts receivable                                                               |  |                                | (1,149   | ) |      |   | (3,618  | )
|Inventories                                                                       |  |                                | (324     | ) |      |   | 240     |  
|Other current assets                                                              |  |                                | 1,032    |   |      |   | (171    | )
|Accounts payable                                                                  |  |                                | 6,516    |   |      |   | (840    | )
|Payroll related accruals                                                          |  |                                | 1,771    |   |      |   | 417     |  
|Accrued liabilities and reserves                                                  |  |                                | (13,875  | ) |      |   | 211     |  
|Deferred revenue                                                                  |  |                                | 16,753   |   |      |   | 5,005   |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                | 26,008   |   |      |   | 18,780  |  
|                                                                                  |  |                               
|Investing activities                                                              |  |                                |          |   |      |   |         |  
|Proceeds from sales/maturities of investments                                     |  |                                | 46,431   |   |      |   | 9,156   |  
|Purchases of investments                                                          |  |                                | (15,390  | ) |      |   | (23,455 | )
|Purchase of property and equipment, net                                           |  |                                | (8,368   | ) |      |   | (1,737  | )
|Decrease/(increase) in intangibles and other assets                               |  |                                | 734      |   |      |   | (2,954  | )
|Cash paid for business acquisitions, net of cash acquired                         |  |                                | (256,747 | ) |      |   |        |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Net cash used for investing activities                                            |  |                                | (233,340 | ) |      |   | (18,990 | )
|                                                                                  |  |                               
|Financing activities                                                              |  |                                |          |   |      |   |         |  
|Proceeds from revolving debt                                                      |  |                                | 2,000    |   |      |   |        |  
|Proceeds from long-term debt, net of transaction fees                             |  |                                | 86,868   |   |      |   |        |  
|Proceeds from issuance of preferred stock, net of transaction fees                |  |                                | 69,945   |   |      |   |        |  
|Proceeds from issuance of common stock                                            |  |                                | 7,317    |   |      |   | 6,233   |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                                | 166,130  |   |      |   | 6,233   |  
|                                                                                  |  |                               
|Effect of exchange rates                                                          |  |                                | (927     | ) |      |   | 12      |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Net (decrease)/increase in cash and cash equivalents                              |  |                                | (42,129  | ) |      |   | 6,035   |  
|Cash and cash equivalents, beginning of period                                    |  |                                | 50,039   |   |      |   | 37,899  |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                              | 7,910    |   |      | $ | 43,934  |  
|                                                                                  |  |                                |          |   |      |   |         |  
|Supplemental Cash Flow Disclosure                                                 |  |                                |          |   |      |   |         |  
|Common stock issued for purchase of CyberGuard Corporation                        |  | $                              | 188,476  |   |      |   |        |  
|Common stock issued for purchase of CipherTrust, Inc.                             |  | $                              | 68,100   |   |      |   |        |  
|Release of deferred tax asset valuation as a reduction to goodwill                |  | $                              | 9,520    |   |      |   |        |  

See accompanying notes to the condensed consolidated financial statements.



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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 regulations of the Securities and Exchange
Commission, but 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, 2005 Condensed Consolidated Balance Sheet is derived from our audited Consolidated Balance Sheet as of December 31, 2005. These condensed financial
statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our Annual Report of Form 10-K for the year ended December 31, 2005, 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 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 vendor specific
objective evidence 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.

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 evidence at the time we fulfill the order from a channel partner, we do not recognize revenue until
the channel partner supplies end-user 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, for which we recognize revenue
upon shipment of product, net of estimated returns.

Derivative Instrument

In September 2006, we entered into an interest rate cap agreement which is required to be accounted for under Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair



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3. Summary of Significant Accounting Policies (continued)

value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The interest rate cap agreement applies to (b), referred to as a cash flow hedge. For a derivative that is
designated as a cash flow hedge the effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income (see Comprehensive (Loss)/Income below) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is immediately recognized in income.

Selling and
Marketing

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

Comprehensive (Loss)/Income

During the three months ended September 30, 2006, total comprehensive (loss)/income amounted to ($7.3 million) compared to $5.8 million for the
same period of 2005. During the nine months ended September 30, 2006, total comprehensive (loss)/income amounted to ($918,000) compared to $14.8 million for the nine months ended September 30, 2005. The components of our comprehensive
(loss)/income are net (loss)/income, foreign currency translation adjustments, unrealized gain/(loss) on investments, and unrealized gain/(loss) on interest rate cap for debt. 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 income.

Share-Based Compensation

Prior to January 1, 2006, we accounted for share-based employee compensation plans under the
measurement and recognition provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, we recorded no share-based employee compensation expense for options granted under our current stock option plans during the three months and nine months ended September 30, 2005 as all options
granted under those plans had exercise prices equal to the fair market value of our common stock on the date of grant. We also recorded no compensation expense in those periods in connection with our Employee Stock Purchase Plan (ESPP) as the
purchase price of the stock was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each purchase period. In accordance with SFAS No. 123 and SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, we provided pro forma net income or loss and net income or loss per share disclosures for each period prior to the adoption of SFAS No. 123(R),
Share-Based Payment, as if we had applied the fair value-based method in measuring compensation expense for our share-based compensation plans.

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), using the modified prospective transition method. Under that transition method, we recognized compensation
expense for share-based payments that vested during the three months and nine months ended September 30, 2006 using the following valuation methods: (a) for share-based payments granted prior to, but not yet vested as of, January 1,
2006, the grant date fair value was estimated in accordance with the original provisions of SFAS No. 123, and (b) for share-based payments granted on or after January 1, 2006, the grant date fair value was estimated in accordance with
the provisions of SFAS No. 123(R). Because we elected to use the modified prospective transition method, results for prior periods have not been restated. In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 107, Share-Based Payment, which provides supplemental implementation guidance for SFAS No. 123(R). We have applied the provisions of SAB No. 107 in our adoption of SFAS No. 123(R). See Note 13
for information on the impact of our adoption of SFAS No. 123(R) and the assumptions we use to calculate the fair value of share-based employee compensation.

Recently Issued Accounting Standards

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109. 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. FIN 48
is effective for fiscal years beginning after December 15, 2006. We are currently assessing the impact of adoption of FIN 48.



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3. Summary of Significant Accounting Policies (continued)

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. The results of
CipherTrusts operations have been included in the condensed consolidated financial statements since that date. 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 products include IronMail, powered by Trusted Source, IronIM, IronMail Edge, IronNet, and RADAR. As a
result of the acquisition we are expected to be established as a leader in the Messaging Gateway Security market. In addition to protecting corporate network infrastructures, our combined solutions will address the fast-growing Web and messaging
gateway security needs.

The aggregate purchase price was $270.1 million consisting primarily 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.

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 recorded as a result of the acquisition will be subject to an annual impairment test and will not be amortized. Given the uncertainty of finite-lived intangible assets at the time of this
filing, sufficient information is not available at this time to provide specifics with regard to intangible assets, including customer contracts and relationships, patents, trademarks, and developed technology. The following table summarizes the
estimated preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):



|                                                                    |  |                       |          |  
|------------------------------------------------------------------- |  | --------------------- | -------- | -
|                                                                    |  | As of August 31, 2006 |         
|Cash paid net of cash acquired                                      |  | $                     | (187,651 | )
|Current assets                                                      |  |                       | 10,381   |  
|Property and equipment                                              |  |                       | 1,930    |  
|Other long-term assets                                              |  |                       | 1,218    |  
|Goodwill                                                            |  |                       | 274,362  |  
|                                                                    |  |                       |          |  
|Total assets acquired                                               |  |                       | 100,240  |  
|Current liabilities                                                 |  |                       | 6,887    |  
|Acquisition reserve                                                 |  |                       | 7,084    |  
|Revenue deferred from ongoing contractual obligations at fair value |  |                       | 10,384   |  
|                                                                    |  |                       |          |  
|Fair value of assets and liabilities assumed and accrued, net       |  | $                     | 75,885   |  
|                                                                    |  |                       |          |  



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4. Acquisition of CipherTrust (continued)

We accrued approximately $7.1 million in acquisition related expenses, which included legal and accounting fees, bankers fees, severance costs and
other related costs, of which $3.7 million remains as an accrual as of September 30, 2006.

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



|                                                    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                    |  | 2006                            |         |   | 2005                           |   |        | 2006 |  |   | 2005    |  
|Total revenues                                      |  | $                               | 50,728  |   |                                | $ | 38,723 |      |  | $ | 160,161 |   |  | $ | 111,501 |  
|Net (loss)/income applicable to common shareholders |  | $                               | (13,081 | ) |                                | $ | (325   | )    |  | $ | (29,790 | ) |  | $ | (1,194  | )
|                                                    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Basic (loss)/earnings per share                     |  | $                               | (0.20   | ) |                                | $ | (0.01  | )    |  | $ | (0.47   | ) |  | $ | (0.03   | )
|                                                    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Diluted (loss)/earnings per share                   |  | $                               | (0.20   | ) |                                | $ | (0.01  | )    |  | $ | (0.47   | ) |  | $ | (0.03   | )
|                                                    |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   |         |  

The unaudited pro forma data gives effect to actual operating results prior to the acquisitions,
and adjustments to reflect interest income foregone 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.

5. Acquisition of CyberGuard

On January 12,
2006, we acquired 100% of the outstanding common shares of CyberGuard Corporation. The results of CyberGuards operations have been included in the condensed consolidated financial statements since that date. 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, for enterprise Network Gateway Security appliances, 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 32.6 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 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 indefinite lived trademarks recorded as a result of the acquisition will be subject to an annual impairment test and will not be amortized.



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5. Acquisition of CyberGuard (continued)

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):



|                                                                    |  |        |  |                       |         |  
|------------------------------------------------------------------- |  | ------ |  | --------------------- | ------- | -
|                                                                    |  |        |  | As ofJanuary 12, 2006 |        
|Cash paid net of cash acquired                                      |  |        |  | $                     | (69,096 | )
|Current assets                                                      |  |        |  |                       | 18,016  |  
|Property and equipment                                              |  |        |  |                       | 2,090   |  
|Other long-term and indefinite lived assets                         |  |        |  |                       | 10,570  |  
|Goodwill                                                            |  |        |  |                       | 283,235 |  
|Intangible assets subject to amortization:                          |  |        |  |                       |         |  
|Customer relationships (60 month useful life)                       |  | 28,610 |  |                       |         |  
|Tradenames (6 month useful life)                                    |  | 390    |  |                       |         |  
|Tradenames (12 month useful life)                                   |  | 290    |  |                       |         |  
|Acquired developed technology (12 month useful life)                |  | 2,080  |  |                       |         |  
|Acquired developed technology (36 month useful life)                |  | 1,160  |  |                       |         |  
|Acquired developed technology (48 month useful life)                |  | 6,930  |  |                       |         |  
|                                                                    |  |        |  |                       |         |  
|                                                                    |  |        |  |                       | 39,460  |  
|                                                                    |  |        |  |                       |         |  
|Total assets acquired                                               |  |        |  |                       | 284,275 |  
|Current liabilities                                                 |  |        |  |                       | 9,366   |  
|Acquisition reserve                                                 |  |        |  |                       | 9,481   |  
|Revenue deferred from ongoing contractual obligations at fair value |  |        |  |                       | 28,903  |  
|Deferred tax liability  long-term                                  |  |        |  |                       | 18,723  |  
|                                                                    |  |        |  |                       |         |  
|Fair value of assets and liabilities assumed and accrued, net       |  |        |  | $                     | 217,802 |  
|                                                                    |  |        |  |                       |         |  

We accrued approximately $9.5 million in acquisition related expenses, which included legal and
accounting fees, bankers fees, excess capacity fees, directors and officers insurance policy premium, severance and other related costs, of which $2.6 million remains as an accrual as of September 30, 2006.

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



|                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|--------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | -------
|                                                    |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                    |  | 2006                            |        |                                | 2005 |   | 2006   |  |   | 2005   
|Total revenues                                      |  | $                               | 43,748 |                                |      | $ | 44,685 |  | $ | 126,888 |   |  | $ | 130,291
|Net (loss)/income                                   |  | $                               | (7,291 | )                              |      | $ | 4,939  |  | $ | 46      |   |  | $ | 8,267  
|Net (loss)/income applicable to common shareholders |  | $                               | (8,194 | )                              |      | $ | 4,036  |  | $ | (2,607  | ) |  | $ | 5,614  
|                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Basic (loss)/earnings per share                     |  | $                               | (0.14  | )                              |      | $ | 0.08   |  | $ | (0.05   | ) |  | $ | 0.11   
|                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        
|Diluted (loss)/earnings per share                   |  | $                               | (0.14  | )                              |      | $ | 0.09   |  | $ | (0.05   | ) |  | $ | 0.15   
|                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |        

The unaudited pro forma data gives effect to actual operating results prior to the acquisitions,
and adjustments to reflect interest income foregone, increased intangible amortization, income taxes, and preferred stock accretion. 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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6. Debt

Debt as of
September 30, 2006 consists of the following (in thousands):



|                                                                          |  |        
|------------------------------------------------------------------------- |  | -------
|Revolving credit facility, due August 31, 2012, LIBOR plus 3.25%          |  | $ 2,000
|Secured term loan, due August 31, 2013, LIBOR plus 3.25%                  |  | 90,000 
|Deferred financing fees related to secured term loan, due August 31, 2013 |  | (3,095)
|                                                                          |  |        
|Total long-term debt                                                      |  | 88,905 
|Less current portion                                                      |  | 2,900  
|                                                                          |  |        
|Total long-term debt, less current portion                                |  | $86,005
|                                                                          |  |        

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 beginning 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, 2006 was 8.58%.

The revolving credit facility matures on August 31, 2012 with interest payable quarterly at LIBOR
+ 3.25%. The interest rate on the revolving credit facility may be adjusted quarterly based on our Leverage Ratio and range from LIBOR +3.25% to LIBOR +2.75%. The revolving credit facility also requires that we pay an annual commitment fee of .5%.
The annual commitment fee, based on our Leverage Ratio and ranging from .5% to .375%, is payable quarterly in arrears. The Leverage Ratio is defined as the ratio of (a) consolidated indebtedness to (b) consolidated adjusted EBITDA
(earnings before interest, taxes, depreciation, amortization and other adjustments as defined in the agreement). The Leverage Ratio will be calculated quarterly on a pro forma basis that includes the four preceding quarters. The initial Leverage
Ratio calculation will be as of December 31, 2006 and cannot exceed the following thresholds over the term of the loan: August 31, 2006 through December 31, 2006  4.75 to 1.00; First six months of Fiscal 2007  4.00 to
1.00; Last six months of Fiscal 2007  3.50 to 1.00; Fiscal 2008  2.50 to 1.0; Fiscal 2009  2.25 to 1.00; Fiscal 2010 through maturity  2.00 to 1.00.

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 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.

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, in December 2006, to comply with certain financial covenants, including maintaining leverage and interest coverage ratios and capital expenditure limitations.

Derivative Instrument

We have 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 starting March 30, 2007. 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 consolidated balance sheet and the related gains or losses on this contract are deferred in
stockholders equity as a component of other comprehensive income. 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 $29,000 as of September 30, 2006.



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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 of perpetual convertible 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 warrants become dilutive
and 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 warrants 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 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, 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.

8. Net (Loss)/Income Per Share

In accordance with SFAS No. 128, Earnings Per Share, basic net (loss)/income per share is computed by dividing net (loss)/income
applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss applicable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income per share is computed by dividing net income by the combination of dilutive common share equivalents, which consist of stock options and the weighted average number of common shares
outstanding. All potential common share equivalents for the three and nine months ended September 30, 2006 were excluded from the computation of diluted earnings per share as inclusion of these shares would have been anti-dilutive.
Additionally, 5,480,784 and 5,412,446 shares of convertible Series A preferred stock were excluded from the effect of dilutive securities for the three and nine months ended September 30, 2006, respectively, because we reported a net loss for
these periods. Potential common shares of 2.3 million and 2.5 million for the three months and nine months ended September 30, 2005, respectively, related to our outstanding stock options, were excluded from the computation of diluted
earnings per share as inclusion of these shares would have been anti-dilutive.

The following table represents the calculation of basic and
diluted net (loss)/income per share (in thousands, except per share amounts):



|                                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|------------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                                    |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                    |  | 2006                            |        |                                | 2005 |   | 2006   |  |   | 2005   
|Net (loss)/income applicable to common shareholders                 |  | $                               | (8,194 | )                              |      | $ | 5,792  |  | $ | (15,231 | ) |  | $ | 14,800
|                                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Shares used in computing basic net (loss)/income per share          |  |                                 | 57,378 |                                |      |   | 36,573 |  |   | 54,417  |   |  |   | 36,157
|Effect of outstanding dilutive stock options                        |  |                                 |       |                                |      |   | 1,609  |  |   |        |   |  |   | 1,188 
|                                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Shares used in computing diluted net (loss)/income per share        |  |                                 | 57,378 |                                |      |   | 38,182 |  |   | 54,417  |   |  |   | 37,345
|Basic net (loss)/income per share applicable to common shareholders |  | $                               | (0.14  | )                              |      | $ | 0.16   |  | $ | (0.28   | ) |  | $ | 0.41  
|                                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Diluted net (loss)/income per share                                 |  | $                               | (0.14  | )                              |      | $ | 0.15   |  | $ | (0.28   | ) |  | $ | 0.40  
|                                                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       



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9. Contingencies

In December 2002, we were named as the defendant in a rental property lawsuit brought by Salvio Pacheco Square LLP in the Superior Court of California, County of Contra Costa. The complaint alleges that we
breached a commercial lease at our Concord, CA office and asked for declaratory relief, and compensatory and other damages. The Superior Court entered judgment in favor of plaintiff in June 2004 in the amount of $1.1 million and found we
had breached the lease. We appealed to the First Appellate District, California Court of Appeal. The Court of Appeal denied our appeal in April 2006. In addition to the judgment entered by the Superior Court in June 2004, we incurred
additional costs of $1.4 million as damages for the rental and other costs due on the balance of the lease, interest on the judgment and unpaid amounts due under the lease and plaintiffs attorneys fees and costs. As a result of the April
2006 denial of our appeal, we accrued $2.5 million as of March 31, 2006 for the settlement of this litigation. The settlement of $2.5 million was subsequently paid in July 2006.

10. Income Taxes

During the three months ended September 30, 2006, we recorded income tax
expense of $1.4 million. The $1.4 million of income tax expense is related to current income tax components such as the utilization of acquired net operating losses, alternative minimum income tax, and state and foreign income taxes. This is
compared with $164,000 of income tax expense recorded in the three months ended September 30, 2005 which consisted of $91,000 for alternative minimum tax expense, $14,000 for state income tax expense, and $59,000 for various foreign income and
withholding tax expenses.

During the nine months ended September 30, 2006, we recorded an income tax benefit of $5.9 million. Of this
$5.9 million income tax benefit, a non-cash benefit of $7.3 million is related to the reversal of the previously recorded tax valuation allowance on our non-acquired net operating losses as we have determined it to be more likely than not that a
portion of our existing deferred tax assets will be realized; the remainder of the income tax expense is related to current income tax components such as the utilization of acquired net operating losses, alternative minimum income tax, and state and
foreign income taxes. This is compared with $423,000 of income tax expense recorded in the nine months ended September 30, 2005 which consisted of $212,000 for alternative minimum tax expense, $14,000 for state income tax expense and $197,000
for various foreign income and withholding tax expenses.

Federal alternative minimum tax was provided on the portion of our alternative
minimum taxable income which could not be entirely offset by the alternative tax net operating loss deduction carryforward which we have available.

In accordance with FAS No. 109, we have determined that it is more likely than not that the net deferred tax assets of $17.1 million at September 30, 2006 will be realized based on expected levels of future taxable income in the
United States. Our expectations regarding future profitability may change due to future market conditions, changes in tax laws and other factors. Future taxable income of $44.3 million is required to realize the $17.1 million net deferred tax asset
at September 30, 2006. We have recorded $19.2 million of deferred tax liabilities related to purchased intangible assets recognized for financial reporting purposes.



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11. Related Party Transaction

(a) Strategic Investment

In February 2005, we made a strategic investment in a privately-held technology
company. As a result of this $2.7 million investment, we have a 15% ownership stake in this company. This investment is reported in other assets on our 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 decision to make the investment.

(b) Operating Lease

In August 2006, we assumed from CipherTrust a lease for its corporate headquarters of approximately 75,288 square feet located in Alpharetta,
Georgia. The lease has a term of three years commencing on August 1, 2006 and provides for a free rent period of three months with the first payment due November 1, 2006. Lease expense is recorded based on its ratable portion of the total
lease obligation on a straight-line basis.

One of our directors and officers is Chairman of the Board of Directors and a majority
shareholder in AirDefense, Inc. (AirDefense). In August 2006, we assumed from CipherTrust a sublease agreement with AirDefense, subleasing approximately 13,997 square feet of the premises. AirDefense is obligated via the sublease agreement to
pay its pro rata share of the monthly base rental payment of $17,000 through the term of the lease. As of September 30, 2006, we have included $17,000, $4,000 and $4,000 in the accounts receivable, accounts payable and accrued expense balance,
respectively, on our condensed consolidated balance sheet. We have reflected $94,000 of lease expense and $17,000 of sublease income in our statement of operations in general and administrative expenses since the date of acquisition.

(c) Software License

Our CipherTrust subsidiary sublicenses
certain internal use software from Jupiter Ventures, LLC under a sublicense arrangement. Jupiter is controlled by one of our directors and officers and his associates. The sublicense agreement dated December 27, 2002 included a term of two
years and allowed for one-year renewal options. In December 2005, the sublicense was renewed for a term of one additional year. The payment terms provide that CipherTrust pay a license fee to Jupiter in the amount of $10,000 quarterly.
CipherTrust acts as the primary point of contact with the software vendor and is billed directly for the quarterly license fee due by the software vendor. CipherTrust then allocates the software license costs through a cost-sharing agreement with
AirDefense based on headcount of each company. Since the date of acquisition, we have recorded $6,000, as general and administrative expenses, related to the portion of the license fee of CipherTrust.

(d) Travel Service Expenses

Since the date of acquisition,
AirDefense billed our CipherTrust subsidiary $4,000 for travel services provided to CipherTrust, which are included in our sales and marketing expenses. The travel services relate to the procurement of airline travel, hotel reservations, and ground
transportation for our employees for business-related travel.

(e) Shared International Sales Resources

One of our directors and officers is Chairman of the board of Directors and a minority shareholder in Air2Web. Certain employees of Air2Webs
subsidiary in India provide our CipherTrust subsidiary with various marketing and customer support services. Since the date of acquisition, Air2Web billed us $8,000 for such services. As of September 30, 2006, we have included $8,000 and $2,000
in the accounts payable and accrued expense balance, respectively, on our condensed consolidated balance sheet.

(f) Banking Relationship

During the one month period ended September 30, 2006, we had net billings to Silicon Valley Bank and corresponding revenue of $5,000 and $3,000,
respectively. As of September 30, 2006, $12,000 was deferred and included in deferred revenue and $6,000 was included in accounts receivable on our condensed consolidated balance sheet



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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 32% and 30% of
total revenue for the three months ended September 30, 2006 and 2005, respectively and 40% and 31% for the nine months ended September 30, 2006 and 2005, respectively. The following table summarizes our domestic and international revenue
(in thousands):



|              |  |                                 |        |                                |   |        |  |      |         |  |   |       
|------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | ------
|              |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|              |  | 2006                            |        | 2005                           |   | 2006   |  | 2005
|Revenues:     |  |                                 |        |                                |   |        |  |      |         |  |   |       
|Domestic      |  | $                               | 29,753 |                                | $ | 19,074 |  | $    | 74,872  |  | $ | 54,460
|International |  |                                 | 13,995 |                                |   | 8,175  |  |      | 50,239  |  |   | 24,481
|              |  |                                 |        |                                |   |        |  |      |         |  |   |       
|              |  | $                               | 43,748 |                                | $ | 27,249 |  | $    | 125,111 |  | $ | 78,941
|              |  |                                 |        |                                |   |        |  |      |         |  |   |       

13. Share-Based Compensation

Description of Plans

2002 Stock Incentive Plan

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 6.5 million shares authorized under the 2002 Plan at
September 30, 2006. All options granted under the 2002 Plan through September 30, 2006 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. Outstanding awards that were originally granted under several predecessor plans also remain in effect in accordance with their terms. The 2002 Plan and its
predecessor plans are described more fully in our fiscal 2005 Annual Report on Form 10-K.

N2H2 Stock Option Plans

In connection with our acquisition of N2H2 in October 2003, we assumed all of the outstanding N2H2 stock options under the 1997 Stock Option Plan, 1999
Stock Option Plan, 1999 Non-Employee Director Plan, 1999/2000 Transition Plan, the 2000 Stock Option Plan, and the Howard Philip Welt Plan, which were converted into options to purchase approximately 420,000 shares of our common stock. All
stock options assumed were exercisable and vested. These options were assumed at prices between $1.55 and $258.63 per share, with a weighted average exercise price of $10.06 per share. The options granted under these plans, since the
acquisition, have ten year terms and vest 25% after the first year and then monthly over the following three years. The N2H2 Stock Option Plans are described more fully in our fiscal 2005 Annual Report on Form 10-K.

CyberGuard Stock Option Plans

In
connection with our acquisition of CyberGuard in January 2006, we assumed all of the outstanding CyberGuard stock options under the 1994 and 1998 Stock Option Plans which were converted into options to purchase approximately 3,039,545 shares of our
common stock. All outstanding stock options assumed were exercisable and vested. These options were assumed at prices between $1.56 and $15.07 per share, with a weighted average exercise price of $7.21 per share. The options granted under these
plans, since the acquisition, have ten year terms and vest 25% after the first year and then monthly over the following three years.

CipherTrust 2000 Stock Option Plan

In connection with our acquisition of CipherTrust in August 2006, we assumed all of the
outstanding CipherTrust stock options under the 2000 Stock Option Plan which were converted into options to purchase approximately 2,543,662 shares of our common stock. All outstanding stock options assumed were unvested and have seven-year terms.
These options were assumed at prices between $0.01 and $6.19 per share, with a weighted average exercise price of $2.88 per share. After the date of acquisition, the options granted under these plans have ten year terms and vest 25% after the first
year and then monthly over the following three years.



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13. Share-Based Compensation (continued)

Employee Stock Purchase Plan

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. The ESPP is described more fully in our fiscal 2005 Annual Report on Form 10-K.

Impact of the Adoption of SFAS No. 123(R)

See Note 3 for a description of our adoption
of SFAS No. 123(R), on January 1, 2006. A summary of the share-based compensation expense that we recorded in accordance with SFAS No. 123(R) for the three months and nine months ended

September 30, 2006 for stock options, restricted stock and shares purchased under our ESPP is as follows (in thousands, except per share amounts):



|                                     |  |                                      |       |                                     |   |      
|------------------------------------ |  | ------------------------------------ | ----- | ----------------------------------- | - | -----
|                                     |  | Three Months EndedSeptember 30, 2006 |       | Nine Months EndedSeptember 30, 2006
|Cost of product revenues             |  | $                                    | 109   |                                     | $ | 262  
|Cost of service revenues             |  |                                      | 170   |                                     |   | 439  
|Selling and marketing                |  |                                      | 1,863 |                                     |   | 3,333
|Research and development             |  |                                      | 706   |                                     |   | 1,625
|General and administrative           |  |                                      | 488   |                                     |   | 1,360
|                                     |  |                                      |       |                                     |   |      
|Increase of loss before income taxes |  | $                                    | 3,336 |                                     | $ | 7,019
|                                     |  |                                      |       |                                     |   |      
|Increase of basic loss per share     |  | $                                    | 0.06  |                                     | $ | 0.13 

Prior to the adoption of SFAS No. 123(R), we presented all tax benefits for deductions
resulting from the exercise of stock options as operating cash flows on our statement of cash flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense recorded for
those options (excess tax benefits) to be classified as financing cash flows. There were no excess tax benefits for the nine months ended September 30, 2006.

Determining Fair Value

Valuation and Amortization Method.We estimate the fair value of stock options granted using the
Black-Scholes option valuation model. For options granted before January 1, 2006, we amortize the fair value on an accelerated basis. For options granted on or after January 1, 2006, we amortize the fair value on a straight-line basis. All
options are amortized over the requisite service periods of the awards, which are generally the vesting periods. For restricted stock, the fair value is calculated as the market price on date of grant and we amortize the fair value on a
straight-line basis over the requisite service period of the award, which is generally the vesting period.

Expected Term. The expected term of
options granted represents the period of time that they are expected to be outstanding. In light of new accounting guidance under SFAS No. 123(R) and SAB No. 107, we reevaluated our expected term assumption used in estimating the fair
value of employee options. We estimate the expected term of options granted based on historical exercise patterns, which we believe are representative of future behavior. Our estimate of the expected life of new options granted to our employees is 3
years, consistent with prior periods. We have examined our historical pattern of option exercises in an effort to determine if there were any discernable patterns of activity based on certain demographic characteristics. Demographic characteristics
tested included age, salary level, job level and geographic location. We have determined that there were no meaningful differences in option exercise activity based on the demographic characteristics tested.

Expected Volatility. Also in light of implementing SFAS No. 123(R), we reevaluated our expected volatility assumption used in estimating the fair value of
employee options. We estimate the volatility of our common stock at the date of grant based on historical volatility, consistent with SFAS No. 123(R) and SAB No. 107. Our decision to use historical volatility instead of implied volatility
was based upon analyzing historical data along with the lack of availability of history of actively traded options on our common stock.



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13. Share-Based Compensation (continued)

Risk-Free Interest Rate.We base the risk-free interest rate that we use in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon
issues with equivalent remaining terms.

Dividends.We have never paid cash dividends on our common stock and we do not anticipate paying cash
dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

Forfeitures.SFAS No. 123(R) requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures
and record share-based compensation expense only for those awards that are expected to vest. For purposes of calculating pro forma information under SFAS No. 123 for periods prior to fiscal 2006, we accounted for forfeitures as they occurred.

We used the following assumptions to estimate the fair value of options granted and shares purchased under our ESPP for the three months
and nine months ended September 30, 2006 and 2005, respectively:



|                                  |      |                                 |   |      |                                |   |      |      |   |      |      |  
|--------------------------------- | ---- | ------------------------------- | - | ---- | ------------------------------ | - | ---- | ---- | - | ---- | ---- | -
|                                  |      | Three Months EndedSeptember 30, |   |      | Nine Months EndedSeptember 30, |  
|                                  | 2006 |                                 |   | 2005 |                                |   | 2006 |      |   | 2005 |     
|Stock Options  Assumptions used: |      |                                 |   |      |                                |   |      |      |   |      |      |  
|Average expected terms (years)    |      | 3.0                             |   |      | 3.0                            |   |      | 3.0  |   |      | 3.0  |  
|Weighted-average volatility       |      | 83                              | % |      | 88                             | % |      | 83   | % |      | 74   | %
|Risk-free interest rate           |      | 4.8                             | % |      | 3.8                            | % |      | 4.8  | % |      | 3.8  | %
|Dividend yield                    |      |                                |   |      |                               |   |      |     |   |      |     |  
|                                  |      |                                 |   |     
|ESPP  Assumptions used:          |      |                                 |   |      |                                |   |      |      |   |      |      |  
|Average expected terms (years)    |      | 0.25                            |   |      | 0.25                           |   |      | 0.25 |   |      | 0.25 |  
|Weighted-average volatility       |      | 37                              | % |      | 53                             | % |      | 39   | % |      | 53   | %
|Risk-free interest rate           |      | 4.9                             | % |      | 3.4                            | % |      | 4.5  | % |      | 3.0  | %
|Dividend yield                    |      |                                |   |      |                               |   |      |     |   |      |     |  

The Black-Scholes option-pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because changes in the subjective
input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single value of our options and may not be representative of the future effects on reported net income or the
future stock price of our company.

Share-Based Compensation Expense and Stock Option Activity

We recorded $3.3 million in share-based compensation expense, which includes $3.0 million for stock options, $102,000 for our ESPP and $223,000 for restricted stock
for the three months ended September 30, 2006. For the nine months ended September 30, 2006, we recorded $7.0 million in share-based compensation expense, which includes $6.2 million for stock options, $300,000 for our ESPP and
$468,000 for restricted stock. At September 30, 2006, we had 241,000 non-vested restricted stock awards that had a weighted average grant date fair value of $11.56. As of September 30, 2006, there was $39.7 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 3.4 years.



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##### Table of Contents

13. Share-Based Compensation (continued)

A summary of stock option activity under all stock option plans during the nine months ended September 30, 2006 is as follows:



|                                        |  |              |   |  |                                         |       |                                                 |     |                          |   |           
|--------------------------------------- |  | ------------ | - |  | --------------------------------------- | ----- | ----------------------------------------------- | --- | ------------------------ | - | ----------
|                                        |  | StockOptions |   |  | WeightedAverage ExercisePrice per Share |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsic Value
|Outstanding at December 31, 2005        |  | 8,549,315    |   |  | $                                       | 10.06 |                                                 | 6.5 |                          | $ | 18,793,738
|Granted                                 |  | 4,379,449    |   |  |                                         | 8.37  |                                                 | 9.8 |                          |   |          
|Assumed upon acquisition of CyberGuard  |  | 3,039,545    |   |  |                                         | 7.21  |                                                 | 3.5 |                          |   |          
|Assumed upon acquisition of CipherTrust |  | 2,543,662    |   |  |                                         | 2.88  |                                                 | 2.6 |                          |   |          
|Exercised                               |  | (1,013,393   | ) |  |                                         | 6.11  |                                                 |    |                          |   |          
|Cancelled/forfeited/expired             |  | (619,455     | ) |  |                                         | 11.13 |                                                 |    |                          |   |          
|                                        |  |              |   |  |                                         |       |                                                 |     |                          |   |           
|Outstanding at September 30, 2006       |  | 16,879,123   |   |  |                                         | 8.27  |                                                 | 6.7 |                          |   | 14,235,934
|Exercisable at September 30, 2006       |  | 8,525,744    |   |  | $                                       | 9.53  |                                                 | 5.4 |                          | $ | 5,503,838 

The weighted average fair value of options granted during the nine months ended September 30,
2006 was $4.73.

We define in-the-money options at September 30, 2006 as options that had exercise prices that were lower than the $6.33 market price
of our common stock at that date. The aggregate intrinsic value of options outstanding at September 30, 2006 is calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the
4.7 million shares that were in-the-money at that date. There were 2.1 million in-the-money options exercisable at September 30, 2006.

We received $6.1 million in cash from option exercises under all share-based payment arrangements for the nine months ended September 30, 2006.

Comparable Disclosure

Prior to January 1, 2006, we accounted for our share-based
compensation plans under the recognition and measurement provisions of APB Opinion No. 25 and related Interpretations. No share-based employee compensation cost is reflected in the condensed consolidated statements of operations for the three
and nine months ended September 30, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and
net income per share if we had applied the fair value recognition provisions of SFAS No. 123 to share-based employee compensation prior to January 1, 2006 (in thousands, except per share amounts):



|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ----------------------------------- | - | ------ | -
|                                                                                                                                            |  | Three Months EndedSeptember 30, 2005 |        |   | Nine Months EndedSeptember 30, 2005 |  
|Net income, as reported                                                                                                                     |  | $                                    | 5,792  |   |                                     | $ | 14,800 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                      | (2,230 | ) |                                     |   | (6,758 | )
|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  
|Pro forma net income                                                                                                                        |  | $                                    | 3,562  |   |                                     | $ | 8,042  |  
|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  
|Net income per share:                                                                                                                       |  |                                      |        |   |                                     |   |        |  
|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  
|Basic  as reported                                                                                                                         |  | $                                    | 0.16   |   |                                     | $ | 0.41   |  
|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  
|Basic  pro forma                                                                                                                           |  | $                                    | 0.10   |   |                                     | $ | 0.22   |  
|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  
|Diluted  as reported                                                                                                                       |  | $                                    | 0.15   |   |                                     | $ | 0.40   |  
|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  
|Diluted  pro forma                                                                                                                         |  | $                                    | 0.09   |   |                                     | $ | 0.22   |  
|                                                                                                                                            |  |                                      |        |   |                                     |   |        |  



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Item 4. Controls and Procedures

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, 2006 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, 2006, 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, 2006, 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, except that relating to the acquisition of CipherTrust, Inc. as of September 30, 2006. See Note 4 to the condensed
consolidated financial statements included in Item 1 for discussion of the acquisition and related financial data. We are in the process of integrating the CipherTrust operations and will be incorporating these operations as part of our
internal controls. However, for purposes of this evaluation, the impact of this acquisition on our internal controls over financial reporting has been excluded.



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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: February 16, 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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EXHIBIT INDEX



|     |  |                                                                                                                          
|---- |  | -------------------------------------------------------------------------------------------------------------------------
|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.



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