<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------
                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

      [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2001

                                       OR

      [ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM __________ TO _______

                         COMMISSION FILE NUMBER 0-24544

                             CYBERGUARD CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           FLORIDA                                               65-0510339
(STATE OR OTHER JURISDICTION                                  (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)

2000 WEST COMMERCIAL BOULEVARD, SUITE 200, FORT LAUDERDALE, FLORIDA     33309
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                              (ZIP CODE)

       Registrant's telephone number, including area code: (954) 958-3900

        Securities Registered Pursuant to Section 12(b) of the Act: NONE

Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE

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

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

         The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $13,177,673 (Calculated by excluding all shares
that may be deemed to be beneficially owned by executive officers, directors and
greater than 10% shareholders of the registrant, without conceding that all such
persons are "affiliates" of the registrant for purpose of the federal securities
laws), and computed by reference to the last sales price of Registrant's Common
stock on September 27, 2001).

         As of September 27 2001, 18,640,462 shares of the Registrant's Common
Stock, par value $.01 per share were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Definitive Proxy Statement to be issued in connection
with the Company's 2001 Annual Meeting of Shareholders (incorporated in Part III
to the extent provided in Item provided in Items 10, 11, 12 and 13 hereof).


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                             CYBERGUARD CORPORATION
                                    FORM 10-K
                     FOR THE FISCAL YEAR ENDED JUNE 30, 2001
                                TABLE OF CONTENTS

Forward-Looking Statements

Part I:
         Item 1: Business
         Item 2: Properties
         Item 3: Legal Proceedings
         Item 4: Submission of Matters to a Vote of Security Holders

Part II:
         Item 5: Market for Registrant's Common Equity and Related Stockholder
                   Matters
         Item 6: Selected Financial Data
         Item 7: Management's Discussion and Analysis of Financial Condition and
                   Results of Operations
         Item 8: Consolidated Financial Statements and Supplementary Data
         Item 9: Changes In and Disagreements with Accountants on Accounting and
                   Financial Disclosures

Part III:
         Item 10: Directors and Executive Officers of the Registrant
         Item 11: Executive Compensation
         Item 12: Security Ownership of Certain Beneficial Owners and Management
         Item 13: Certain Relationships and Related Transactions

Part IV:
         Item 14: Exhibits, Financial Statement Schedules and Reports on
                    Form 8-K
         Signatures


CyberGuard(R), KnightSTAR(TM), STARLord(TM) and FireSTAR(TM) are trademarks of
CyberGuard Corporation


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FORWARD-LOOKING STATEMENTS

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

         Forward-looking statements are based upon assumptions and analyses made
by the Company in light of current conditions, future developments and other
factors the Company believes are appropriate in the circumstances, or
information obtained from third parties and are subject to a number of
assumptions, risks and uncertainties. Readers are cautioned that forward-looking
statements are not guarantees of future performance and that the actual results
might differ materially from those suggested or projected in the forward-looking
statements. Accordingly, there can be no assurance that the forward-looking
statements will occur or that results will not vary significantly from those
described in the forward-looking statements. Some of the factors that might
cause future actual events to differ from those predicted or assumed include:
future advances in technologies and computer security; the Company's history of
annual net operating losses and the financing of these losses through the sale
of assets and newly issued Company securities; the Company's ability to execute
on its business plans; the Company's dependence on outside parties such as its
key customers and alliance partners; competition from major computer hardware,
software, and networking companies; risk and expense of government regulation
and effects on changes in regulation; the limited experience of the Company in
marketing its products; uncertainties associated with product performance
liability; risks associated with growth and expansion; global economic
conditions, risks associated with obtaining and maintaining patent and
intellectual property right protection; uncertainties in availability of
expansion capital in the future and other risks associated with capital markets.
In addition, certain events that have occurred also are factors that might cause
future actual events to differ from those predicted or assumed, including: the
impact of the restatement of financial results for the Company's fiscal year
ended June 30, 1997 and quarters ended September 30, 1997, December 31, 1997 and
March 31, 1998; the completion of the numerous organizational changes and the
assembly of a new management team for CyberGuard; the outcome of a purported
class action lawsuit against the Company and former executive officers and
directors of the Company, relating to the restatement of financial results for
the fiscal periods noted above and a Securities and Exchange Commission
investigation regarding these matters; and the de-listing of the Company from
the NASDAQ National Market. In addition, the forward-looking statements herein
involve assumptions, risks and uncertainties, including, but not limited to
economic, competitive, operational, management, governmental, regulatory,
litigation and technological factors affecting the Company's operations,
liquidity, capital resources, markets, strategies, products, prices and other
factors discussed elsewhere herein and in the other documents filed by the
Company with the Securities and Exchange Commission. Many of the foregoing
factors are beyond the Company's control.

         The Company's future success is based largely on its ability to develop
and sell increasingly technologically advanced network security solutions in
sufficient volume and at sufficient prices to become profitable on a consistent
basis. In addition, the network security market is characterized by extremely
rapid technological change, requiring rapid product development. The velocity of
technological change has accelerated, and the Company believes that it is
important to its future that it keeps pace with these changes. The Company
believes that competition will continue to intensify in the rapidly evolving
markets in which the Company is involved, and that the continued development of
technologically advanced products will be necessary to keep its products
current. The Company believes that its ability to generate adequate cash flow
from operations will be critical to its future.

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                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     CyberGuard Corporation ("CyberGuard" or the "Company") is a leading
provider of network security solutions designed to protect enterprises that use
the Internet for electronic commerce and secure communication (customers include
Fortune 1000 companies, major financial institutions, and government agencies
worldwide). The Company's CyberGuard(R) firewall provides a level of security,
features and availability that the Company believes is not matched in the
industry. Through a combination of proprietary and third-party technology (such
as Virtual Private Network ("VPN"), authentication, virus scanning, encryption,
advanced reporting, high availability and centralized management), the Company
provides a full suite of products and services that are designed to protect the
integrity of electronic data and customer applications from unauthorized
individuals and digital thieves.

     CyberGuard delivers plug-and-play appliance solutions that, we believe, are
high performance, easy to install and cost effective. The firewall appliance is
sold to end users directly and indirectly by direct sales and resellers
worldwide in over thirty-nine countries.

     The Company was incorporated in 1994 in connection with a spin-off from
Harris Corporation. The Company produced computers for the real-time computing
market as well as the CyberGuard firewall for the secure computing market. The
Company changed its name from Harris Computer Systems Corporation in June 1996
following a sale of the Company's real-time computer business. The Company has
two subsidiaries, CyberGuard Europe Ltd. and CYBG Consultants, Inc.

SIGNIFICANT EVENTS

     During the Company's fiscal year ended June 30, 2001, the Company made the
following changes.

     o   Retained new Executive Management Team: Chief Executive Officer,
         President and Chief Financial Officer

     o   On January 24, 2001, approximately $5.7 million of convertible debt and
         the interest accrued on that debt was converted into approximately 4.6
         million shares of common stock at $1.00 per share and approximately
         668,000 shares of common stock at $1.51 per share.

     o   During January 2001, warrants for the purchase of approximately 2.4
         million shares of the Company's common stock were exercised at a total
         of approximately $4.8 million in cash.

     o   During January 2001, newly appointed Chief Executive Officer, Scott J.
         Hammack, invested $500,000 to purchase at the market value 142,857
         shares of common stock at $1.75 per share and 62,500 shares of common
         stock at $4.00 per share. In conjunction with the purchase of the
         142,857 shares of common stock, Mr. Hammack was granted an equal number
         of warrants to purchase the Company's common stock at $1.75 per share.
         The warrants are exercisable any time before December 25, 2005.

INDUSTRY BACKGROUND

      Network security has historically been a requisite for businesses in
security-sensitive industries such as healthcare, financial services, insurance,
telecommunications, governments and related interests. Businesses in these
industries historically maintained a secure network environment by isolating
their networks from others and allowing only authorized users to connect to
their privately managed networks.

     With the increased growth and reliability of the Internet, businesses are
now able to use the Internet as a more cost-effective alternative to their
existing private network. These businesses are also shifting corporate data
dissemination, which traditionally occurred via call centers, facsimile, and/or
postal mail, to the Internet. These systems can provide a more customized
interface to their customers, business partners, or employees. As this migration
continues, more business sensitive data and systems are exposed to a potentially
hostile environment, hence the growing need for network security.

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     As popularity and use of the Internet and intranets for business
applications have increased, companies have become increasingly concerned that
data collected and stored electronically by organizations might be vulnerable to
access by unauthorized users, including certain of a Company's own employees.
This concern is due in part to the fact that the underlying protocol used by the
Internet is particularly susceptible to penetration, and, as a result, interest
in and purchases of firewall technology to protect enterprise networks have
increased.

     According to IDC, an industry research firm, nearly 1 billion people, about
15 percent of the world's population, will be using the Internet by 2005. Their
use will contribute to more than $5 trillion in Internet commerce, a 70 percent
compound annual growth rate ("CAGR") from Internet spending of $354 billion in
2000. IDC states that Internet use will be widespread, not dominated by a single
region.

     Today, the United States accounts for just under half (46%) of total
E-commerce. By 2005, however, its share will dip to 36 percent. Growth in
E-commerce in all regions will be healthy, but Asia/Pacific and Western Europe
will grow the fastest between the years 2000 and 2005.

     Internet security crime is growing at a rapid pace. According to the 2001
COMPUTER CRIME AND SECURITY SURVEY conducted by the FBI and the Computer
Security Institute, 85 percent of respondents (primarily large corporations and
government agencies) detected computer security breaches within the last 12
months; 64 percent acknowledged financial losses due to computer breaches; the
most serious financial losses occurred through theft of proprietary information
and financial fraud; 70 percent said their Internet connection was a frequent
point of attack, up from 59 percent in 2000; and 40 percent of respondents
detected system penetration from the outside, up from 25 percent in 2000.

     Those statistics factor heavily in business decisions to adopt security
technology. Infonetics Research, another industry research group, predicts that
U.S/Canada end-user expenditures for security products, managed security
services and PKI products and services will grow 239 percent from $2.8 billion
to $9.5 billion between the years 2001 and 2005, while worldwide end-user
expenditures for firewalls and managed firewall services will grow 231 percent.
The following elements are principal means for protecting organizations from
digital mischief. These elements require substantial integration and
interoperability to smoothly implement an organization's security policy.

     SECURITY POLICY. Security products are not effective unless they follow a
well-thought-out enterprise security policy. Creating a policy requires
cooperation between information technology staffers, business unit managers and
senior executives. Generally, a policy should follow one of two philosophies.
The first is, "That which is not expressly prohibited is permitted." The second
is, "That which is not expressly permitted is prohibited." The former is less
intrusive but will not provide maximum protection. The latter requires
discussion and support from management because it affects the workflow of the
entire organization--all the way down to rules for locking offices and filing
cabinets and discarding waste paper. The use of such security technology as a
firewall generally is associated with the second philosophy.

     LAN SECURITY. Popular local-area network ("LAN") operating system software
provides various security options--many of which are seldom used. Network
managers can immediately improve protection by implementing security features
such as login restrictions on specific workstations, days of the week and hours
of the day. More stringent password policies also create extra barriers, such as
increasing the minimum password length, requiring that passwords include a
combination of numbers and letters, and forcing regular password changes.
Rigorous application of LAN security features can bolster protection from
internal breaches.

     FIREWALLS. Firewalls provide access control. They usually are aimed at
preventing external security breaches but can also provide additional internal
security for corporate intranets. Firewalls are a combination of software and
hardware, usually consisting of a fast workstation located outside the LAN but
inside the router link to the Internet. To be effective, all network traffic
must pass through the firewall, whether going to the outside world or entering
the LAN. The firewall permits only authorized traffic to pass either way and
must be impervious to unauthorized penetration.

     Premium firewalls run on special versions of the UNIX(R) operating system
although Windows NT(R)-based versions are also popular for less-rigorous
security environments. Some firewalls also support ancillary special features
such as Web URL filtering or virus scanning. Firewall features and the
underlying operating system of the firewall generally determine the level of
security that a firewall provides. Presented below is the security spectrum of
firewall products available today.

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          ROUTER-         PROXY         HYBRID      FIREWALL
FULL       BASED       APPLICATION     FIREWALL   WITH SECURE     NO
ACCESS   FILTERING       FIREWALL                     OS        ACCESS




     LEAST SECURE                                         MOST SECURE


     Generally, these technologies build on each other so that the most secure
technologies can also perform the functions of the less secure ones and,
depending on price and other factors, can serve markets for such products.
CyberGuard has developed its products to emphasize stringent security and thus
falls to the far right of this diagram.

     Traditionally, when businesses have selected a firewall solution, they have
had to choose between high security and high performance. The higher the level
of protection and the more work the firewall has had to do to provide a secure
environment, the slower its throughput. Since network administrators are also
responsible for keeping their network performing at optimal speed so that users
do not experience slow performance, they have typically had to sacrifice speed
for security or vice versa. CyberGuard's approach to firewall technology is to
offer extremely high security as well as high-speed throughput and substantial
numbers of simultaneous connections. In independent testing, CyberGuard earns
high marks for its performance. CyberGuard's line of appliance firewalls allows
purchasers to choose based on the level of performance they require for their
particular business environment.

     ENCRYPTION. Encryption is a data-scrambling technique that prevents
information from being read by unauthorized people. It is used to protect data
packets during transmission from one point to another. Encryption can be
implemented in two ways: from the PC that originates the data or from the server
or Internet connection device that passes the data outside the LAN. Protected
data is decrypted by a reciprocating destination LAN server or PC. Digital key
technology is a common means of implementing encryption. A digital key bearing a
secret value is used to encrypt data. Decryption can occur only by someone who
possesses the appropriate decryption key--much like secret agents passing coded
messages from behind enemy lines. Systems using the same key for encryption and
decryption are referred to as symmetric key encryption systems, whereas those
that use a different key for decryption than encryption are referred to as
asymmetric or public-key encryption systems. Encryption is a common security
technique used to protect virtual private networks ("VPN") and standard
intranets.

     ANTI-VIRUS. A computer virus modifies programs and data, sometimes in an
innocuous manner and sometimes with malicious intent. Some viruses can erase
applications and data from systems or merely act as electronic graffiti. Any
form of computer virus, regardless of its intent, increases costs and decreases
productivity and, therefore, cannot be tolerated. Anti-virus software can be run
from individual workstations or from a network server or firewall. This software
scans incoming files and attachments to E-mail messages to protect servers, PCs
and LANs from infection.

     IDENTIFICATION AND AUTHENTICATION. On the Internet, no one can truly see
who is using the system. Digital identification technology is used to identify
who you are before you start using an information system. Authentication is the
means for proving to the system that you actually are the person you claim to
be. This is similar to the process of signing a check, then showing a driver's
license and a major credit card to a store clerk. Digital identification and
authentication employ passwords, keys, physical tokens, badges and smart
cards--even fingerprints, retinal scans or voiceprints (biometric
identification) in advanced systems. Digital identification and authentication
are particularly important for securing electronic commerce, which mostly
operates outside the protection of a corporate intranet's security
infrastructure.

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THE CYBERGUARD SOLUTION

     The Company produces two different firewall products: the first consists of
a family of firewall appliances that all utilize a UNIX operating system
obtained from Caldera International, Inc., and the second is based on the
Microsoft(R) Windows NT operating system. CyberGuard has modified the Caldera
SCO(R) UnixWare(R) operating system to remove penetration vulnerabilities that
are common in UNIX platforms. On the Windows NT operating system, CyberGuard has
developed a capability called SecureGuard that closes virtually all of the
security holes in that operating system.

     The Company's secure operating system and secure networking software
technologies allow CyberGuard to position its product suite to address the broad
range of customer requirements in the commercial network security market.
Generically speaking, a firewall consists of the hardware, a firewall
application, an operating system and networking software, each playing an
important role in the receipt and processing of data through the firewall. In
competitive network security products, only the firewall application has been
designed to resist penetration by an attacker, leaving the operating system and
network software unsecured. Therefore, an attacker can penetrate a competitive
firewall through the unsecured operating system or networking software.
CyberGuard's firewall uses a secure operating system and secure networking
software to prevent network penetration by requiring network communication to
pass through the firewall application.

     The graphic presentation below depicts the three major components of a
firewall system and demonstrates the fundamental security deficiency of an
application-only solution as compared to the CyberGuard firewall.

                 MULTILEVEL SECURITY PROVIDES HIGHEST DEGREE OF
                                   PROTECTION

                                    [CHART]

     CyberGuard's secure operating system and secure networking software are
based on multilevel security ("MLS"); that is, they restrict access to
information based on the sensitivity of the information and the access
authorization of system users. In an MLS system, a user cannot read data that
has been labeled at a level more sensitive than the security level that person
has been given and cannot create or modify data having a different security
label. The operating system and programs reside at a protected level that cannot
be read or modified by network users.

     The Company's secure operating system and networking software are designed
to meet the United States TCSEC/NCSC (Trusted Computer System Evaluation
Criteria/National Computer Security Center ("NCSC")) criteria at a B1 level. The
NCSC assurance levels for operating systems range from D (systems with minimal
security) to A1 (systems with assured security). Certain agencies of the United
States government have incorporated the NCSC ratings into their procurement
requirements, and commercial users, while not having specific NCSC-rating
requirements, often look to an NCSC rating as an indication of the product's
proven reliability. The Company believes that the CyberGuard firewall is the
only commercially available firewall built on an integrated operating system and
networking software designed to a B1 level. These components have also been
successfully evaluated by the Centre d'Electronique de l'Armement ("CELAR") in
France and have been awarded an E3 evaluation level in the United Kingdom and
Australia against the United Kingdom's Information Technology Security
Evaluation Criteria ("ITSEC") predefined assurance scale. On this scale, E
(evaluation level) is followed by a number ranging from 1 to 6, where 6
represents the highest evaluation level. In December of 2000, the Company
completed its Common Criteria evaluation for its operating system and networking
software and was awarded the EAL4 evaluation level. EAL (Evaluation Assurance
Level) followed by a number ranging from 1 to 7 denotes the assurance level of
the product on the Common Criteria's predefined assurance scale, where 7
represents the highest evaluation assurance level. EAL4 represents assurance on
a methodically designed, tested, and reviewed product.

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     Through a strategic partnership, the Company's CyberGuard firewall also
meets the compliance standards of the Internet Protocol Security Standard
("IPSec"). IPSec is a framework of open standards for ensuring private
communications over public networks like the Internet. Based on standards
developed by the Internet Engineering Task Force ("IETF") IP Security Working
Group, IPSec is an industry-driven standard that ensures confidentiality,
integrity, and authenticity on an IP network. IPSec is a key component of this
standards-based, flexible solution for deploying a network-wide security policy.

     In addition to enhanced operating system and network security, CyberGuard's
firewalls have been built on the Company's legacy of providing high-performance,
real-time computing systems. Therefore, the Company's CyberGuard firewall also
addresses the high performance end of the commercial network security market
because the underlying operating system and networking software were designed
for demanding security environments. The Company's secure operating system is
designed to function as a high performance, real-time operating system able to
process high levels of throughput without time-consuming failures. This same
operating system technology underlies the Company's secure networking software
and firewall technology.

     The CyberGuard firewall product is the basis for the Company's ability to
offer a complete suite of enterprise-wide security products including mobile
security applications, secure database applications, and network access control
filters.

     The Company's firewall that is based on a UNIX operating system is
currently using Caldera's SCO UnixWare 2.1.3. The Company is currently
transitioning its firewall technology to be multiplatform capable. This will
enhance the Company's ability to take advantage of advancements in operating
system technology as well as third-party products.

PRODUCTS AND SERVICES

PRODUCTS

     CyberGuard produces a line of premium appliance firewalls built on
technology developed when the Company was originally a division of Harris
Corporation. The technology is based on a operating system ("OS") that was first
evaluated to meet OS security features outlined by the National Computer
Security Center ("NCSC") Trusted Computer System Evaluation Criteria ("TCSEC").
The result was a trusted secure operating system that used layers of protection
or multilevel security ("MLS") to provide the high level of network protection
required by such customers as the U.S. and European governments, who needed to
safeguard classified, national security information.

     Today's product offerings continue to earn the highest independent security
certifications and evaluations--most notably, Common Criteria Evaluation
Assurance Level 4 ("EAL4"). CyberGuard's products are designed for high-end
customers who require high levels of security and are serious about their
security needs. Those customers may be governmental agencies protecting
sensitive classified information, a worldwide financial institution securing
customers' private financial data and transactions, an international
communications corporation safeguarding its headquarters and operations around
the globe, or a Fortune 1000 Company whose dependence on electronic commerce
continues to grow at the same time Internet security dangers increase.

     In 2000, in response to customer demand for an integrated, easy-to-use,
high-performance, high-security product, CyberGuard launched three premium
appliance firewalls to meet various customer bandwidth requirements and
operating environments: KnightSTAR(TM), introduced in January 2000; STARLord(TM)
in September 2000; and FireSTAR(TM) in October 2000.

     The KnightSTAR ("KS") appliance offers extremely high performance and
support for more than one million simultaneous connections; it is designed for
customers with high bandwidth and high security needs such as large enterprises,
data centers, and Fortune 1000 companies.

     The STARLord ("SL") appliance was designed not only to provide very high
performance and gigabit connectivity but also to offer the robust functionality
required by high-volume operating environments such as large service providers
and telecommunications companies.

     The FireSTAR ("FS") appliance was designed for small to mid-sized networks
that require evaluated security but do not have extremely high bandwidth needs.
Since it utilizes the same architecture as KnightSTAR and STARLord, it is an
ideal complement for a large customer who may utilize one of the
higher-performing appliances at a primary location but decides to deploy FS
units at branch locations.

     The Company also offers and continues to support a software-only version of
its firewall technology for customers who have earlier versions of CyberGuard
firewalls installed on certain validated hardware platforms.

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Additionally, CyberGuard offers a software firewall for Windows NT, which has
been evaluated at the ITSEC E3 level of protection in the United Kingdom.

     CyberGuard's firewall products may include the following features and
attributes:

         PACKET FILTERING. CyberGuard uses packet-filtering technology to allow
     the firewall to expressly permit or deny connections using criteria based
     upon source and destination host or network and the type of network service
     being requested and the time of day or day of week.

         SECURITY AUDITING AND ALARMS. CyberGuard's firewall technology
     incorporates built-in auditing and alarm functions designed to permit
     administrators to review a chronological record of dynamic system
     activities and allow the reconstruction of security sensitive activities.
     CyberGuard's firewall can be configured to process the security auditing
     information and, in real-time, take explicit actions in response to actions
     deemed security sensitive or possible attempts to attack the network or
     firewall.

         APPLICATION PROXIES. CyberGuard's firewall supports a number of
     security-enhanced application proxies for many network services, including
     remote login ("rlogin"), terminal emulation ("Telnet"), File Transfer
     Protocol ("FTP"), Hypertext Transport Protocol ("HTTP"--used with the
     Internet), Secure Sockets Layer ("SSL") security, Network News Transport
     Protocol ("NNTP"), Simple Mail Transport Protocol ("SMTP"), X-Window System
     ("X11"), Lightweight Directory Access Protocol ("LDAP"), Server Message
     Block ("SMB"), Load Equalizer ("LDE"), Lotus Notes(R) ("Notes"), Port Guard
     intercept ("Port Guard"), Post Office Protocol Version 3 ("POP3"), Oracle
     SQL*Net for secure connection to a database host ("SQL*Net"), Proxy-Writer
     for custom proxies ("Proxy-Writer"), RealAudio(TM) protocol proxy
     ("RealAudio"), and Gopher(TM) protocol ("Gopher").

         SECURE REMOTE ADMINISTRATION. CyberGuard's firewall supports the
     ability to remotely monitor and administer a firewall from a Network
     Operations Center. Using this remote administration capability, a system
     administrator can manage a CyberGuard firewall from a remote site as if he
     or she were physically located with the firewall.

         CENTRAL MANAGEMENT. CyberGuard's firewall technology provides the
     ability to centrally manage and monitor multiple remote CyberGuard
     firewalls. Remote, or target, firewalls can be administered and monitored
     individually or within groups from one central station, the firewall
     manager. To ensure constant availability, CyberGuard offers central
     management fail-over, a mechanism that allows a back-up firewall manager to
     take over management duties for the primary firewall manager when the
     primary manager is not available (during system maintenance or a power
     outage, for example). The back-up manager can be located anywhere in the
     world remote from the primary firewall manager.

         DYNAMIC NETWORK ADDRESS TRANSLATION. A CyberGuard firewall can be
     configured to translate all internal addresses to the firewall's network
     address. From the Internet, the firewall appears to be the only machine
     connected, reducing the risk of possible penetration attacks against the
     internal network.

         STATIC NETWORK ADDRESS TRANSLATION. CyberGuard firewalls support the
     ability to map internal private network addresses to public network
     addresses. This allows machines with illegal or private network addresses
     to be accessed via a public network address different from that of the
     firewall.

         GRAPHICAL USER INTERFACE. CyberGuard's firewalls provide an
     OSF/Motif(TM)-based graphical user interface, or GUI, designed to
     facilitate system configuration and administration. The GUI is generally
     considered easier to use than the traditional command-line interface.

         SPLIT DOMAIN NAME SERVICE. The CyberGuard firewall can function as a
     Domain Name Service (DNS) server. With split DNS, the network responds to
     queries differently depending on their source. For example, responses to
     requests from the Internet might contain only CyberGuard firewall
     information; responses from internal requests might contain a complete list
     of hosts.

         VIRTUAL PRIVATE NETWORKING. CyberGuard currently supports a variety of
     VPN products from RedCreek Communications, Inc., including its IPSec-based
     product line. VPN products provide a mechanism for establishing a logically
     separate network between multiple firewall systems. This logical network
     supports fully-encrypted communication among the machines in the network.
     VPN also supports high-performance encrypted communication between
     CyberGuard's firewalls and/or remote/mobile users. The Company is currently
     developing an integrated software VPN solution that will become part of its
     appliances.

         LINK AGGREGATION. CyberGuard provides a feature called link aggregation
     (LAG) that will combine multiple physical network interface controller
     ports into one logical network interface. This feature offers two benefits.

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     The first is an increase in the overall reliability of the network gained
     from redundancy. In this instance, two physical ports are configured
     beneath one LAG device, and one port will be active while the other will be
     a hot standby. The second benefit is that link aggregation can also be used
     to provide higher throughput. In this case, multiple ports are configured
     under a single LAG device, and the LAG driver will optimize port
     utilization by balancing the traffic load.

         AUTOMATIC SYSTEM UPDATE. CyberGuard's firewall includes a feature that
     allows an administrator to update the firewall automatically with necessary
     patches via a remote download. This feature is especially useful for very
     large firewall installations because the administrator is able to implement
     patches to large numbers of firewalls from a single central location.

         NETWORK TIME PROTOCOL SUPPORT. CyberGuard firewalls provide a means to
     update time automatically via a network. Time synchronized via a trusted
     Network Time Protocol (NTP) server is required to insure that audit data
     can be accurately correlated. This feature is especially important to
     installations with large numbers of firewalls.

         AUTOMATED AUDIT LOG ARCHIVING. The CyberGuard firewall offers a feature
     for automatically archiving audit logs to a remote archive server. The log
     files can be encrypted to insure confidentiality. This feature is
     especially important with the increase in the amount of audit information
     that is directly proportional to data throughput.

         HIGH AVAILABILITY. CyberGuard's firewalls support an optional high
     availability configuration that combines two firewalls to operate as a
     single logical unit. If there is a disruption in network connectivity or if
     the primary firewall fails, the secondary firewall is designed to
     automatically take over to provide nearly continuous network connectivity.
     All configuration changes are automatically synchronized between the
     firewalls in the high availability pair. For critical connections, such as
     those to electronic commerce sites, this high availability configuration
     minimizes the risk of lost network connectivity.

THIRD-PARTY PRODUCTS AND SERVICES

         Through strategic alliances, the Company offers other network security
products for use with CyberGuard's firewalls. These products include:

         URL BLOCKING AND FILTERING. This software monitors and controls access
to non-business-related Web sites such as pornography, gambling, on-line
shopping, stock-trading, job searching, sports, "pay-to-surf" sites and other
sites that an employer may wish to block. CyberGuard's firewall integrates with
Websense(TM) Enterprise v4, allowing businesses to more effectively monitor,
report and manage employee activity on the Internet. As personal use of the
Internet increases in the work setting, more organizations are exploring
solutions to limit inappropriate use of the Internet. An integrated solution
enables businesses to accomplish that by establishing acceptable parameters on
personal Internet use.

         TOKEN AUTHENTICATION PRODUCTS. CyberGuard offers a number of
third-party token authentication devices, including those offered through
alliances with Symantec Corporation and RSA Security, Inc., among others. Token
authentication devices provide an alternative to the use of static passwords for
user authentication, resulting in reduced likelihood of system penetration
through the reuse of an old password.

SERVICES

     CyberGuard offers a range of services to customers who have its firewall
products and to customers who require consulting or professional services. In
January 2001, INFORMATION SECURITY magazine published the results of a survey of
more than 2,000 readers. Among companies grouped by size, CyberGuard scored
highest overall in customer satisfaction. Among the largest companies, that is,
those with more than 50,000 employees, CyberGuard received a perfect score of 5.
Among government users, CyberGuard received the highest overall score.

     SUPPORT SERVICES. CyberGuard believes that service can be a key
differentiator for the Company. Our worldwide customer support center provides
help on the phone and online around the clock. Support staff are highly trained
and qualified, level-2 experienced security professionals. Each support engineer
either has or will soon have CISSP certification, one of the highest levels of
certifications a security professional can achieve.

                                       10
<PAGE>   11

     With the globalization of the economy and the connectivity made possible by
the Internet, many large organizations no longer operate regionally or
nationally. Instead those organizations have begun to operate globally, either
independently or as part of a large multinational corporate entity. CyberGuard
recently entered into a strategic agreement with a major international service
provider to expand its worldwide support services, adding onsite and hardware
support around the clock, around the globe, and in multiple languages.

     TRAINING AND EDUCATION. The Company offers a variety of courses to help
customers make the most of their CyberGuard firewall product. The courses
include basic and advanced training and are offered at CyberGuard's corporate
headquarters in Ft. Lauderdale, Florida; at its subsidiary headquarters in
London; and at various reseller locations. Training courses may also be offered
at customer locations as appropriate.

     Additionally, the Company has developed modular CyberGuard sales
professional training designed to equip the sales force--both internal and
channel--to better sell CyberGuard products against its competition.

     As customers and resellers become more knowledgeable about the product,
they also become better advocates for the technology and the CyberGuard
advantages. Since word of mouth is one of the most effective forms of
advertising, the Company believes that a successful strategy for growing the
Company must include an emphasis on education and training.

     PROFESSIONAL SERVICES. Leveraging its security expertise and experience,
CyberGuard markets several specific types of consulting services relating to,
among others, penetration testing; vulnerability assessment; Internet gateway
security and technical evaluation; system security; corporate data security
policies and management control; network security policy and management control;
Internet security policy and management controls; network security analysis; and
information security training.

PRODUCT DEVELOPMENT

     The following table shows the significant products and product enhancements
that the Company introduced during the last two quarters of fiscal year 2001 and
will introduce during the first two quarters of fiscal year 2002.

     PRODUCT              INTRODUCTION                  DESCRIPTION
     -------              ------------                  -----------

Firewall Software           Q4 2001          Significant enhancements to proxies
Update                                       that help to prevent many known or
                                             future viruses or worms

KnightSTAR(TM) (KS)[ ]      Q4 2001          Transition from 2nd generation
                                             hardware platform to 3rd generation

Windows NT and 2000         Q2 2002          New software release with
Enhancements                                 ease-of-use features and support
                                             for Windows(R) 2000 in DSL/Cable
                                             environments

5.0                         Q2 2002          New software release for the
                                             appliance family (FS/KS/SL) that
                                             includes integrated IPSec VPN

LX                          Q2 2002          Small form-factor entry-level
                                             business firewall appliance


                                       11
<PAGE>   12




     CyberGuard's IPSec VPN offering, which is integrated with the firewall
product, will feature a single management interface that, the Company believes,
makes setup and use easy. It will provide support for gateway-to-gateway and
gateway-to-client VPN configurations; support for X.509 certificates and use of
certificates with IPSec and IKE (Internet Key Exchange); capability for VPN
access through NAT (network address translation) to remote private networks;
access control for all traffic; central administration, monitoring, and logging
capabilities; support for a wide range of cryptographic algorithms (e.g., 3DES,
DES, AES, Cast-128); and optional cryptographic hardware acceleration support.

     The expected dates of introduction in the above table are forward-looking
statements and are based on certain assumptions, including certain assumed
levels of staffing and capital resources, contractual arrangements with
suppliers, customers or strategic allies, market conditions, overall product
development costs and related sales and marketing expenses, the nature of
available competing and complementary technologies and products, and other
assumptions. Should these assumptions change or prove to be inaccurate, or
should the Company's plans change due to certain unforeseen factors, the
development of such products may be delayed or discontinued.

     Development of new products and features is performed by the Company's
internal engineering staff and through third-party licensing. The Company has
approximately 35 full-time employees and independent contractors devoted to
product development. The Company supplements the development staff from time to
time with contract engineers as needed to meet product demands in the market.

     For the fiscal years ended June 30, 2001, June 30, 2000, and June 30, 1999,
the Company spent approximately $5.5 million, $3.0 million, and $3.7 million,
respectively, on research and development, an equivalent of 22%, 16%, and 27%,
respectively, of total sales during such periods.

STRATEGIC ALLIANCES AND RELATIONSHIPS

     In 1998, CyberGuard entered into an agreement with RedCreek Communications,
Inc. to integrate and market a family of hardware network security products for
VPN applications on the Internet. VPNs offer a secure, cost-effective
alternative to private leased communication lines. These products are available
for CyberGuard's line of premium firewalls and the Windows NT firewall.

     CyberGuard has alliances for the purpose of reselling the Company's
products with several strategic partners. The Company has additional strategic
resellers outside the United States--in Asia, the United Kingdom and Latin
America.

     CyberGuard continues to actively seek additional strategic alliances for
product development and sales and marketing purposes. The Company seeks such
alliances to continue efforts to develop additional products or enhancements to
its existing product offerings, particularly those relating to encryption, token
authentication, VPNs, intrusion detection and virus detection.

     During the final quarter of fiscal year 2001, CyberGuard engaged in
discussions with Marketlink Technologies LLC to become CyberGuard's reseller
development firm in the US. Those discussions led to an agreement that was
announced on July 2, 2001. The agreement with Marketlink Technologies LLC is
intended to identify, recruit, educate and drive sales through U.S. reseller
channels at an accelerated pace. There can be no assurance that the Company will
be able to develop new reseller partners through this partnership or that, if
formed, such resellers will be successful.

CUSTOMERS AND MARKETS

     CyberGuard has traditionally served very large commercial businesses where
network security was a top priority. These businesses include government
agencies, the utilities, financial institutions and a myriad of other Fortune
100 companies. Today, CyberGuard customers include two Fortune 10 companies,
multinational corporations, commercial enterprises, financial institutions,
stock exchanges, educational institutions, telecommunications companies, large
service providers and many Fortune 1000 companies.

     In many instances, CyberGuard supplies its product to authorized resellers,
VARs (value-added resellers), solution providers, distributors, business
partners or system integrators who ultimately sell to and support end users. In
turn, the Company supports these reseller channels through training and
education, product collateral, consulting and interaction with CyberGuard's
direct sales force.

                                       12
<PAGE>   13


     Current and prospective commercial customers include medium to large
domestic and multinational companies that routinely create and store proprietary
and/or highly sensitive information, which is accessible via corporate networks
including intranets and extranets. From a buyer's perspective, these customers
have a higher level of security knowledge, are educated about the importance of
accreditation and are likely to consider network security and network throughput
performance as decisive factors in their procurement decisions. As the first
firewall provider in the world to achieve Common Criteria Evaluated Assurance
Level 4 (EAL4) certification for firewall appliances, CyberGuard enjoys an
advantage with this group of network security purchasers.

     Target markets for the Company's products include financial institutions,
financial news services, insurance companies, health care institutions,
telecommunications companies and companies that market electronic commerce
applications to businesses and consumers. In addition, the Company focuses its
marketing efforts on specific vertical market sectors including government,
banking and finance, telecommunications and healthcare.

SALES, MARKETING AND DISTRIBUTION

     In addition to a direct sales force, the Company has established a range of
channels to market its products in the United States and internationally,
including value-added resellers ("VARs"), distributors, manufacturers'
representatives and strategic alliance partners. Key resellers and distributors
include Hucom, Inc., Datacraft Asia, Baltimore, Zergo and Nissin Electric Co.
Ltd. (a member of Japan's Sumitomo Group). During the year ended June 30, 2001,
indirect marketing channels for CyberGuard's products accounted for 51 percent
of the Company's sales. Sales in Europe, Middle East and Africa ("EMEA")
accounted for 35 percent of the Company's sales. Sales in Asia and Latin America
accounted for 16 percent of the Company's sales.

     CyberGuard employs national and regional sales managers and maintains
offices in the United States, the United Kingdom and Singapore. The sales force
focuses its sales and marketing efforts on customers and resellers in selected
vertical markets such as financial services, healthcare, insurance,
telecommunications and electronic commerce application providers. The Company's
sales team also includes an internal sales staff and technical support engineers
who extend CyberGuard's marketing and sales efforts. The sales force also
solicits prospective customers and provides technical advice and support with
respect to the Company's products.

     Marketing activities include advertising, publishing technical and
educational articles in industry journals, participating in industry tradeshows,
product technology conferences, direct mail, telemarketing, on-going customer
and third-party communication programs, sales training and marketing on our Web
site. As of June 30, 2001, the Company had 25 employees in the Sales and
Marketing organization. CyberGuard also generates interest in and educates
potential customers about computer and network security through speaking
engagements, contributed articles, media interviews and outreach to industry
analysts.

     CyberGuard focuses its direct and indirect marketing efforts on commercial
businesses that the Company perceives to have a need for network security due to
the sensitive nature of data they collect or the potential negative impact of
computer hacking. CyberGuard addresses these markets with its direct sales force
and through indirect channels such as VARs and systems integrators who already
serve such markets. The Company also believes its products are particularly
well-suited to a spectrum of Web service providers including internet service
providers ("ISP"), application service providers ("ASP"), managed service
providers ("MSP") and Internet-based retailers of subscription products and
services.

     As the relationship with Marketlink Technologies LLC evolves, the intent
will be to provide a reseller focus in the U.S. similar to the successful
reseller strategy utilized in Europe and Asia. U.S. resellers will be able to
sell all of CyberGuard's product offerings without limitation. CyberGuard
competitors often place limits on resellers that restrict them from pursuing
certain customers or certain revenue-generating opportunities. While the goal is
to increase the number of resellers in the U.S. who can sell CyberGuard
products, CyberGuard will focus on working with Marketlink Technologies, LLC to
achieve maximum distribution without commoditising our product.

                                       13
<PAGE>   14


COMPETITION

     The market for network security products is intensely competitive and
characterized by frequent technological change. CyberGuard believes that
competition in this market is likely to persist and intensify as demand for
network security products continues to increase.

     At the same time, the Company believes that it enjoys certain advantages
because of its high level of independently evaluated security; its firewall
appliance strategy that offers a trusted secure operating system, multilevel
security, performance and functionality; and a strong core of developers who
helped create the Company's original technology, which continues to earn
industry awards and certifications even as it evolves to meet new security
demands.

     In market segments requiring the highest levels of network security,
CyberGuard competes with Secure Computing Corporation, which also offers a
firewall with a security-enhanced operating system. The Company also competes
with manufacturers such as Check Point Software Technologies Ltd., Cisco
Systems, Inc., Symantec Corporation (which acquired AXENT Technologies, Inc.),
Network Associates, WatchGuard, Lucent Technologies, and IBM. Most of these
companies enjoy higher sales volumes than CyberGuard due to their sales of
lower-end firewalls and other non-firewall products and applications.

     These companies' products may be considered to be alternatives to
CyberGuard. In addition, companies such as Compaq (Digital Equipment
Corporation) and Sun Microsystems, Inc. sell products with similar features and
functions that could be considered competitors of the Company. Certain
companies, such as Microsoft, now offer network-related security products that
could eventually compete with CyberGuard's firewall products.

     Many of CyberGuard's current and potential competitors have greater name
recognition, larger installed customer bases and significantly greater
financial, technical and marketing resources. There can be no assurance that
CyberGuard can maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other competitive resources. Failure to keep
pace with rapid technology changes could result in the Company's products
becoming less valuable or obsolete. Certain of CyberGuard's competitors may
determine, for strategic reasons, to consolidate, substantially lower the price
of their network security products, or bundle their products with other products
such as hardware products or other enterprise software products. The trend
toward enterprise-wide network management and security solutions may result in a
consolidation of the network management and security market around a smaller
number of vendors who are able to provide the necessary software and support
capabilities. In addition, current and potential competitors have established or
may establish financial or strategic relationships among themselves with
existing or potential customers, resellers or other third parties.

     CyberGuard believes that the principal competitive factors affecting the
market for computer and network security products include the product's level of
security, performance and reliability, technical features including
interoperability and functionality, ease of use, capabilities, customer service
and support, integration of products, manageability of products, brand name
recognition, Company reputation, distribution channels and lower total cost of
ownership. Based on its understanding of the features of the products and
services offered by CyberGuard's competitors, the Company believes that its
products currently compete favorably with respect to such factors. Based on its
experience and understanding of the existing network security market, CyberGuard
believes that potential purchasers of its security products who do not
differentiate between the level of security provided by competing security
products are as likely to base their purchasing decisions on price, ease of use,
or other considerations as they are to base such decisions on the level of
security provided. In circumstances where a potential purchaser's primary
concern is the level of security provided by products being considered, the
Company believes that its products compete favorably.

     Additionally, CyberGuard believes that a key competitive factor in the
foreign network security market and certain domestic vertical markets, is a
computer system's security rating by intelligence and other government agencies
such as the internationally recognized Common Criteria, NCSC and ITSEC. The
CyberGuard firewall is built on an integrated secure operating system and secure
networking software components that are certifiable to the B1 level by the NCSC,
rated E3 by ITSEC Certification testing in the United Kingdom and Australia, and
certified at the Common Criteria EAL4 level, which is accepted by 15 countries
around the world. The Company's secure operating system has also successfully
completed evaluation by the ICSA, CheckMark and NSS organizations.

                                       14
<PAGE>   15


     BorderWare has been evaluated at the EAL4 level. Cisco has earned EAL4+
certification for its Cisco PIX appliance and Secure Computing is under
evaluation for EAL4+, as well. It is important to note, however, that a Company
may choose which portions of its firewall technology to have evaluated (as
specified in the target of evaluation or TOE document). When those elements of a
firewall that are outside the scope of the TOE are utilized, the firewall does
not, in fact, have an EAL4 level of certification. In each instance where TOEs
are compared, the number of features and functions in the CyberGuard firewall
that are within the scope of the EAL4 evaluation exceed those of competitive
evaluated products.

PATENTS AND PROPRIETARY TECHNOLOGY

     The Company relies upon license agreements with customers; trademark,
copyright and trade secret laws; employee conflict of interest and third-party
non-disclosure agreements and other methods to protect the trade secrets,
proprietary know-how and other proprietary rights on which the Company's
business depends. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by competitors. The Company has no pending patent applications to
cover any aspects of its technology. The Company has received trademark
registration in the United States, Canada and numerous other countries for its
CyberGuard(R) firewall marks and its CyberGuard logo.

GOVERNMENT REGULATION

     The Company's security products are subject to export restrictions
administered by the US Department of Commerce. Export controls on cryptographic
products permit the export of the Company's encryption products outside the U.S.
only with the required level of export license or through an export license
exception. Although to date the Company has been able to secure all required
U.S. export licenses and license exceptions, there can be no assurance that the
Company will continue to be able to secure such licenses or exceptions in a
timely manner in the future. The effect of these regulations is to create delays
in the introduction of the Company's products in international markets, and, in
some cases, to prohibit them altogether.

     There are currently few laws or regulations directly applicable to access
to or commerce on the Internet. Additional laws and regulations covering issues
such as privacy, pricing and characteristics and quality of products and
services could be adopted with respect to the Internet. The adoption of
additional laws or regulations may decrease the growth of the Internet, which
could, in turn, decrease the demand for the Company's products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, operating results or financial condition.

EMPLOYEES

     On June 30, 2001, the Company employed 102 employees through its Fort
Lauderdale headquarters, and its field offices in the United States and abroad.
The Company also utilizes the services of approximately three contract engineers
on a temporary basis for software or documentation development. All employees
and contract engineers are bound by agreements containing confidentiality and
conflict of interest provisions.

     CyberGuard's future success will depend in significant part on the
continued service of its key technical, sales and senior management personnel.
Competition for such personnel is intense and there can be no assurance that
CyberGuard can retain its key managerial, sales and technical employees, or that
it can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. None of CyberGuard's employees is
represented by a labor union. CyberGuard has not experienced any work stoppages
and considers its relations with its employees to be good.

ITEM 2. PROPERTIES

     The Company's principal administrative, sales and marketing, development,
engineering, production and support facility is located in Fort Lauderdale,
Florida, and consists of approximately 26,000 square feet of leased office
space. The lease on the facility expires on June 30, 2004, although the Company
has the right to sublease the premises. Additionally, the Company maintains a
marketing and sales office located in the United Kingdom, which also functions
as the administrative office for the Company's subsidiary, CyberGuard Europe
Ltd.

     The Company leases its office locations in the United States and abroad.
CyberGuard believes that its existing facilities are adequate for its current
needs and additional space will be available at current market rates as required
in the future.

                                       15
<PAGE>   16

ITEM 3. LEGAL PROCEEDINGS

     On August 24, 1998, the Company announced, among other things, that due to
a review of its revenue recognition practices relating to distributors and
resellers, it would restate prior financial results. After the August 24, 1998
announcement, twenty-five purported class action lawsuits were filed by alleged
shareholders against the Company and certain former officers and directors.
Pursuant to an order issued by the Court, these actions have been consolidated
into one action, styled STEPHEN CHENEY, ET AL. V. CYBERGUARD CORPORATION, ET
AL., Case No. 98-6879-CIV-Gold, in the United States District Court, Southern
District of Florida. On August 23, 1999, the plaintiffs filed a Consolidated and
Amended Class Action Complaint. This action seeks damages purportedly on behalf
of all persons who purchased or otherwise acquired the Company's common stock
during various periods from November 7, 1996 through August 24, 1998. The
complaint alleges, among other things, that as a result of accounting
irregularities relating to the Company's revenue recognition policies, the
Company's previously issued financial statements were materially false and
misleading and that the defendants knowingly or recklessly published these
financial statements which caused the Company's common stock prices to rise
artificially. The action alleges violations of Section 10(b) of the Securities
Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5 promulgated thereunder
and Section 20(a) of the Exchange Act. Subsequently, the defendants, including
the Company, filed their respective motions to dismiss the Consolidated and
Amended Class Action Complaint. On July 31, 2000, the Court issued a ruling
denying the Company's and Robert L. Carberry's (the Company's CEO from June 1996
through August 1998) motions to dismiss. The court granted the motions to
dismiss with prejudice for defendants William D. Murray (the Company's CFO from
November 1997 through August 1998), Patrick O. Wheeler (the Company's CFO from
April 1996 through October 1997), C. Shelton James (the Company's former Audit
Committee Chairman), and KPMG Peat Marwick LLP ("KPMG"). On August 14, 2000, the
plaintiffs filed a motion for reconsideration of that order. The Company filed
an answer to the plaintiffs' Consolidated and Amended Class Action Complaint on
August 24, 2000. On March 20, 2001, the Court ruled on the plaintiffs' motion
for reconsideration that the previously dismissed defendants William D. Murray,
Patrick O. Wheeler and C. Shelton James should not have been dismissed from the
action and shall be defendants in this action under the control person liability
claims under Section 20(a) of the Exchange Act, and that the plaintiffs may
amend the Consolidated and Amended Class Action Complaint to bring claims
against C. Shelton James under Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder. On April 5, 2001, the plaintiffs filed their Second
Consolidated and Amended Class Action Complaint to include amended claims
against C. Shelton James. On May 10, 2001, the Company filed an answer and
affirmative defenses to plaintiff's Second Consolidated and Amended Class Action
Complaint. On April 20, 2001, the plaintiffs filed amended motion for class
certification. Both parties are currently conducting class certification and
limited merits discovery. The trial date is set to begin on June 2, 2003.

     The Company's obligation to indemnify its officers and directors under the
aforementioned lawsuit is insured to the extent of the limits of the applicable
insurance policies. The Company has notified its insurance carrier of the
existence of the lawsuit, and the carrier has sent the Company a reservation of
rights letter. The Company intends to vigorously defend this action, and
believes that in the event that it is unsuccessful, insurance coverage will be
available to defray a portion, or substantially all, of the expense of defending
and settling the lawsuit or paying a judgment. However, the Company is unable to
predict the ultimate outcome of the litigation. There can be no assurance that
the Company will be successful in defending the lawsuit or if unsuccessful,
insurance will be available to pay all or any portion of the expense of the
lawsuit. If the Company is unsuccessful in defending the lawsuit and the
insurance coverage is unavailable or insufficient, the resolution of the lawsuit
could have a material adverse effect on the Company's consolidated financial
position, results of operations, and cash flows. The Company's consolidated
financial statements do not include any adjustments related to these matters.

     In August 1998, the Securities and Exchange Commission ("SEC") commenced an
informal inquiry into certain accounting and financial reporting practices of
the Company and its officers, directors and employees. On March 25, 1999, the
SEC issued a formal order of investigation (which the Company learned of on
September 27, 1999) into certain accounting and financial reporting practices of
the Company and its officers, directors and employees. The SEC staff ("Staff")
recently advised the Company that the Staff has made a preliminary determination
to recommend bringing a civil enforcement action against the Company based on
allegations that the Company violated the Exchange Act in connection with its

                                       16
<PAGE>   17


financial statements during the period from the quarter ended June 30, 1996
through the quarter ended March 31, 1998. The Company is aware that the
potential range of sanctions against the Company, should an enforcement
proceeding be brought, could include injunctive relief against the Company
prohibiting future violations of the Exchange Act. The Company is also aware
that the Staff has advised several former executive officers of the Company of
its intention to recommend the bringing of enforcement actions against them
based on allegations that they violated the Exchange Act. The Company is aware
that the potential range of sanctions against the former executive officers
could include injunctive relief against future violations of the Exchange Act as
well as civil monetary penalties and bars against their serving as officers and
directors of a public Company. The Company is seeking to resolve the issues with
the SEC.

     On September 16, 1999, the Company filed a lawsuit against KPMG and August
A. Smith, the KPMG engagement partner. The lawsuit is pending in the Circuit
Court of the 17th Judicial Circuit in and for Broward County, Case No.
00-004102-CACE-14. On May 1, 2000, the Company filed the First Amended
Complaint, alleging that KPMG failed to properly audit the Company's financial
statements and provided inaccurate advice on accounting matters for fiscal years
1996, 1997 and 1998. The action alleges professional malpractice, breach of
fiduciary duty, breach of contract and breach of implied duty of good faith, and
seeks damages in excess of $10 million. KPMG and Mr. Smith filed motions to
dismiss, which were denied. In August 2000, KPMG and Mr. Smith filed their
answers and KPMG filed counterclaims against the Company, alleging the Company's
breach of contract, negligent misrepresentation and abuse of process, and
seeking an unspecified amount of damages consisting of unpaid service fees and
legal fees and costs. The Company filed an answer to KPMG's counterclaims and
moved to dismiss KPMG's abuse of process counterclaim. On April 9, 2001, the
Court dismissed the abuse of process counterclaim with prejudice.

     The Company is involved from time to time in other litigation on various
matters relating to the conduct of its business. The Company believes that these
other litigation matters will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 2001.

                                       17
<PAGE>   18


                                     PART II

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

         The Company's Common Stock was traded on NASDAQ under the symbol "CYBG"
until October 2, 1998. From October 2, 1998 until January 13, 1999, the
Company's stock symbol was changed to "CYBGE" due to the Company being late in
filing its Form 10-K for its fiscal year ended June 30, 1998. On January 13,
1999, the Company was de-listed from the NASDAQ Stock Market, on which its
securities were traded, because the Company was delinquent in its filings under
the Exchange Act. From January 13, 1999, the Company's securities have been
traded by market makers through the "pink sheets" again under the symbol "CYBG."

         The Company is current in its reporting responsibilities pursuant to
the Exchange Act. On February 14, 2000, the Company filed an application to list
its securities on the Nasdaq SmallCap Market ("Nasdaq SmallCap"), which
application was denied by the Nasdaq Staff on July 27, 2000 and further denied
on appeal by the Nasdaq Listing Qualifications Panel on September 27, 2000. On
October 10, 2000, the Company filed an appeal to the Nasdaq Listing and Hearing
Review Council ("Council"). On February 9, 2001, the Company received a letter
from the Council denying the Company's appeal to list its securities on Nasdaq
SmallCap. At the present time, the Company is unable to predict whether the
Company's securities will be available for public trading on the Nasdaq
SmallCap.

         The Company is also eligible for trading on the OTC Bulletin Board;
however, moving from being traded on the "pink sheets" to the OTC Bulletin Board
requires that at least one NASD Broker/Dealer serve as a market maker for the
Company's securities. Although the Company has been meeting with various
potential market makers, there can be no assurance that any NASD Broker/Dealer
will undertake to serve as market maker, in which case, the Company's securities
will continue to be traded through the "pink sheets." Therefore, at the present
time, the Company is unable to predict whether its securities will be available
for public trading on the OTC Bulletin Board.

         There were approximately 3,919 holders of record of Common Stock as of
June 30, 2001. The table below sets forth, for the quarters indicated, the high
and low bid prices of the Company's Common Stock as reported by NASDAQ.

                                                       BID PRICES
                                             ----------------------------
                                             HIGH                     LOW
                                             ----                     ---
FISCAL YEAR 1999
Quarter Ended September 30, 1998            $  11               $    1.0625
Quarter Ended December 31, 1998                 3.375                1.0625
Quarter Ended March 31, 1999                    2.25                 1.25
Quarter Ended June 30, 1999                     1.375                 .625

FISCAL YEAR 2000
Quarter Ended September 30, 1999            $   1.75            $    1
Quarter Ended December 31, 1999                 6.25                 1.75
Quarter Ended March 31, 2000                   15.875                4.25
Quarter Ended June 30, 2000                    10.125                5.375

FISCAL YEAR 2001
Quarter Ended September 30, 2000            $   6.125           $    3.4062
Quarter Ended December 31, 2000                 4.25                  .9531
Quarter Ended March 31, 2001                    5.7969               1.5938
Quarter Ended June 30, 2001                     3.95                 1.80


                                       18
<PAGE>   19


         The Company has never paid dividends on its Common Stock. The Company
intends to retain earnings, if any, to finance future operations and expansion
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Any future payment of dividends will depend upon the financial
condition, capital requirements and earnings of the Company, as well as upon
other factors that the Board of Directors may deem relevant. The Company issued
on August 26, 1999, convertible debt securities in the approximate amount of
$4,300. For more information regarding this sale of the Company's securities,
see Item 7 of this report on Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

         The following table sets forth, for the fiscal years ended June 30,
2001, 2000, 1999, 1998, and 1997, selected historical consolidated financial
data for the Company. The financial data for the fiscal years ended June 30,
2000 and 2001 has been derived from the audited consolidated financial
statements of the Company as audited by Grant Thornton, LLP. The financial data
for the fiscal years ended June 30, 1999, June 30, 1998 and June 30, 1997 have
been derived from the audited consolidated financial statements of the Company
as audited by PricewaterhouseCoopers, LLP.
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                                       Twelve Months Ended
                                                                        (Dollars in 000's)
--------------------------------------------------------------------------------------------------------------------
                                                    June 30,     June 30,      June 30,      June 30,      June 30,
                                                      2001         2000          1999          1998          1997
                                                    --------     --------      --------      --------      --------
<S>                                                  <C>          <C>           <C>           <C>           <C>
Revenues                                             $24,406      $18,859       $13,873       $15,552       $14,224
Cost of Goods Sold                                     7,216        5,956         5,313         7,076         7,244
                                               ---------------------------------------------------------------------
Gross Profit                                          17,190       12,903         8,560         8,476         6,980
-----------------------------------------------

Research & Development                                 5,450        2,969         3,664         5,767         4,723
Selling, general & administrative                     14,680        9,752        14,724        18,869        15,133
                                               ---------------------------------------------------------------------

Operating income/(loss)                               (2,940)         182        (9,828)      (16,160)      (12,876)
Interest income/(expense), net                          (751)      (1,066)         (186)          399           646
Other income/(expense)                                   (90)         (92)           41            11          (200)
Loss on sale of securities available for sale              0            0             0          (128)       (5,012)
Gain/(loss) on sale of assets                           (106)           0         1,858        (2,386)            0
                                               ---------------------------------------------------------------------

Loss before cumulative change in accounting
principle                                            $(3,887)       $(976)      $(8,115)     $(18,264)     ($17,442)
Cumulative effect of change in accounting
principle                                               (129)           0             0             0             0
--------------------------------------------------------------------------------------------------------------------

Net Loss                                             $(4,016)       $(976)      $(8,115)     $(18,264)     ($17,442)
                                               =====================================================================

Basic & fully diluted loss per share                  $(0.30)      $(0.10)       $(0.90)       $(2.17)       $(2.46)
                                               =====================================================================
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       19
<PAGE>   20


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

OVERVIEW

         CyberGuard is a leading provider of Internet security solutions
designed to protect enterprises that use the Internet for electronic commerce
and secure communications. Our award winning products and services include
firewalls and virtual private networks or VPN for secure communications. Our
core market includes Fortune 1000 companies, major financial institutions and
government agencies worldwide.

         We generate sales through selling of our products and services directly
and through a distribution network at a discount from our list price.

         We recognize revenues only when a contract or agreement has been
executed, delivery of the product has occurred, the fee is fixed and
determinable and we believe collection is probable. While we generally recognize
product revenue on product shipment, we defer revenues on products sales for
channel partners until the partners demonstrates consistency in payments and
minimal product returns. Service revenue are recognized ratably on a monthly
basis over the contract term.

         The following information should be read in conjunction with the
Consolidated Financial Statements and the related Notes to Consolidated
Financial Statement. Except for historical information contained herein, the
matters discussed herein are forward-looking statements made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995.

RESULTS OF OPERATIONS

The following table provides financial data for the periods indicated as a
percentage of total revenue.

                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                    Twelve Months Ended
                                                                 -----------------------------
                                                                 June 30,   June 30,  June 30,
                                                                   2001       2000      1999
                                                                   ----       ----      ----
<S>                                                              <C>        <C>       <C>
Revenues:
Products                                                              77%      79%      82%
Services                                                              23%      21%      18%
                                                                ----------------------------
  Total revenues                                                     100%     100%     100%

Cost of revenues:
Products                                                              20%      20%      26%
Services                                                               9%      12%      12%
                                                                ----------------------------
  Total cost of revenues                                              30%      32%      38%
                                                                ----------------------------
Gross profit                                                          70%      68%      62%
                                                                ----------------------------

Operating expenses:
Research and development                                              22%      16%      26%
Selling, general and administrative                                   60%      52%     106%
                                                                ----------------------------
  Total operating expenses                                            82%      67%     133%
                                                                ----------------------------
Operating income (loss)                                              -12%       1%     -71%
                                                                ----------------------------

Other income (expense)
Interest expense, net                                                 -3%      -6%      -1%
Gain (loss) on sale of assets                                          0%       0%      13%
Other income (expense)                                                 0%       0%       0%
                                                                ----------------------------
  Total other income (expense)                                        -4%      -6%      12%
                                                                ----------------------------
Loss before cumulative effect of change in accounting
principle                                                            -16%      -5%     -58%
                                                                ----------------------------

Cumulative effect of change in accounting principle                   -1%       0%       0%
                                                                ----------------------------
Net Loss                                                             -16%      -5%     -58%
                                                                ============================
</TABLE>


                                       20
<PAGE>   21








FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 2000

         NET REVENUES. Net Revenues for the year ended June 30, 2001 were
$24,406 compared to $18,859 for the year ended June 30, 2000. This represents an
increase of $5,547 or 29%. The increase in net revenues for 2001 is principally
the result of increased sales of the Company's firewall appliance products and
the associated maintenance revenue.

         International sales accounted for $12,326 or 51% of the total revenue
in 2001 as compared to $6,993 or 37% of the total revenue in 2000. This
represents an increase of $5,333 or 76%. North American sales accounted for
$12,080 in 2001 as compared to $11,866 in 2000, a difference of $214 or 2%. The
increase in international sales is mainly attributed to the acceptance of the
Company's products in the European and Asian markets.

         CyberGuard provides its customer base with a service offering that
includes the installation of its firewall customer support including product
training and consulting. For the fiscal year ended June 30, 2001, the Company
reported service revenue for its security products of $5,721, an increase of
$1,850 or 48% compared to revenues of $3,871 for the year ended June 30, 2000.
As a percentage of total security revenues, service revenues accounted for 23%
in 2001 as compared to 21% in 2000. The increase in net revenues from services
is attributable to a growing base of customers under maintenance agreements.

         GROSS PROFIT. CyberGuard's costs of sales includes license fees to
third parties, media, packaging costs, equipment costs, and maintenance costs.
The Company's overall gross profit increased by $4,287 or 33% from $12,903 for
the year ended June 30, 2000 to $17,190 for the year ended June 30, 2001 as a
direct result of the revenue growth.

         Gross profit for network security products was $13,756 or 74% in 2001
as compared to $11,280 or 75% in 2000. The gross margin for security product has
remained relatively constant year over year.

         Gross profit for security-related services was $3,434 or 60% in 2001
compared to $1,623 or 42% in 2000, an increase of 18%. The increase in
service-related gross profit margin is the result of a greater number of
customers under firewall maintenance support contracts, while the costs of
supporting those contracts has remained relatively constant on a per unit basis.

         OPERATING EXPENSES. For the year ended June 30, 2001, the Company
reported total operating expenses of $20,130 compared to $12,721 for the year
ended June 30, 2000. The increase of $7,409 is attributable to a $2,481 increase
in research and development costs and a $4,928 increase in selling, general and
administrative costs. The increased R&D expense is attributed to an increase in
headcount and salary rates and a decrease in the amount of capitalized software
development costs year over year of approximately $845. The increase in selling,
general and administrative costs is the result of several factors, including a
significant increase in marketing costs, an increase in compensation and related
employee costs, and one-time charges related to severance and a product branding
campaign.

         INTEREST EXPENSE. For the year ended June 30, 2001, the Company
reported net interest expense of $751 compared to $1,066 for the year ended June
30, 2000. The decrease of $315 is attributable to the conversion of convertible
debt and warrants during January 2001 and lower interest expense related to the
reduced balance on the revolving line of credit facility during the year.

         CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. For the year
ended June 30,2001, the Company reported a cumulative effect of a change in
accounting principle of $129. This represents the implementation of EITF 00-27,
"Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios", which required the Company to use an effective
conversion price to determine the convertible debt's beneficial conversion
feature.

         NET LOSS. For the year ended June 30, 2001, the Company incurred a net
loss of $3,887 compared to a net loss of $976 for the year ended June 30, 2000.
The loss is a direct result of the increase operating expenses.

                                       21
<PAGE>   22


FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1999

         NET REVENUES. Net Revenues for the year ended June 30, 2000 were
$18,859 compared to $13,873 for the year ended June 30, 1999. This represents an
increase of $4,986 or 36%. The increase in net revenues from network security
products for 2000 is principally the result of increased sales of the newly
released Premium Appliance Firewall Solution, KnightSTAR and the associated
maintenance revenue.

         International sales accounted for $6,993 or 37% of the total revenue in
2000 as compared to $2,991 or 22% of the total revenue in 1999, an increase of
$4,002 or 134%. North American sales rose slightly to $11,866 in 2000 compared
to $10,882 in 1999, which represents an increase of $984 or 9%. The increase in
international sales was mainly attributed to growth in the Asian market.

         CyberGuard provides its customer base with a service offering that
includes the installation of its firewall and customer support including product
training and consulting. For the fiscal year ended June 30, 2000, the Company
reported service revenue for its security products of $3,871, an increase of
$1,407 or 57% compared to revenues of $2,464 for the year ended June 30, 1999.
As a percentage of total security revenues, service revenues accounted for 21%
in 2000 as compared to 18% in 1999. The increase in net revenues from services
is attributable to a growing base of customers under maintenance agreements and
additional consulting and training service revenues.

         GROSS PROFIT. CyberGuard's costs of sales includes license fees to
third parties, media, packaging costs, equipment costs, and support costs. The
Company's overall gross profit increased by $4,343 or 51% from $8,560 for the
year ended June 30, 1999 to $12,903 for the year ended June 30, 2000.

         Gross profit for network security products was $11,280 or 75% in 2000
as compared to $7,791 or 68% in 1999. The Company's gross profit margin has
increased over the past two fiscal years. The Company believes this percentage
will level off with the continued sales trend of the appliance product. The
increase in gross profit for security product is directly related to the lower
costs associated with third party royalties.

         Gross profit for security-related services was $1,623 or 42% in 2000
compared to $769 or 31% for 1999, an increase of $854. The increase in
service-related gross profit margin is the result of a greater number of
customers under firewall maintenance support contracts.

         OPERATING EXPENSES. For the year ended June 30, 2000, the Company
reported total operating expenses of $12,721 compared to $18,388 for the year
ended June 30, 1999. The decrease of $5,667 is attributable to a $695 decrease
in research and development costs and a $4,972 decrease in selling, general and
administrative costs. The decreased R&D expense is attributed the reduction in
headcount and an increase in the amount of capitalized software development
costs year over year of approximately $1,000. The decrease in selling, general
and administrative costs is the result of several factors, including a
significant decrease in marketing costs, a reduction in compensation and related
employee costs, a reduction in professional accounting and legal fees and better
overall cost control.

         INTEREST EXPENSE. For the year ended June 30, 2000, the Company
reported net interest expense $1,066 compared to $186 for the year ended June
30, 1999. The increase of $880 is attributable to interest expense associated
with the convertible debt and warrants.

         NET LOSS. For the year ended June 30, 2000, the Company incurred a net
loss of $976 compared to a net loss of $8,115 for the year ended June 30, 1999.
The net loss for the year ended June 30, 2000 included approximately $1,000 in
interest expense, whereas, the net loss for fiscal year ended June 30, 1999
included a gain from the sale of the Galaxy search engine of $1,858.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has experienced net losses since its spin-off from Harris
Corporation. The Company's historical uses of cash have been to fund net losses
from operations, establish inventory stocking levels, and fund capital
expenditures for property, equipment and software. For the fiscal year ended
June 30, 1999, the Company incurred a loss of approximately $8,115 on revenues
of approximately $13,873. For the fiscal year ended June 30, 2000, the Company
incurred a net loss of approximately $976 on revenues of approximately $18,859.
For the fiscal year ended June 30, 2001, the Company incurred a net loss of
approximately $4,016 on revenues of approximately $24,406. Capital expenditures
for the fiscal year ended June 30, 1999, June 30, 2000 and June 30, 2001, were
approximately $185, $448 and $930, respectively.

                                       22
<PAGE>   23



         During fiscal years 1999 and 2000, the funding for the Company's cash
requirements came principally from the Company's sale of Company common stock
through a private debt offering. During December 1997, the Company entered into
a $3,350 asset based revolving line of credit and a $650 Term Note Agreement
with Coast Business Credit (collectively, the "Credit Facility"). The Credit
Facility is collaterized by all the tangible assets and intellectual property of
the Company. The Term Note is secured by a $650 cash compensating balance. At
June 2001, the Company had borrowings of $113 under the revolving asset based
line of credit. At June 30, 2001, the Company had cash and cash equivalents of
$4,771.

         Subsequent to the end of the 1998 fiscal year, the Company has
continued to experience net losses from operations. These net losses have been
funded through the sales of assets and convertible debt financing agreements.
The sales of assets have included the sale of the Company's Galaxy Internet
search engine (sold during the first quarter of the Company's 1999 fiscal year
for approximately $2,000 in cash), and the sale of substantially all the assets
of the Company's Arca Systems, Inc. subsidiary, (sold during the second quarter
of fiscal year 1999 for approximately $3,400 in cash). The Arca subsidiary was
expected to provide approximately $1,700 in revenues on a quarterly basis for
the Company. The Galaxy search engine revenues were not significant.

         On December 17, 1999, the Company executed an agreement to issue $1,125
of Convertible Debt ("Debt"). The Debt was interest bearing at a rate of prime
plus 200 basis points and was payable quarterly. The Debt was convertible into
750,000 shares of common stock at a conversion price equal to $1.50 per share.
The Debt was convertible, at the debt holders' option, after February 1, 2000.
In addition, the Company issued the debt holders warrants to purchase 500,000
shares of the Company's common stock at $2.00 per share. The warrants were
exercisable at any time before June 2001. The terms of the Debt and warrant
agreement that permitted the conversion of the Debt and warrants to common stock
at a discount to market, was considered a beneficial conversion feature. The
beneficial conversion feature at the date of issuance of the Debt was recognized
as interest expense over the shortest possible conversion period. The
convertible debt was secured by a second lien on the Company's assets and
properties and was subordinated to the Company's senior debt.

         On August 26, 2000, the Company increased the convertible debt to
approximately $4,300 that included repaying the December 1998 issuance. This
increased amount was principally with the same debt holders as the December 1998
transaction, with certain Company officers, directors and employees also
participating. The debt matures on June 30, 2002. The interest rate is 11.5% per
annum. Interest is payable quarterly, except that interest accruing from the
date of issuance through July 1, 2000, which will be added to the principal
amount of the note. The number of shares of common stock into which the debt may
be converted is equal to the principal amount of the note, plus the accrued
interest, divided by the conversion price of $1.00 per share. In addition, the
warrants from the December 17, 1998 transaction were cancelled, and the Company
issued approximately 4,300,000 warrants to purchase the Company's common stock
at $2.00 per share. The warrants have a term of five years. The warrants were
valued at $431 and this amount is being recognized as interest expense over the
debt conversion period.

         As of September 30, 1999, the Company had recorded a beneficial
conversion feature attributable to the convertible debt. This feature was being
amortized over the term of the debt. Based upon a report issued by a national
valuation firm, the Company subsequently determined that the amount so
recognized was in error. Specifically, the fair value of the Company's common
stock was below the conversion price and therefore, no such beneficial
conversion feature existed as of the date of the transaction. The Company
reversed the charge to interest expense of approximately $300 in the fourth
quarter of fiscal year 2000. The effect on the prior quarterly results was
immaterial.

         On January 24, 2001, approximately $5,700 of convertible debt and the
interest accrued on that debt was converted into approximately 5.3 million
shares of common stock at prices between $1.00 and $1.51 per share.

         During January 2001, warrants for the purchase of approximately 2.4
million shares of the Company's common stock were exercised at $2.00 per share
for a total of approximately $4,800 in cash. Approximately 2.2 million warrants
related to the convertible debt are still outstanding.

         On May 31, 2001, approximately $600 of convertible debt and the
interest accrued on that debt was converted into approximately 0.6 million
shares of common stock at $1.00 per share. On June 30, 2001, the balance on the
debt was approximately $62.

                                       23
<PAGE>   24


         Working capital increased by $3,960 from $472 at June 30, 2000 to
$4,432 at June 30, 2001. The Company spent approximately $930 on capital
expenditures during fiscal year 2001, which included updating the existing
telephone system, lab equipment for the Company's research and development
efforts, demonstration units and an upgrade of outdated personal computers,
laptops and servers. Based upon information currently available to the Company,
including the Company's current level of sales, its margins on sales, its
expected levels of expense, opportunities for selling additional network
security products and the availability of additional equity and debt financing,
the Company believes that it has an opportunity to execute on its business plans
and achieve profitability. There can be no assurance, however, that the Company
will be able to execute on its business plans, or that it will not be required
to obtain additional financing or capital infusions. There can be no assurance
that the Company will be able to secure additional financing or that such
additional financing will be on terms and conditions acceptable to the Company.
Any additional financing may involve dilution of the interests of the Company's
then existing shareholders. The future liquidity of the Company will be affected
by numerous factors, including sales volumes, gross margins, the levels of
selling, general and administrative expenses, levels of required capital
expenditures and access to external sources of financing.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board approved the
issuance of SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and
Other Intangible Assets." The new standards require that all business
combinations initiated after June 30, 2001 must be accounted for under the
purchase method. In addition, all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset apart
from goodwill. Goodwill and intangibles with indefinite lives will no longer be
subject to amortization, but will be subject to an annual assessment for
impairment by applying a fair value based test. As the Company has no goodwill
or other intangibles generated as a result of a business combination, the
adoption of these Standards is not expected to have an impact on the Company's
operations.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133, as amended by Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. In June 2000, Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities--an Amendment of FASB Statement No. 133," was issued to clarify
certain provisions of SFAS 133. SFAS 133 will be effective for our fiscal year
ended December 31, 2001. We believe the adoption of this statement will not have
a significant impact on our financial position, results of operations or cash
flows.


                                       24
<PAGE>   25



FORWARD-LOOKING INFORMATION:  CERTAIN CAUTIONARY STATEMENTS

         Certain statements contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this report
that are not related to historical results are forward-looking statements.
Actual results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events, which may not prove to be accurate.
Subsequent written and oral forward-looking statements attributable to the
Company or to persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth below and elsewhere in this
report and in other reports filed by the Company with the Securities and
Exchange Commission.

WE HAVE INCURRED SIGNIFICANT LOSSES IN THE PAST AND MAY NOT ACHIEVE OR SUSTAIN
CONSISTENT PROFITABILITY, WHICH COULD RESULT IN THE DECLINE IN THE VALUE OF OUR
COMMON STOCK.

     For the past 5 years and the fourth quarter of 2001 we incurred net losses
and experienced negative cash flows in each quarter, except for the 4th fiscal
quarter 2001. As of June 30, 2001 we have an accumulated deficit of
approximately $81.5 million. Although our revenues have increased, we may not
achieve or sustain profitability in future periods. Moreover, we currently
expect to increase our operating expenses in connection with:

     o   Expanding into new geographical markets
     o   Expanding into new product markets
     o   Continuing to develop our technology
     o   Hiring additional personnel
     o   Upgrading our information and internal control systems

     If we are not able to achieve or sustain profitability in future quarters,
the trading price of our common stock could decline.

OUR OPERATING RESULTS FLUCTUATE AND CAN FALL BELOW EXPECTATIONS OF ANALYSTS AND
INVESTORS, RESULTING IN A DECLINE OF OUR STOCK PRICE.

     Our quarterly and yearly operating results have varied widely in the past
and will probably continue to fluctuate. For this reason we believe that
period-to-period comparisons of our operating results may not be meaningful. In
addition, our limited operating history makes predicting our future performance
difficult.

     Beginning in 2000 and continuing into 2001, we have seen a general economic
downturn in the U.S. economy, which has affected the demand for our products and
services. We do not know how long this economic turndown will last or how severe
it will become. We also cannot predict the extended timing, if any, of the
impact of the economic turndown in the United States, on the economy in other
countries in geographic regions in which we conduct business. To the extent this
turndown continues or spreads to other geographic regions, the Internet security
industry and demand for our products and services are likely to be adversely
affected and can result in a decline in our stock price.

     On September 11, 2001, presently unknown terrorist group(s) staged a
preplanned attack against the World Trade Towers in New York City and the
Pentagon in Arlington, Virginia. Due to the perceived seriousness of this attack
and the threat of possible others, the various stock indicies in this country
and around the world had the largest weekly percentage drop in history. The
resulting economic and political climate due to the attacks is presently
extremely volatile and may result in a decline of our stock price.

     We base our spending levels for Product Development, Sales & Marketing and
other operating expenses largely on our expected future revenues. Because our
expenses are largely fixed for a particular quarter or year we may be unable to
adjust our spending in time to compensate for any unexpected quarterly or annual
shortfall in revenues. A failure to adjust our spending in time also could cause
operating results to fall below the expectations of our investors and result in
declining stock price.

BECAUSE MANY POTENTIAL CUSTOMERS REMAIN UNAWARE OF THE NEED FOR INTERNET
SECURITY OR MAY PERCEIVE IT AS COSTLY AND DIFFICULT TO IMPLEMENT, OUR PRODUCTS
AND SERVICES MAY NOT ACHIEVE MARKET ACCEPTANCE.

     We believe that many potential customers are not fully aware of the need
for Internet security products and services. Historically, only enterprises
having substantial resources have developed or purchased Internet security
solutions. Also, there's a perception that Internet security is costly and
difficult to implement. We will therefore not succeed unless the market
understands the need for Internet security and we can convince our potential
customers of our ability to provide this security in a cost effective manner.
Although we have spent and will continue to spend considerable resources
educating potential customers about the need for Internet security and the
benefits of our products and services our efforts may be unsuccessful.

                                       25
<PAGE>   26


SEASONALITY AND CONCENTRATION OF REVENUES AT THE END OF THE QUARTER COULD CAUSE
OUR REVENUES TO FALL BELOW THE EXPECTATION OF ANALYSTS AND INVESTORS, RESULTING
IN A DECLINE OF OUR STOCK PRICE.

     Growth rate of our domestic and international sales has been and may
continue to be slower in the summer months, when businesses often defer
purchasing decisions. Also, as a result of customer buying patterns and the
efforts of our sales force to meet or exceed quarterly and year-end quotas,
historically we have earned a substantial portion of a quarter's revenue during
its last month and more recently in the latter half of the last month. If
expected revenues at the end of any quarter are delayed, our revenues for that
quarter could fall below the expectations of the analysts and investors
resulting in a decline of our stock price.

IF THIRD PARTY CHANNEL PARTNERS FAIL TO PERFORM, OUR ABILITY TO SELL OUR
PRODUCTS AND SERVICES WILL BE LIMITED.

     We expect to sell most of our products and services through our channel
network partners and we expect our success to depend in large part on their
performance. Some of our channel partners have the ability to sell products and
services that are competitive with ours, to devote more resources to those
competitive products and to cease selling our products and services all
together. If our third party channel partners fail to perform, our ability to
expand our business and increase sales will be limited.

IF WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE MARKET FOR
INTERNET SECURITY PRODUCTS AND SERVICES OUR BUSINESS WILL FAIL.

     The market for Internet security products is intensely competitive and we
expect competition to intensify in the future. An increase in competitive
pressures in our market or failure to compete effectively may result in price
reduction, reduced gross margin and loss of market share. Currently the primary
competitors in our industry include CISCO Systems, Checkpoint Software
Technologies Ltd., Nokia Corporation, Sonic Wall and WatchGuard Technologies,
Inc. Other competitors offering security products include hardware and software
vendors, such as Netscreen Technologies Inc., Lucent Technologies, Inc. and
Network Associates Inc., operating systems vendors, such as Microsoft
Corporation, Novell and Sun Microsystems Inc. and a number of smaller companies.
Many of our competitors have longer operating histories, greater name
recognition and larger customer bases and a significantly greater financial,
technical, marketing and other resources than we do.

     In addition, our current and potential competitors may establish
cooperative relationships among themselves or with third parties that may
further enhance their resources. As a result they may be able to adapt more
quickly to new technologies and customer needs, devote greater resources to the
promotion or sales of their products and services, initiate or withstand
substantial price competition, take advantage of acquisitions or other
opportunities more readily or develop and expand their product and services
offerings more quickly. In addition, our competitors may bundle products
competitive with ours along with other products that they may sell to our
current or potential customers. These customers may accept these bundled
products rather than separately purchase our products.

FAILURE TO ADDRESS STRAIN ON OUR RESOURCES CAUSED BY GROWTH WILL RESULT IN OUR
INABILITY TO EFFECTIVELY MANAGE OUR BUSINESS.

     Our current systems, management and resources will be inadequate if we
begin to grow at a significant rate. A rapid expansion of our business will
place a significant strain on our administrative, operational and financial
resources and will result in ever increasing responsibilities of our management
personnel. We will be unable to effectively manage our business if we are unable
to timely and successfully alleviate the strain on our business caused by rapid
growth.

WE MAY BE UNABLE TO ADEQUATELY EXPAND OUR OPERATIONAL SYSTEMS TO ACCOMMODATE
GROWTH, WHICH CAN HARM OUR ABILITY TO DELIVER OUR PRODUCTS AND SERVICES.

     Our operational systems have not been tested at customer volumes that may
be required in the future. We may encounter performance difficulty when
operating with a substantial greater number of customers. An inability to add
additional operating systems and personnel to handle increased demands may cause
unanticipated disruptions in our current process, slower response times and poor
customer service, including problems filling customer orders.

                                       26
<PAGE>   27


RAPID CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS COULD RENDER OUR PRODUCTS AND
SERVICES UNMARKETABLE OR OBSOLETE AND WE MAY BE UNABLE TO INTRODUCE NEW PRODUCTS
AND SERVICES TIMELY AND SUCCESSFULLY.

     To succeed we must continually change and improve our products in response
to rapid technological developments and changes in operating systems, Internet
access and communications, application and network software, computer and
communication hardware, programming tools, computer language technology and
hacker techniques. We may be unable to successfully and timely develop these new
products and services or achieve and maintain market acceptance. The development
of new technology, advance products and services is a complex and uncertain
process requiring innovation and the ability to anticipate technological and
market trends. Because the Internet security technology is complex it can
require long development and testing periods. Releasing new products and
services premature may result in quality problems, and releasing them late may
result in loss of customer confidence and market share. In the past we have on
occasion experienced delays in the schedule introduction of new and enhanced
products and services, and we may experience delays in the future. When we do
introduce new or enhanced products and services, we may be unable to manage the
transition from the older products and services to minimize disruptions to the
customers ordering patterns, avoid excess inventory of older products and
deliver enough products and services to meet customer demand.

WE MAY BE REQUIRED TO DEFEND LAWSUITS OR PAY DAMAGES IN CONNECTION WITH THE
ALLEGED OR FACTUAL FAILURE OF OUR PRODUCTS AND SERVICES.

     Because our products provide Internet security and may protect valuable
information, we may face claims for product liability, tort or breach of
warranty relating to our products and services. Anyone that circumvents our
products' security measures could misappropriate the confidential information or
other property of end-users using our products and services or interrupt their
operations. If that happens, affected end-users or channel partners may sue us.
In addition, we face breaches caused by faulty installations and implementation
of our products by end-users or channel partners. Although we attempt to reduce
the risk of loss from claims through contractual or warranty disclaimers and
liability limitation provisions, these provisions may be unenforceable. Some
courts, for example, have found contractual limitations of liability in standard
software licenses to be unenforceable because the licensee does not sign them.
Defending a suit regardless of its merit could be costly and could divert
management's attention. Although we currently maintain business liability
insurance this coverage may be inadequate or be unavailable in the future on
acceptable terms if at all.

A BREACH IN SECURITY COULD HARM PUBLIC PERCEPTION OF OUR PRODUCTS.

     We will not succeed unless the market place is confident that we provide
effective Internet security protection. Even networks protected by our products
may be vulnerable to electronic break-ins and computer viruses. If an actual or
perceived breach of Internet security occurs in an end-user system, regardless
of whether the breach is attributable to us, the market perception of the
efficiency of our products and services could be harmed. This could cause us or
our channel partners to lose current and potential customers or cause us to lose
potential channel partners. Because the technology used by computer hackers to
access or sabotage networks change frequently and generally are not recognized
until launched against the target we may be unable to anticipate these
techniques.

IF WE ARE UNABLE TO PREVENT ATTACKS ON OUR INTERNAL NETWORK SECURITY SYSTEM BY
COMPUTER HACKERS, PUBLIC PERCEPTION OF OUR PRODUCTS AND SERVICES WILL BE HARMED.

     Because we provide Internet security we are at a significant target of
computer hackers. We have experienced attacks by computer hacks in the past and
expect the attacks to continue. If attacks on our internal network systems are
successful public perceptions of our products and services will be harmed.

WE MAY BE UNABLE TO DELIVER OUR PRODUCTS AND SERVICES IF WE CANNOT CONTINUE TO
LICENSE THIRD PARTY TECHNOLOGY THAT IS IMPORTANT FOR THE FUNCTIONALITY OF OUR
PRODUCTS.

     Our success will depend in part on our continued ability to license
technology that is important for the functionality of our products. A
significant interruption in the supply of third party technology could delay our
development and sales until we can find, license and integrate equivalent
technology. This could damage our brand and result in loss of current and
potential customers. Although we believe we can find other sources for the
technology we license, alternative technology may be unavailable on acceptable
terms, if at all. We depend on our third party license to deliver reliable
quality, high quality products, develop new products on a timely and cost
effective basis and response to evolving technology and changes in the industry
standards. We also depend on the continued compatibility of third party software
with future versions of our product.

                                       27
<PAGE>   28


WE WILL BE UNABLE TO DELIVER OUT PRODUCTS AND SERVICES IF COMPONENT MANUFACTURES
FAILS TO SUPPLY COMPONENT PARTS WITH ACCEPTABLE QUALITY, QUALITY AND COST.

     We obtain the component parts for hardware from a variety of manufacturers.
While our component vendors have produced parts for us in acceptable quantities
and with acceptable quality and cost in the past, they may be unable to do so in
the future. Companies in the electronic industry regularly experience lower than
required component allocations and this industry is subject to frequent
component shortfalls. Although we believe we can find additional or replacement
sources for our hardware components our operation could be disrupted if we have
to add or switch to a replacement vendor or for our components supply is
interrupted for an extended period. This could result in a loss of customers
order and revenue.

WE MAY NEED ADDITIONAL CAPITAL AND OUR ABILITY TO SECURE ADDITIONAL FUNDING IS
UNCERTAIN.

     Our future revenue may be insufficient to support the expense of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital. We may seek additional funding through:

     o   public or private equity financing, which could result in the
         significant dilution to stockholder;

     o   Public or private debt financing and capital lease transactions.

     o   Capital lease transactions.

     We believe that existing cash and equivalent balances will be sufficient to
meet our capital requirements for at least the next twelve months. Our capital
requirements will depend on several factors, however, including:

     o   The rate of market acceptance of products and services.

     o   Our ability to expand our customer base.

     o   The growth of our Sales & Marketing capabilities.

     o   The cost of any acquisitions we may complete.

     o   Financing may be unavailable to us when needed or on acceptable terms.

IF WE DO NOT RETAIN OUR KEY EMPLOYEES, OUR ABILITY TO EXECUTE OUR BUSINESS PLAN
STRATEGY WILL BE IMPAIRED.

     Our future success will depend on the efforts and ability of our senior
management and our key development, technical, operation, information systems,
customer support, and sales and marketing personnel, and on our ability to
retain them. These employees are not obligated to continue their employment with
us and may leave us at any time.

     o   If we do not extend our international operations and successfully
         overcome the risk inherent in international business activities, the
         growth of our business will be limited. Our ability to grow will depend
         in part to the expansion of our International sales and operations,
         which are expected to continue to account for a significant portion of
         our revenues. Sales to customers outside the United States accounted
         for approximately 22% of our revenues in 1999, 38% in 2000 and 51% in
         2001. The failure of our channel partners to sell our products
         internationally will limit our ability to increase our revenues. In
         additional our international sales are subject to the risk inherent
         international business activity including:

     o   Cost of customizing products for foreign countries.

     o   Export and import restrictions such as those affecting the encryption
         commodities and software.

     o   Difficulties in acquiring and authenticating customers' information.

     o   Reduced protection of intellectual property rights and increased
         liability exposure.

     o   Regional economic and political conditions.

     Our international sales currently are U.S. dollar denominated. As a result,
an increase in the value of the U.S. dollar relative to foreign currencies has
made and may continue to make our products less competitive in the International
markets.

                                       28
<PAGE>   29

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY LIMIT
OUR ABILITY TO COMPETE EFFECTIVELY.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may misappropriate or infringe on our trade secrets, copyrights, trademarks,
service marks and similar proprietary rights. We face additional risk when
conducting business in countries, which have poorly developed or inadequately
enforced intellectual property laws. While we are unable to determine the extent
to which privacy of our software products exist we expect privacy to be a
continuing concern, particularly in international markets and as a result of the
growing use of the Internet.

INTELLECTUAL PROPERTY CLAIMS AND LITIGATIONS COULD SUBJECT US TO SIGNIFICANT
LIABILITIES FOR DAMAGES AND INVALIDATION OF OUR PROPRIETARY RIGHTS.

     In the future we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to develop the
validity and scope of our proprietary rights of others. Any litigation,
regardless of its success, would be costly and require significant time and
attention of our key management and technical personnel. The litigation could
also force us to:

     o   Stop or delay selling, incorporating or using products that incorporate
         the challenged intellectual property.

     o   Pay damages.

     o   Enter into licensing or royalty agreements, which may be unavailable
         under acceptable terms.

     o   Redesign products and services that incorporate infringing technology.

     Although we have not been sued for intellectual property infringement, we
may face infringement claims from third parties in the future. The software
industry has seen frequent litigation over intellectual property rights, and we
expect that participants in the Internet security industry will be increasingly
subject to infringement claims as the number of products, services, and
competitors grow and functionality of the products and services overlap. We
cannot assure you that the steps taken by us will be adequate to deter
misappropriation of our proprietary rights or that third parties will not
independently develop substantially similar products, services and technology.
Furthermore, there can be no assurance that our products will not infringe upon
the intellectual property rights of third parties. We may not be able to avoid
infringement of third party intellectual property rights and may have to obtain
a license, defend an infringement action, or challenge the validity of the
intellectual property rights in court. Failure to obtain or maintain our
intellectual property rights in our products, for any reason, would have a
material adverse effect on us.

UNDETECTED PRODUCT ERRORS OR DEFECTS COULD RESULT IN LOSS OF REVENUES, MARKET
ACCEPTANCE AND CLAIMS AGAINST US.

     Our products and services may contain undetected error or defects,
especially when first released. Despite extensive testing, some errors are
discovered only after a product has been installed and used by customers. Any
errors discovered after commercial release could result in loss of revenue or
claims against us or our channel partners.

GOVERNMENTAL CONTROLS OVER THE EXPORT OR IMPORT OF ENCRYPTION TECHNOLOGY COULD
CAUSE US TO LOSE SALES.

     Any additional governmental regulations of imports or exports, or failure
to obtain required approval for our encryption technologies could adversely
affect our international and domestic sales. The United States and various other
countries have imposed controls, export license requirements and restrictions on
the import or export of some technologies, especially encryption technology. In
addition, from time to time governmental agencies have proposed additional
regulation over encryption technology, such as requiring the escrow and
governmental recovery of private encryption keys. Additional regulation of
encryption technology could delay or prevent the acceptance and use of
encryption products in public networks for secure communications. This in turn
could result in decreased demand for our products and services. In addition,
some foreign competitors are subject to less stringent controls on exporting
their encryption technologies. As a result, they may be able to compete more
effectively than we can in the U.S. and international security markets.

                                       29
<PAGE>   30


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         INTEREST RATE RISK. We do not hold derivative financial instruments or
derivative equities securities. Financial investments, which potentially subject
the Company to a concentration of credit risk principally consist of cash, cash
equivalents and trade receivables. The Company holds any excess cash in
short-term investments consisting of commercial paper. Concentration of credit
risk with respect to receivables are limited due to the Company's customer base.

         FOREIGN CURRENCY RISK. The majority of our sales and the majority of
our expenses are currently denominated in US dollars. As a result, we have not
experienced significant foreign exchange gains and losses. While we conducted
some transactions in foreign currency during 2001 and expect to do so in the
future, we do not anticipate the foreign currency gains or losses will be
material to CyberGuard. Although we have not engaged in foreign currency hedging
to date, we may do so in the future.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following items are attached and incorporated into this Item 8.

Report of Independent Certified Public Accountants                     F-1

Report of Independent Accountants                                      F-2

Consolidated Balance Sheets as of June 30, 2001 and June 30, 2000      F-3

Consolidated Statements of Operations for years ended June 30, 2001,
     June 30, 2000, and June 30, 1999                                  F-4

Consolidated Statements of Cash Flows for years ended June 30, 2001,
     June 30, 2000, and June 30, 1999                                  F-5

Consolidated Statements of Changes in Shareholders' Equity (Deficit)
     and Comprehensive Income for years ended June 30, 2001,
     June 30, 2000, and June 30, 1999                                  F-6

Notes to Consolidated Financial Statements                             F-7






















                                       30
<PAGE>   31


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Shareholders of
CyberGuard Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of CyberGuard
Corporation and Subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive income, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CyberGuard Corporation and
Subsidiaries as of June 30, 2001 and 2000, and the consolidated results of its
operations and its consolidated cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.

Grant Thornton LLP

Ft. Lauderdale, Florida
August 16, 2001


                                      F-1
<PAGE>   32


                        REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders of
CyberGuard Corporation and Subsidiaries

In our opinion, the accompanying consolidated statement of operations, cash
flows and changes in shareholders' equity (deficit) and comprehensive income,
present fairly, in all material respects, the results of operations and cash
flows of CyberGuard Corporation and its Subsidiaries for the year ended June 30,
1999, in conformity with generally accepted accounting principles. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We conducted our audit in accordance
with generally accepted auditing standards, which requires that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

PricewaterhouseCoopers LLP
Atlanta, Georgia
August 27, 1999

                                      F-2
<PAGE>   33
                    CYBERGUARD CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                       June 30,         June 30,
                                                                         2001             2000
                                                                       --------         --------
<S>                                                                    <C>              <C>
ASSETS
Cash and cash equivalents                                              $  4,771         $  2,497
Restricted cash                                                             780              800
Accounts receivable, less allowance for  uncollectible accounts
  of $36 at Jun. 30, 2001 and $52 at Jun. 30, 2000                        4,147            3,614
Inventories, net                                                            294              159
Other current assets                                                      1,065            1,255
                                                                       --------         --------
  Total current assets                                                   11,057            8,325

Property and equipment at cost, less accumulated
  depreciation of $1,710 at Jun. 30, 2001 and
  $1,181 at Jun. 30, 2000                                                 1,211            1,086
Capitalized software, net                                                   741            1,142
Non-compete agreements, net                                                  --              280
Other assets                                                                 90              163
                                                                       --------         --------
        Total assets                                                   $ 13,099         $ 10,996
                                                                       ========         ========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Line of credit & notes payable                                              919            1,575
Accounts payable                                                            967            1,424
Convertible debenture, net                                                   62               --
Deferred revenue                                                          2,308            2,912
Accrued expenses and other liabilities                                    2,369            1,942
                                                                       --------         --------
  Total current liabilities                                               6,625            7,853
Term Note Payable                                                            --              650
Convertible debenture, net                                                   --            4,445
                                                                       --------         --------
  Total liabilities                                                    $  6,625         $ 12,948
                                                                       --------         --------

Commitments and Contingencies                                                --               --

Shareholders' equity (deficit)
Common stock par value $0.01; authorized 50,000 shares;
   issued and outstanding 18,429 at Jun. 30, 2001
   and 9,799 at Jun. 30, 2000                                               184               98
Additional paid-in capital                                               87,557           75,290
Accumulated deficit                                                     (81,467)         (77,451)
Accumulated other comprehensive income                                      200              111
                                                                       --------         --------
  Total shareholders' equity (deficit)                                    6,474           (1,952)
                                                                       --------         --------

                                                                       --------         --------
        Total liabilities and shareholders' equity (deficit)           $ 13,099         $ 10,996
                                                                       ========         ========
</TABLE>


           See accompanying notes to consolidated financial statements



                                      F-3

<PAGE>   34

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

<TABLE>
<CAPTION>
                                                                                  Twelve Months Ended
                                                                       June 30,         June 30,         June 30,
                                                                         2001             2000             1999
                                                                         ----             ----             ----
<S>                                                                    <C>              <C>              <C>
Revenues:
Products                                                               $ 18,685         $ 14,988         $ 11,409
Services                                                                  5,721            3,871            2,464
                                                                       --------         --------         --------
  Total revenues                                                         24,406           18,859           13,873

Cost of revenues:
Products                                                                  4,929            3,708            3,618
Services                                                                  2,287            2,248            1,695
                                                                       --------         --------         --------
  Total cost of revenues                                                  7,216            5,956            5,313

                                                                       --------         --------         --------
Gross profit                                                             17,190           12,903            8,560
                                                                       --------         --------         --------


Operating expenses:
Research and development                                                  5,450            2,969            3,664
Selling, general and administrative                                      14,680            9,752           14,724
                                                                       --------         --------         --------
  Total operating expenses                                               20,130           12,721           18,388

                                                                       --------         --------         --------
Operating income (loss)                                                  (2,940)             182           (9,828)
                                                                       --------         --------         --------

Other income (expense)
Interest expense, net                                                      (751)          (1,066)            (186)
Gain (loss) on sale of assets                                              (106)              --            1,858
Other income (expense)                                                      (90)             (92)              41
                                                                       --------         --------         --------
  Total other income (expense)                                             (947)          (1,158)           1,713

                                                                       --------         --------         --------
Loss before cumulative effect of change in accounting principle          (3,887)            (976)          (8,115)
                                                                       --------         --------         --------

Cumulative effect of change in accounting principle                    $   (129)        $     --         $     --

                                                                       --------         --------         --------
Net Loss                                                               $ (4,016)        $   (976)        $ (8,115)
                                                                       ========         ========         ========

Basic & fully diluted loss per common share:
Before cumulative effect of change in accounting principle             $  (0.29)        $  (0.10)        $  (0.90)
Cumulative effect of change in accounting principle                    $  (0.01)        $     --         $     --
Basic & fully diluted loss per common share                            $  (0.30)        $  (0.10)        $  (0.90)
                                                                       ========         ========         ========

Weighted average number of common shares outstanding                     13,188            9,318            8,967
                                                                       ========         ========         ========
</TABLE>

           See accompanying notes to consolidated financial statements


                                   F-4

<PAGE>   35

                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                              Twelve Months Ended
                                                                     June 30,        June 30,       June 30,
                                                                       2001            2000           1999
                                                                       ----            ----           ----
<S>                                                                 <C>             <C>             <C>
Cash flows from operating activities
Net  loss                                                           $ (4,016)       $   (976)       $ (8,115)
Adjustments to reconcile net loss to net cash
  used in operating activities:
Depreciation                                                             670             494             789
Amortization                                                           1,101             531             525
Loss on disposal of fixed assets                                         134              21               3
Interest expense related to convertible debt                             534             803              --
Compensation and benefits                                                 --              --             242
Provision for uncollectible accounts receivable                          (15)           (355)            326
Provision for inventory reserve                                           (5)             35              38
Compensation expense related to modification of stock options            195              --              --
Cumulative effect of change in accounting principle                      129              --              --
Translation adjustment                                                    89              89              --
Gain on sale of business assets                                           --              --          (1,858)

Changes in assets and liabilities:
Restricted cash                                                           20             108            (258)
Accounts receivable                                                     (517)         (1,239)            896
Other current assets                                                     130            (776)
Inventories                                                             (130)             17             667
Accounts payable                                                        (457)         (1,342)            383
Accrued expenses and other liabilities                                   428            (988)            591
Deferred revenue                                                        (604)            867             630
Other, net                                                                74             (29)            (31)
                                                                    --------        --------        --------
  Net cash provided by (used in) operating activities                 (2,240)         (2,740)         (5,172)
                                                                    --------        --------        --------


Cash flows provided by (used in) investing activities
Capitalized software costs                                              (360)         (1,205)           (230)
Purchases of property & equipment                                       (930)           (448)           (185)
Proceeds from sale of Arca Systems                                        --              --           3,261
                                                                    --------        --------        --------
  Net cash provided by (used in) investing activities                 (1,290)         (1,652)          2,846
                                                                    --------        --------        --------

Cash flows provided by (used in) financing activities:

Proceeds from sale of business assets                                     --              --           2,225
Issuance of convertible debt                                           1,000           4,313           1,125
Retirement of convertible debt                                            --          (1,125)             --
Proceeds from exercise of warrants                                     4,804              --              --
Borrowings under notes payable                                           310             741              --
Repayment of notes payable                                              (413)           (761)
Net repayment under revolving line of credit                          (1,203)            (89)           (194)
Proceeds from stock options exercised                                    532             888              --
Proceeds from private placement of common stock                          500              --              --
Proceeds from sale of common stock                                       274             301              19
                                                                    --------        --------        --------
  Net cash provided by financing activities                            5,804           4,267           3,175
                                                                    --------        --------        --------

Net increase (decrease) in cash                                        2,274            (125)            849
Cash and cash equivalents at beginning of period                       2,497           2,622           1,773
                                                                    --------        --------        --------
Cash and cash equivalents at end of period                          $  4,771        $  2,497        $  2,622
                                                                    ========        ========        ========
Supplemental disclosure of cash flow information
Cash paid for interest                                                   511             608             274
                                                                    ========        ========        ========
Cash paid for income taxes                                                --              --              --
                                                                    ========        ========        ========
</TABLE>

Supplemental disclosure of non-cash information

During fiscal year 2001, the expiration dates of approximately 141 options to
purchase shares of the Company's common stock were extended, which required the
Company to record $141 in compensation expense. In addition, approximately 310
options to purchase shares of the Company's common stock were issued at a below
market price, which required the Company to record approximately $54 in
compensation expense.

During fiscal year 2001, the Company recorded $129 as a cumulative effect of a
change in accounting principle associated with the recognition of the effective
conversion price related to the convertible debt issued in August 1999.

During fiscal year 2001, approximately $5,892 in convertible debt and interest
on the debt was converted into approximately 5,492 shares of the Company's
common stock.

During fiscal year 2001, the Company issued a $1,000 convertible debenture and
issued 334 warrants valued at $40.

During fiscal year 2000, the Company issued a $4,300 convertible debenture and
issued 4,300 warrants valued at $431.

          See accompanying notes to consolidated financial statements

                                      F-5
<PAGE>   36

                     CYBERGUARD CORPORATION AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                            AND COMPREHENSIVE INCOME
                    (Amounts in thousands, except share data)
<TABLE>
<CAPTION>

                                                                                                            Accumulated
                                                                                                               Other
                                             Common Stock    Common Stock   Additional Paid   Accumulated  Comprehensive
                                                 Shares        Par Value      in Capital        Deficit        Income       Total
                                            --------------------------------------------------------------------------------------
<S>                                             <C>                 <C>       <C>          <C>               <C>          <C>
Balance June 30, 1998                           8,902,699           $ 89      $ 72,999     $ (68,360)        $ (140)      $ 4,588

Net loss                                                                                      (8,115)                      (8,115)
Translation adjustment                                                                                          162           162
Issuance of common stock                          162,057              2           258                                        260
Beneficial conversion feature on
  convertible debentures                                                           420                                        420
                                            --------------------------------------------------------------------------------------
Balance June 30, 1999                           9,064,756           $ 91      $ 73,677     $ (76,475)          $ 22      $ (2,685)

Net loss                                                                                        (976)                        (976)
Translation adjustment                                                                                           89            89
Issuance of common stock                          734,565              7         1,182                                      1,189
Discount on warrants                                                               431                                        431
                                            --------------------------------------------------------------------------------------
Balance June 30, 2000                           9,799,321           $ 98      $ 75,290     $ (77,451)         $ 111      $ (1,952)

Net loss                                                                                      (4,016)                      (4,016)
Translation adjustment                                                                                           89            89
Issuance of warrants related to
  debt conversion                                                                   73                                         73
Modification of stock options                                                      195                                        195
Cumulative change in accounting
  principle                                                                        129                                        129
Issuance of common stock related
  to debt conversion                            5,506,905             55         5,791                                      5,846
Issuance of common stock related
  to exercise of warrants                       2,402,000             24         4,780                                      4,804
Issuance of common stock related
  to the exercise of options                      385,938              4           528                                        532
Issuance of common stock                          334,408              3           771                                        774
                                            --------------------------------------------------------------------------------------
Balance June 30, 2001                          18,428,572          $ 184      $ 87,557     $ (81,467)         $ 200       $ 6,474
</TABLE>

           See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>   37


                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

(1) DESCRIPTION OF BUSINESS

     CyberGuard Corporation ("CyberGuard" or the "Company") is a leading
provider of network security solutions designed to protect enterprises that use
the Internet for electronic commerce and secure communication (customers include
Fortune 1000 companies, major financial institutions, and government agencies
worldwide). The Company's CyberGuard(R) Firewall provides a level of security,
features and availability that the Company believes is not matched in the
industry. Through a combination of proprietary and third-party technology (such
as Virtual Private Network ["VPN"], authentication, virus scanning, encryption,
advanced reporting, high availability and centralized management), the Company
provides a full suite of products and services that are designed to protect the
integrity of electronic data and customer applications from unauthorized
individuals and digital thieves.

     CyberGuard sells high performance firewall appliance solutions, in over
thirty-nine countries, directly to end-users and through a worldwide network of
resellers.

     The Company was incorporated in 1994 in connection with a spin-off from
Harris Corporation. The Company produced computers for the real-time computing
market as well as the CyberGuard Firewall for the secure computing market. The
Company changed its name from Harris Computer Systems Corporation in June 1996
following a sale of the Company's real-time computer business. The Company has
two subsidiaries, CyberGuard Europe Ltd. and CYBG Consultants, Inc.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF CONSOLIDATION. The consolidated financial statements of CyberGuard
Corporation and its subsidiaries (CyberGuard Europe Ltd. and CYBG Consultants,
Inc. (the "Company")) include the accounts of the Company and its subsidiaries
over which it maintains control. All significant inter-company balances and
transactions have been eliminated.

     USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reported periods. Significant estimates include those made
for software development costs, reserve for inventories, the allowance for
un-collectible accounts, and contingencies. Actual results could differ from
those estimates.

     CASH EQUIVALENTS AND RESTRICTED CASH--The Company considers all investments
purchased with an original maturity of three months or less at the time of
purchase to be cash equivalents. Restricted cash is unavailable to the Company
until certain contractual terms and conditions are met.

     Restricted cash as of June 30, consists of the following:

<TABLE>
<CAPTION>

                                                                                       2001             2000
                                                                                       ----             ----
<S>                                                                                    <C>              <C>
 Cash held on behalf of employees for purchase of company  stock                         103              125
 Cash held on behalf of employees for flexible reimbursement plan                          2               --
 Certificate of deposit as collateral on a lease                                          25               25
 Escrow on line of credit facility                                                       650              650
                                                                                      ------          -------
                                                                                         780              800
                                                                                      ======          =======
</TABLE>

     INVENTORIES--Inventories consist primarily of purchase component parts and
are carried at the lower of cost, determined by the First-In-First-Out ("FIFO")
method, or market.

     PROPERTY AND EQUIPMENT--Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed by the straight-line method
using the estimated useful lives of the assets, which range from 2 to 5 years.
Maintenance and repairs are charged to expense as incurred. Upon sale,

                                      F-7
<PAGE>   38
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in the consolidated statement of
operations.

     IMPAIRMENT OF LONG LIVED ASSETS--The Company evaluates the recoverability
of all its long-lived assets, including intangibles. If the sum of the
undiscounted future cash flows is less than the carrying amount of the asset, an
impairment loss is recognized as the amount by which the carrying amount of the
asset exceeds its fair value.

     SOFTWARE DEVELOPMENT COSTS--The Company capitalizes costs related to the
development of certain software products in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting For the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" ("SFAS No. 86") which
requires capitalization to begin when technological feasibility has been
established and ends when the product is available for general release to
customers. Software development costs incurred prior to technological
feasibility, defined by completion of a working model, are considered research
and development costs and are expensed as incurred. Capitalized costs are
amortized on a straight-line method over two years.

     During fiscal year 2001, the Company capitalized software development costs
of $360 and associated amortization of $761. During 2000, the Company
capitalized software development costs of $1,205 and associated amortization of
$247. During 1999, the Company capitalized software development costs of $230
and associated amortization of $45.

      REVENUE RECOGNITION--Revenues from software license sales are recognized
when all of the following conditions are met: a non-cancelable license agreement
has been signed; the product has been delivered; there are no material
uncertainties regarding customer acceptance; collection of the receivable is
probable; and no other significant vendor obligations exist. When factors
indicate that the sales price in a reseller or distributor arrangement is not
fixed or that a reasonable basis for estimating the degree of collectability of
the receivable does not exist, revenue is recognized as cash is received. During
the fourth quarter of fiscal year 2001, the revenue recognition policy for three
resellers in Europe was changed from cash basis to accrual, based on a
reasonable assurance of collectibility from evaluating their payment histories.
The impact was to increase revenue by approximately $500 in the fourth quarter
of fiscal year 2001. Revenue on post contract customer support is deferred and
amortized by the straight-line method over the term of the contracts. The
Company also provides professional support services, which are available under
Service Agreements and charged for separately. These services are generally
provided under time and materials contracts and revenue is recognized as the
service is provided.

     In December 1999, Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" ("SAB 101") was issued. SAB 101 summarizes the
Securities and Exchange Commission staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
implementation of SAB 101 shall be no later than the fourth quarter of fiscal
years beginning after December 15, 1999. The adoption of SAB 101 did not have a
material impact on the Company's revenue recognition.

     DEFERRED REVENUE--Deferred revenue represents amounts billed or payments
received in advance of maintenance services to be rendered over a certain period
of time, and are recognized ratably over the service term. At June 30, 2001 and
2000 deferred revenue was $2,309 and $2,912 respectively.

     RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform to the current year presentation.

     ADVERTISING EXPENSE--The Company expenses advertising and promotional costs
as incurred. Advertising expense for the years ended June 30, 2001, 2000 and
1999 was $1,475, $569 and $812, respectively

     INCOME TAXES--The provision for income taxes and corresponding balance
sheet accounts are determined in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred tax liabilities and assets are determined based on

                                      F-8
<PAGE>   39
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

the temporary differences between the bases of certain assets and liabilities
for income tax and financial reporting purposes. The deferred tax assets and
liabilities are classified according to the financial statement classification
of the assets and liabilities generating the differences. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount,
which more likely than not, is expected to be realized.

     FOREIGN CURRENCY TRANSLATION--The Company's foreign operations utilize the
local foreign currency as the functional currency. The results of operations and
cash flows for the foreign operations are translated at an average exchange rate
for the period, and the assets and liabilities of the foreign operations are
translated at the exchange rate at the end of the period. Translation
adjustments are included in stockholders' equity (deficit) as accumulated other
comprehensive income (loss), a separate component of stockholders' equity
(deficit).

     NET LOSS PER SHARE--Basic income (loss) per share excludes dilution and is
computed by dividing income (loss) available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted net
income (loss) per share reflects the potential dilution that could occur if
securities, stock options, warrants or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Potential common
stock in the form of options or warrants which do not have an effect on diluted
net loss per share calculations due to its anti-dilutive efforts are excluded.

(3) PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:


                                                         June 30,    June 30,
                                                           2001        2000
                                                      ------------ ------------

Property and equipment                                  $2,514       $1,904
Purchased software for internal use                        374          342
Leasehold improvement                                       34           21
                                                      ------------ ------------
         Subtotal                                        2,922        2,170
                                                      ------------ ------------
Less: accumulated depreciation                          (1,710)      (1,181)
                                                      ------------ ------------
Property and equipment, net                             $1,211       $1,086
                                                      ============ ============

(4) NON-COMPETE AGREEMENTS

     In connection with the sale of its Real-time Business, the Company entered
into non-compete agreements for a period of five years with two former officers
of the Company. In consideration for these non-compete agreements, these
officers received 92 shares of the Company's common stock. These shares were
valued at market price as of the date of the agreement, June 28, 1996. These
amounts are being amortized over the life of the agreement. The amortization
expense was $280, for each of the years ended June 30, 2001, 2000, and 1999,
respectively, and was fully amortized at June 30, 2001.

(5) ACCRUED EXPENSES AND OTHER LIABILITIES

     Accrued expenses and other liabilities consists of the following:

<TABLE>
<CAPTION>
                                                                    June 30,                          June 30,
                                                                      2001                              2000
                                                               -------------------             -----------------------
<S>                                                            <C>                             <C>
Salaries, wages and other compensation                                     $ 1,570                             $ 1,271
Other payables                                                                 799                                 671
                                                               -------------------             -----------------------
                                                                            $2,369                             $ 1,942
                                                               ===================             =======================
</TABLE>

                                      F-9
<PAGE>   40
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

(6) LINE OF CREDIT AND NOTES PAYABLE

     On December 30, 1997, the Company entered into an asset-based revolving
line of credit of approximately $3,350 and a $650 Term Note Agreement with a
financing company. Interest is charged at the prime rate plus 2.0%. At June 30,
2001 and 2000, the interest rate on the revolving line of credit was 9% and
11.5%, respectively. The credit facility is collateralized by all of the
tangible assets and intellectual property of the Company. Availability under the
revolving credit facility is limited to 80% of eligible accounts receivable and
30% of qualified inventory up to a maximum availability of $300 on eligible
inventory. The amount of availability on the revolving line of credit at June
30, 2001 and 2000 was $988 and $41, respectively. The original term note was for
a period of three years and payable in thirty-nine monthly installments. In
December 1999, the Company re-negotiated the terms of the credit facility, which
extended the term of the note until December 30, 2001. The Company has presented
the $650 cash compensating balance equal to the amount of the term loan as
restricted cash, which will be applied against the note at maturity. As of June
30, 2001, there was approximately $113 outstanding under the revolving line of
credit agreement, all of which is classified as a current liability. The Company
estimates that the fair value of the line of credit and note payable
approximates the carrying value based upon its effective current borrowing rate.

     The Company has entered into two insurance premium financing agreements. At
June 30, 2001 the total amount outstanding was $156 and the interest rate on
both agreements was 8.11%. At June 30, 2000, the amounts outstanding were $122
and $137 and the interest rates on the agreements were 8.01% and 8.14%,
respectively.

(7) CONVERTIBLE DEBENTURE

     On December 17, 1998, the Company executed an agreement to issue $1,125 of
Convertible Debt ("Debt") with an investment company. The Debt was interest
bearing at a rate of prime plus 2% and was payable quarterly. The Debt was
convertible into 750 thousand shares of common stock at a conversion price equal
to $1.50 per share. The Debt was convertible, at the debt holders' option, after
February 1, 2000. In addition, the Company issued the debt holders warrants to
purchase 500 thousand shares of the Company's common stock at $2.00 per share.
The warrants were exercisable at any time before June 2001. The terms of the
Debt and warrant agreement that permitted the conversion of the Debt and
warrants to common stock at a discount to market, was considered a beneficial
conversion feature. The beneficial conversion feature at the date of issuance of
the Debt was recognized as interest expense over the shortest possible
conversion period. The convertible debt was secured by a second lien on the
Company's assets and properties and was subordinated to the Company's senior
debt.

     On August 26, 1999, the Company increased the convertible debt to
approximately $4,300 including repaying the December 1998 issuance. This
increased amount is principally with the same debt holders as the December 1998
transaction, with certain company officers, directors and employees also
participating. The debt matures on June 30, 2002. The interest rate is 11.5% per
annum. Interest is payable quarterly, except that interest accruing from the
date of issuance through July 1, 2000, which was added to the principal amount
of the note. The number of shares of common stock into which the debt may be
converted is equal to the principal amount of the note, plus the accrued
interest, divided by the conversion price of $1.00 per share. In addition, the
warrants from the December 17, 1998 transaction were cancelled, and the Company
issued approximately 4.3 million warrants to purchase the Company's common stock
at $2.00 per share and have a term of five years. The warrants were valued at
$431 and this amount is being recognized as interest expense over the debt
conversion period.

     As of September 30, 1999, the Company had recorded a beneficial conversion
feature attributable to the convertible debt of $1,078. This feature was being
amortized over the term of the debt. A report subsequently issued by a national
valuation firm indicated the fair value of the Company's common stock was below
the conversion price at the date of the transaction and therefore, no such
beneficial conversion feature existed. The Company reversed the charge of $317
in the fourth quarter of fiscal year 2000 that had been charged as interest
expense. The effect on the prior quarterly results was immaterial.

     On December 29, 2000, the Company completed an additional $1 million
financing transaction as an add-on to the August 1999 financing agreement. The
additional note is convertible into the Company's common stock at $1.51 per

                                      F-10
<PAGE>   41
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

share and carries a warrant to purchase an additional 333,877 shares of the
Company's common stock at $2.51 per share. The additional convertible note bears
interest at 11.5% per annum with no principal payments due until June 30, 2002.

     At the November 2000 meeting, The Emerging Issues Task Force ("EITF")
reached a consensus opinion on Issue 00-27 regarding the "Application of EITF
Issue 98-5, "Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," to Certain Convertible Instruments".
The consensus opinion required the Company to use an effective conversion price
to determine a convertible instrument's beneficial conversion feature. The
change was effective retroactively to transactions for which a commitment date
occurred prior to November 16, 2000. As a result, in December 2000, the Company
recognized approximately $129 as a cumulative effect of a change in accounting
principle associated with the convertible debt issued in August 1999. During
December 2000, the Company also recognized $33 in interest expense associated
with the convertible debt issued in December 2000.

     On January 24, 2001, approximately $5,700 of convertible debt and the
interest accrued on that debt was converted into approximately 5,300 shares of
common stock at prices between $1.00 and $1.51 per share, by the investment
company, current directors and certain former officers. Approximately $130 of
the value of the warrants associated with this debt conversion was amortized
into interest expense.

     During January 2001, warrants for the purchase of approximately 2.4 million
shares of the Company's common stock were exercised at $2.00 per share for a
total of approximately $4,800 in cash. The value of the warrants decreased by
$127 as a result of this exercise. As of June 30, 2001 approximately 2.2
million warrants were still outstanding.

     On May 31, 2001, approximately $192 of convertible debt and the interest
accrued on that debt was converted into approximately 192 thousand shares of
common stock $1.00 per share. Approximately $7 of the value of the warrants
associated with this debt conversion was amortized into interest expense.

     On June 30, 2001 and 2000, the balance on the convertible debt was
approximately $62 and $4,445, respectively. The number of warrants outstanding
on the convertible debt as of June 30, 2001 and 2000, was 2,222 and 4,313,
respectively. The balance of the value of the warrants as of June 30, 2001 and
2000 was $2 and $304, respectively. During 2001 and 2000, $209 and $127 of the
value of the warrants was amortized into interest expense.

(8) INCOME TAXES

     The significant components of the Company's net deferred income tax assets
(liabilities) are as follows:

<TABLE>
<CAPTION>
                                                                      June 30,              June 30,              June 30,
                                                                        2001                  2000                  1999
                                                                   --------------        --------------        --------------
<S>                                                                <C>                   <C>                   <C>
     DEFERRED TAX ASSETS AND LIABILITIES
     Accrued expenses                                                       $ 339                 $ 243                 $ 384
     Depreciation and amortization                                            313                  (290)                 (347)
     Net operating loss carryforwards                                      23.889                22,843                22,683
     Capital loss carryforwards                                             2,024                 2,024                 2,023
     Other deferred tax assets                                                517                   522                   732
     Valuation allowance                                                  (27,082)              (25,342)              (25,475)
                                                                   --------------        --------------        --------------
     Net deferred income tax liability                                         --                    --                    --
                                                                   ==============        ==============        ==============
</TABLE>

     A reconciliation of the effective income tax rate and the statutory United
States income tax rate follows:

<TABLE>
<CAPTION>
                                                                           Year ended              Year ended
                                                                          June 30, 2001           June 30, 2000
                                                                       --------------------    --------------------
        <S>                                                            <C>                     <C>
        Statutory U.S. income tax rate                                                34.0%                  34.0%
        State taxes                                                                    3.0%                   3.0%
        Other                                                                          0.0%                 (10.5%)
        Interest on convertible debt                                                   4.4%                 (60.4%)
        Valuation Allowance                                                           32.6%                  33.9%
                                                                       --------------------    --------------------
        Effective income tax rate                                                      0.0%                   0.0%
                                                                       ====================    ====================
</TABLE>

                                      F-11
<PAGE>   42


                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

     As of June 30, 2001, the Company had U.S. net operating loss carryforwards
for federal income tax purposes of approximately $64,565. The Company's net
operating loss carryforwards begin to expire in 2010. Under the Tax Reform Act
of 1986, the amounts of, and the benefits from, net operating loss carryforwards
may be impaired or limited due to a change of ownership control as defined by
the Internal Revenue Code. In addition, the Company has an U.S. net capital loss
carryforwards of approximately $5,469. The Company may utilize the capital loss
carryforwards only to the extent it generates future capital gains. As of June
30, 2001 and 2000, a valuation allowance has been established against the net
deferred tax asset since the Company believes it is more likely than not that
the tax asset will not be realized.

(9) SHAREHOLDERS' EQUITY

     COMMON STOCK--The Company has authorized 50,000,000 shares of CyberGuard
common stock, each share having a par value of $0.01 per share.

     PREFERRED STOCK--The Company has authorized 5,000 shares of CyberGuard
preferred stock, each share having a par value of $0.01 per share. No preferred
shares are outstanding.

     STOCKHOLDER PROTECTION RIGHTS AGREEMENT--In September 1994, the Company
approved a Stockholder Protection Rights Agreement. The agreement states that
each share of the Company's common stock has attached to it one right. Each
right entitles its registered holder to purchase from the Company after the
"Separation Time", as hereinafter defined, one-hundredth of a share of
Participating Preferred Stock, par value $0.01 per share, for an amount
calculated in accordance with the Preferred Stock Agreement. The rights will not
trade separately from the common stock unless and until the Separation Time. The
Separation Time is defined as the earlier of the tenth business day after the
date on which any person commences a tender or exchange offer which, if
consummated, would result in an acquisition, and the first date of public
announcement by the Company of such offering. In the event of any voluntary or
involuntary liquidation of the Company, the holders of the Preferred Stock shall
be paid an amount as calculated in accordance with the Preferred Stock
Agreement.

     STOCK OPTION PLANS--Effective October 8, 1994, the Company adopted an
Incentive Stock Option Plan. On February 4, 1996, the Board of Directors
approved an amendment to the plan to reserve 2,025,000 shares of common stock
for grant, and effective October 28, 1997 increased the reserve to 2,400,000
shares. Effective September 4, 1998, the Company adopted an Employee Stock
Option Plan. The Board of Directors approved an initial reserve of 1,400,000
shares of common stock for grant, and effective August 10, 1999 increased the
reserve to 2,500,000 shares. The options vest over a three-year period and have
a term of five years.

     Both plans permit the issuance of stock options; stock appreciation rights,
performance awards, restricted stock and/or other stock based awards to
directors and salaried employees. The option price shall be determined by the
Board of Directors effective on the Grant Date. The option price shall not be
less than 100% of the Fair Market Value of a share of common stock on the Grant
Date. If Incentive Stock Options are granted to a participant who on the Grant
Date is a ten-percent holder, such price shall not be less than one hundred and
ten percent of the Fair Market Value of a share of common stock on the Grant
Date. Vesting of these options occurs based on years of service. Generally it
begins at 33% after one year, 66% after two years, and 100% after the third year
of service. All options become immediately exercisable upon the occurrence of a
Change in Control of the Company.

     In September 1998, the Company elected to have non-qualified stock options
for key executives as part of their compensation plan. The Board of Directors
has the authority to determine who may be granted options, the period of
exercise, the option price at the date of grant, and any other restrictions, if
applicable. For the fiscal years ended June 30, 2001 and 2000, the Company

                                      F-12
<PAGE>   43
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

granted 1,740 and 1,094 options, respectively, under this election, which vest
over a three-year period.

     Options granted under the Company's Incentive Stock Option Plan are
accounted for under APB 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company also makes in accordance with Statement of
Financial Accounting Standards (SFAS) 123, additional pro-forma disclosures.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

     The adoption of SFAS No. 123 under the fair value based method would have
increased compensation expense by $2,560, $3,397, and $2,108 for the years ended
June 30, 2001, 2000, and 1999, respectively. The effect of SFAS No. 123 under
the fair value based method would have affected net loss and loss per share as
follows:

<TABLE>
<CAPTION>
                                                                 Year ended              Year Ended             Year Ended
                                                                  June 30,                June 30,               June 30,
                                                                    2001                    2000                   1999
                                                             --------------------    -------------------    --------------------
<S>                                                          <C>                     <C>                    <C>

Net loss                                                               $ (4,016)                $ (976)               $ (8,115)
                                                             ====================    ===================    ====================

Pro-Forma                                                              $ (6,576)              $ (4,373)              $ (10,223)
                                                             ====================    ===================    ====================

Loss per common share as reported                                        $(0.30)                $ (.10)                $ (0.90)
                                                             ====================    ===================    ====================
Pro-Forma                                                                $(0.50)                $ (.47)                $ (1.14)
                                                             ====================    ===================    ====================
</TABLE>




     The above pro-forma disclosures may not be representative of the effects on
reported net earnings for future years as certain option vest over several years
and the Company may continue to grant options to employees.

     Information relating to the Company's stock option plans is as follows:

<TABLE>
<CAPTION>

                                                                       Number of                 Weighted Average
                                                                         Shares                   Exercise Price
                                                                   -------------------          -------------------
<S>                                                                <C>                          <C>

Options Outstanding at June 30, 1998                                             2,098                        $7.81
Granted                                                                          2,856                        $1.24
Exercised                                                                          (17)                       $1.13
Forfeited                                                                       (1,876)                       $5.03
                                                                   -------------------          -------------------
Shares under option at June 30, 1999                                             3,061                        $1.91
                                                                   ===================          ===================

Option shares exercisable at June 30, 1999                                       1,141                        $2.96
                                                                   ===================          ===================

Options at June 30, 1999                                                         3,061                        $1.91
Granted                                                                          1,094                        $3.94
Exercised                                                                         (640)                       $1.41
Forfeited                                                                         (539)                       $1.79
                                                                   -------------------          -------------------

Option shares under option at June 30, 2000                                      2,977                        $2.65
                                                                   ===================          ===================

Shares exercisable at June 30, 2000                                              1,703                        $2.05
                                                                   ===================          ===================

Options at June 30, 2001                                                         2,977                        $2.70
Granted                                                                          1,740                        $1.98
Exercised                                                                         (386)                       $1.38
Forfeited                                                                         (654)                       $4.66
                                                                   -------------------          -------------------


Shares under option at June 30, 2001                                             3,677                        $2.15
                                                                   ===================          ===================

Option shares exercisable at June 30, 2001                                       1,947                        $1.83
                                                                   ===================          ===================
</TABLE>

                                      F-13
<PAGE>   44
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

     The following information applies to options outstanding as of June 30,
2001:
<TABLE>
<CAPTION>

                               OPTIONS OUTSTANDING                                             OPTIONS EXERCISABLE
                         ----------------------------------                                ---------------------------------
  ACTUAL RANGE OF                         WEIGHTED-AVERAGE
  EXERCISE PRICES          NUMBER             REMAINING           WEIGHTED-AVERAGE           NUMBER         WEIGHTED-AVERAGE
     INCREMENT           OUTSTANDING       CONTRACTUAL LIFE        EXERCISE PRICE          EXERCISABLE        EXERCISE PRICE
     ---------           -----------       ----------------        --------------          -----------        --------------

    <S>                  <C>               <C>                     <C>                     <C>                <C>
    $0.75 - 1.13                 515                    1.7                   $1.05                515                  $1.05
    $1.25 - 1.75               2,345                    4.7                   $1.41              1,130                  $1.33
    $2.09 - 3.00                  81                    6.7                   $2.54                 39                  $2.32
    $3.50 - 5.00                 393                    4.0                   $3.94                119                  $3.87
    $5.56 - 7.38                 335                    6.8                   $6.61                136                  $6.59
    $8.88 - 8.88                   8                    0.3                   $8.88                  8                  $8.88
------------------  ----------------  ---------------------  ----------------------   ----------------  ---------------------
    $0.75 - 8.88               3,677                    4.5                    2.15              1,947                  $1.83
</TABLE>


     During September 1998, the Company re-priced all of the outstanding options
to its then current fair market value per share of $1.125. The total numbers of
shares re-priced were 1,404,891. In addition, during fiscal year 1999, the
Company issued officers, directors and employees approximately 1,110,936 new
options at an exercise price of $1.31 per share. As part of a severance
arrangement with a previous officer, the Company re-issued 235,490 shares at a
weighted average price of $7.10 per share.

     In November 2000, the Company resolved that the former Chief Executive
Officer ("CEO") and current Chairman of the Board's stock options would vest in
full upon his retirement date, and the options would remain exercisable through
June 30, 2003 or the options' expiration date, whichever comes first. The former
CEO waived the extended exercise period and therefore, the Company recorded no
compensation expense related to this modification.

     In November 2000, the Company extended the expiration dates of
approximately 127 options to purchase shares of the Company's common stock.
As a result of this modification, the Company recorded approximately $68 in
compensation expense.

     In January 2001, the Company resolved that the former Chief Financial
Officer's ("CFO") stock options would vest in full upon his retirement date, and
the options would remain exercisable through June 30, 2003 or the options'
expiration date, whichever comes first. As a result of this modification, the
Company recorded approximately $73 in compensation expense.

     During the third quarter of 2001, under market priced options were issued
to the Company's President, which resulted in compensation expense of $43. The
Company also issued under market priced options to two employees, which resulted
in compensation expense of $11.

     On March 9, 2001, the Company filed a Registration Statement on Form S-8
with the Securities and Exchange Commission to register 2 million additional
shares of the Company's common stock for issuance pursuant to the exercise of
options to be granted under the Company's Amended and Restated Employee Stock
Option Plan.

                                      F-14
<PAGE>   45
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

     The fair value method for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 2001, 2000, and 1999, respectively: risk-free interest rates
were 5.31%, 6.0%, and 5.11%, expected dividend yield of 0%, volatility factors
of the expected market price of the Company's common stock were 115.0%, 121.0%,
and 116.3%, and a weighted average expected life of the option of 3, 3, and 3
years, respectively.

     RELATED PARTY EQUITY TRANSACTIONS--During January 2001, the Company's CEO
invested $500 to purchase at the market value approximately 143 shares of common
stock at $1.75 share and approximately 62 shares of common stock at $4.00 per
share. In conjunction with the purchase of the approximately 143 shares of
common stock, the CEO was granted an equal number of warrants to purchase the
Company's common stock at $1.75 per share. The warrants are exercisable any time
before December 25, 2005.

(10) COMMITMENTS AND CONTINGENCIES

     EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements
with certain key employees. These agreements provided for severance and other
benefits if these employees are terminated by the Company for any reason other
than cause.

     LEASE COMMITMENTS. Rent expense was approximately $631 for the year ended
June 30, 2001, approximately $697 for the year ended June 30, 2000, and
approximately $744 for the year ended June 30, 1999.

     Total future minimum rental commitments under non-cancelable operating
leases, primarily for buildings and equipment, for the years following June 30,
2001 are as follows:

                  YEAR                      AMOUNT
                  ----                      ------

                  2002                               491
                  2003                               492
                  2004                               505
                  2005                                42
                                        ----------------
                  Total                           $1,530
                                        ================

     Effective May 1, 1999, the Company sold substantially all the assets of its
TradeWave division and the assumption of several capital and operating leases.
In the transaction, the operating lease amount assumed for the fiscal year ended
1999 are $25, fiscal year end 2000 are $165, fiscal year end 2001 are $3, and
fiscal year end 2002 are $2.

     LITIGATION--On August 24, 1998, the Company announced, among other things,
that due to a review of its revenue recognition practices relating to
distributors and resellers, it would restate prior financial results. After the
August 24, 1998 announcement, twenty-five purported class action lawsuits were
filed by alleged shareholders against the Company and certain former officers
and directors. Pursuant to an order issued by the Court, these actions have been
consolidated into one action, styled STEPHEN CHENEY, ET AL. V. CYBERGUARD
CORPORATION, ET AL., Case No. 98-6879-CIV-Gold, in the United States District
Court, Southern District of Florida. On August 23, 1999, the plaintiffs filed a
Consolidated and Amended Class Action Complaint. This action seeks damages
purportedly on behalf of all persons who purchased or otherwise acquired the
Company's common stock during various periods from November 7, 1996 through
August 24, 1998. The complaint alleges, among other things, that as a result of
accounting irregularities relating to the Company's revenue recognition
policies, the Company's previously issued financial statements were materially
false and misleading and that the defendants knowingly or recklessly published
these financial statements which caused the Company's common stock prices to
rise artificially. The action alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act. Subsequently, the defendants,
including the Company, filed their respective motions to dismiss the
Consolidated and Amended Class Action Complaint. On July 31, 2000, the Court

                                      F-15
<PAGE>   46
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

issued a ruling denying the Company's and Robert L. Carberry's (the Company's
CEO from June 1996 through August 1998) motions to dismiss. The court granted
the motions to dismiss with prejudice for defendants William D. Murray (the
Company's CFO from November 1997 through August 1998), Patrick O. Wheeler (the
Company's CFO from April 1996 through October 1997), C. Shelton James (the
Company's former Audit Committee Chairman), and KPMG Peat Marwick LLP ("KPMG").
On August 14, 2000, the plaintiffs filed a motion for reconsideration of that
order. The Company filed an answer to the plaintiffs' Consolidated and Amended
Class Action Complaint on August 24, 2000. On March 20, 2001, the Court ruled on
the plaintiffs' motion for reconsideration that the previously dismissed
defendants William D. Murray, Patrick O. Wheeler and C. Shelton James should not
have been dismissed from the action and shall be defendants in this action under
the control person liability claims under Section 20(a) of the Exchange Act, and
that the plaintiffs may amend the Consolidated and Amended Class Action
Complaint to bring claims against C. Shelton James under Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder. On April 5, 2001, the
plaintiffs filed their Second Consolidated and Amended Class Action Complaint to
include amended claims against C. Shelton James. On May 10, 2001, the Company
filed an answer and affirmative defenses to plaintiff's Second Consolidated and
Amended Class Action Complaint. On April 20, 2001, the plaintiffs filed amended
motion for class certification. Both parties are currently conducting class
certification and limited merits discovery. The trial date is set to begin on
June 2, 2003.

     The Company's obligation to indemnify its officers and directors under the
aforementioned lawsuit is insured to the extent of the limits of the applicable
insurance policies. The Company has notified its insurance carrier of the
existence of the lawsuit, and the carrier has sent the Company a reservation of
rights letter. The Company intends to vigorously defend this action, and
believes that in the event that it is unsuccessful, insurance coverage will be
available to defray a portion, or substantially all, of the expense of defending
and settling the lawsuit or paying a judgment. However, the Company is unable to
predict the ultimate outcome of the litigation. There can be no assurance that
the Company will be successful in defending the lawsuit or if unsuccessful,
insurance will be available to pay all or any portion of the expense of the
lawsuit. If the Company is unsuccessful in defending the lawsuit and the
insurance coverage is unavailable or insufficient, the resolution of the lawsuit
could have a material adverse effect on the Company's consolidated financial
position, results of operations, and cash flows. The Company's consolidated
financial statements do not include any adjustments related to these matters.

     In August 1998, the Securities and Exchange Commission ("SEC") commenced an
informal inquiry into certain accounting and financial reporting practices of
the Company and its officers, directors and employees. On March 25, 1999, the
SEC issued a formal order of investigation (which the Company learned of on
September 27, 1999) into certain accounting and financial reporting practices of
the Company and its officers, directors and employees. The SEC staff ("Staff")
recently advised the Company that the Staff has made a preliminary determination
to recommend bringing a civil enforcement action against the Company based on
allegations that the Company violated the Exchange Act in connection with its
financial statements during the period from the quarter ended June 30, 1996
through the quarter ended March 31, 1998. The Company is aware that the
potential range of sanctions against the Company, should an enforcement
proceeding be brought, could include injunctive relief against the Company
prohibiting future violations of the Exchange Act. The Company is also aware
that the Staff has advised several former executive officers of the Company of
its intention to recommend the bringing of enforcement actions against them
based on allegations that they violated the Exchange Act. The Company is aware
that the potential range of sanctions against the former executive officers
could include injunctive relief against future violations of the Exchange Act as
well as civil monetary penalties and bars against their serving as officers and
directors of a public company. The Company is seeking to resolve the issues with
the SEC.

     On September 16, 1999, the Company filed a lawsuit against KPMG and August
A. Smith, the KPMG engagement partner. The lawsuit is pending in the Circuit
Court of the 17th Judicial Circuit in and for Broward County, Case No.
00-004102-CACE-14. On May 1, 2000, the Company filed the First Amended
Complaint, alleging that KPMG failed to properly audit the Company's financial
statements and provided inaccurate advice on accounting matters for fiscal years
1996, 1997 and 1998. The action alleges professional malpractice, breach of
fiduciary duty, breach of contract and breach of implied duty of good faith, and
seeks damages in excess of $10 million. KPMG and Mr. Smith filed motions to
dismiss, which were denied. In August 2000, KPMG and Mr. Smith filed their
answers and KPMG filed counterclaims against the Company, alleging the Company's

                                      F-16
<PAGE>   47
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

breach of contract, negligent misrepresentation and abuse of process, and
seeking an unspecified amount of damages consisting of unpaid service fees and
legal fees and costs. The Company filed an answer to KPMG's counterclaims and
moved to dismiss KPMG's abuse of process counterclaim. On April 9, 2001, the
Court dismissed the abuse of process counterclaim with prejudice.

     The Company is involved from time to time in other litigation on various
matters relating to the conduct of its business. The Company believes that these
other litigation matters will not have a material adverse effect on its
consolidated financial position, results of operations or cash flows.

     REGULATORY INVESTIGATIONS--In August 1998, the Securities and Exchange
Commission ("SEC") commenced an informal inquiry into certain accounting and
financial reporting practices of the Company and its officers, directors and
employees. On March 25, 1999, the SEC issued a formal order of investigation
(which the Company learned of on September 27, 1999) into certain accounting and
financial reporting practices of the Company and its officers, directors and
employees. The SEC's investigation is ongoing and the Company is cooperating
with the SEC. The Company is unable to predict the ultimate outcome of the
investigation. The resolution of such matters could have a material adverse
effect on the Company's consolidated financial position, results of operations,
and cash flows. The Company's consolidated financial statements do not include
any adjustments related to these matters.

(11) FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

     Financial instruments, which potentially subject the Company to a
concentration of credit risk principally, consist of cash, cash equivalents and
trade receivables. The Company holds any excess cash in short-term investments
consisting of commercial paper. The carrying value of these financial
instruments approximates fair value.

     The Company does not require collateral or other security on its trade
receivables. During 2001, one customer represented 16% and one distributor
represented 12% of consolidated sales. During 2000, one customer represented 28%
of consolidated sales.

     In March 2001, the Company purchased products from a third-party supplier
for resale. The customer returned the products to the Company for defectiveness,
and the Company subsequently returned the products for defectiveness to the
third-party supplier and has not paid for the products. The third-party supplier
has demanded payment. The Company believes it does not have any obligation to
pay for those defective products. The total amount in dispute is approximately
$300,000.

     The Company's backlog for the quarter ended March 31, 2001 was $463 as
compared to $6,390 for the quarter ended December 31, 2000. The decrease
resulted from the default by one customer in taking delivery of a large purchase
commitment over a 12-month period. The Company continues to have a good
relationship with the customer and is in the process of renegotiating the
contract.

(12) EMPLOYEE BENEFIT PLANS

     The Company has a 401(k) Savings Plan ("the Plan") which covers the
eligible employees of the Company. An employee is eligible to participate in the
Plan on the date of hire. The amount of profit-sharing contributions made by the
Company into the Plan is discretionary. Each participant may contribute up to
19% of compensation into the Plan. The Company makes a matching contribution on
behalf of each participant for the first 6% of their individual contribution.
These contributions are made in the form of cash and common stock of the
Company. Participants' profit sharing and matching contribution vests over a
three-year period. This vesting schedule was effective in fiscal year 2000.
Previously, the vesting occurred over a seven-year period. The Company's
contributions to the Plan were approximately $222 for the year ended June 30,
2001, approximately $72 for year ended June 30, 2000 and approximately $300 for
year ended June 30,1999. For the year ended June 30, 2001, the Company received
proceeds of $241 related to the direct sale of common stock to the Plan.

     The Company has an Employee Stock Purchase Plan ("ESPP") which covers the
eligible employees of the Company. An employee is eligible to participate in the
ESPP beginning on the offering date (defined as January 1 and July 1) following
their hire date. Each participant may contribute the lesser of 10% of eligible
compensation or $25,000 per calendar year.

                                      F-17
<PAGE>   48
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

(13) GEOGRAPHIC AND CUSTOMER INFORMATION

     The Company operates primarily in one segment: trusted systems consisting
of network security and electronic commerce products and services. During 2001,
one customer in the US represented 16% and one international distributor in
Europe represented 12% of consolidated sales. During 2000, one customer in the
US represented 28% of consolidated sales. During 1999, one customer in the US
represented 34% of consolidated sales, another US customer represented 10.1% of
consolidated sales and one international distributor in Europe represented 7.8%
of consolidated sales.

     A summary of the Company's revenues* by geographic area is summarized
below:

                                        Year Ended June 30,

                                   2001        2000          1999
                               ----------- ------------ --------------

United States                     12,080      11,866          10,882

Europe                             8,553       4,974           2,991

Asia                               3,773       2,019              --
                               ----------- ------------ --------------
                                  24,406      18,859          13,873
                               =========== ============ ==============

* Revenues are attributed to countries based on location of customer.

     A summary of the Company's long-lived assets is summarized below:

                                        Year Ended June 30,

                                   2001        2000          1999
                               ----------- ------------ --------------

United States                     1,190       1,048           1,095

Europe                               21          38              59

Asia                                 --          --              --
                               ----------- ----------- ---------------
                                  1,211       1,086           1,154
                               =========== =========== ===============

(14) SALE OF ASSETS

     On June 17, 1998, the Company completed the acquisition of Arca Systems,
Inc. ("Arca"), a privately held information professional security service firm,
for 590,429 shares of its common stock. However, on October 5, 1998, the Company
sold all the assets of Arca.

     In response to the Company's announcement on August 24, 1998, that revenues
for certain 1998 quarters would be restated, the previous shareholders of Arca
threatened legal action under the purchase agreement. On October 5, 1998, the
Company completed the sale of the net assets of Arca to Exodus Communications.
In exchange for the net assets of Arca, the Company received approximately
$3,261, the return of the previously issued 590,429 shares of the Company's
common stock, and the release of any potential legal claims the Arca
shareholders might have had against the Company. The disposition resulted in a
settlement loss that was recorded in the fourth quarter of fiscal 1998. The
settlement loss of $2,386 was determined based on the Company's investment in
and advances to Arca, less the $3,261 cash received and the 590,429 shares of
common stock at its fair value using its quoted market value on the return date.
The shares were assumed to be retired effective June 30, 1998.

                                      F-18
<PAGE>   49
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

(15) NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board approved the
issuance of SFAS No. 141, "Business Combinations" and SFAS 142, "Goodwill and
Other Intangible Assets." The new standards require that all business
combinations initiated after June 30, 2001 must be accounted for under the
purchase method. In addition, all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged shall be recognized as an asset apart
from goodwill. Goodwill and intangibles with indefinite lives will no longer be
subject to amortization, but will be subject to an annual assessment for
impairment by applying a fair value based test. As the Company has no goodwill
or other intangibles generated as a result of a business combination, the
adoption of these Standards is not expected to have an impact on the Company's
operations.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133, as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000. In June 2000, Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities--an Amendment of FASB Statement No. 133," was issued to clarify
certain provisions of SFAS 133. SFAS 133 will be effective for our fiscal year
ended December 31, 2001. We believe the adoption of this statement will not have
a significant impact on our financial position, results of operations or cash
flows.

(16) SUBSEQUENT EVENTS

     CHANNEL DEVELOPMENT AGREEMENT--On July 1, 2001 the Company entered into an
agreement with a national channel development firm to develop regional sales
channels in the United States. The agreement provides for base compensation for
the first six months of $342, with a draw offset by commission for an additional
six months thereafter totaling $342. The agreement allows for the issuance of
options based upon them meeting certain stated targets.

                                      F-19
<PAGE>   50
                     CYBERGUARD CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Amounts in thousands, except per share data)

(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

         Selected unaudited quarterly results for the fiscal year ended June 30,
2001 and 2000 were as follows:

FISCAL YEAR 2001
<TABLE>
<CAPTION>

                                                                      JUN 30,       MAR 31,         DEC 31,        SEP 30,
                                                        TOTAL          2001          2001            2000           2000
                                                        -----          ----          ----            ----           ----

<S>                                                  <C>                <C>         <C>             <C>           <C>
Revenues                                              $ 24,406       $  6,374       $  7,635       $  6,349       $  4,048

Gross profit                                            17,190          4,530          5,333          4,459          2,868

Operating loss                                          (2,940)          (534)          (548)          (183)        (1,675)

Loss before cumulative effect of change in
accounting principle                                  $ (3,887)      $   (655)       $  (888)      $   (485)      $ (1,859)
                                                      --------       --------        -------       --------       --------

Cumulative effect of change in accounting
principle                                                 (129)            --             --           (129)            --
                                                      --------       --------        -------       --------       --------

Net loss                                              $ (4,016)      $   (655)      $   (888)      $   (614)      $ (1,859)
                                                      ========       ========       ========       ========       ========
Basic and fully diluted loss per share before
cumulative effect of change in account principle      $  (0.29)      $  (0.04)      $  (0.06)      $  (0.05)      $  (0.19)
                                                      ========       ========       ========       ========       ========

Cumulative effect of change in accounting
principle                                             $  (0.01)      $  (0.00)      $  (0.00)      $  (0.01)      $  (0.00)
                                                      ========       ========       ========       ========       ========

Basic and fully diluted loss per share                $  (0.30)      $  (0.04)      $  (0.06)      $  (0.06)      $  (0.19)
                                                      ========       ========       ========       ========       ========
</TABLE>

FISCAL YEAR 2000
<TABLE>
<CAPTION>

                                                                 JUN 30,          MAR 31,         DEC 31,         SEP 30,
                                                  TOTAL           2000             2000            1999             1999
                                                  -----           ----             ----            ----             ----

<S>                                            <C>              <C>              <C>             <C>              <C>
Revenues                                       $ 18,859         $  4,893         $  5,265        $  4,370         $  4,331

Gross profit                                     12,903            3,051            3,486           3,262            3,104

Operating income (loss)                             182             (438)             702             148             (230)

Net loss                                       $   (976)        $   (600)        $    270        $    (62)        $   (584)
                                               --------         --------         --------        --------         --------

Basic earnings (loss) per share                $  (0.10)        $  (0.06)        $   0.03        $  (0.01)        $  (0.06)
                                               ========         ========         ========        ========         ========

Fully diluted earnings (loss) per share        $  (0.10)        $  (0.06)        $   0.01        $  (0.01)        $  (0.06)
                                               ========         ========         ========        ========         ========
</TABLE>


                                      F-20
<PAGE>   51



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

         On August 21, 1998, KPMG Peat Marwick LLP ("KPMG"), the Company's
independent public accounting firm, resigned effective immediately. In KPMG's
letter of resignation, KPMG stated that it had "a disagreement with management
of the Company regarding the methodology used for software revenue recognition."
In its letter of resignation, KPMG also advised the Company that it concluded
that it could no longer rely on management's representations and that it was
unwilling to be associated with the financial statements prepared by management.

         On August 19, 1998, two days before KPMG's resignation, the Company's
Audit Committee met with KPMG to discuss the Company's software revenue
recognition policies and KPMG's concerns about the quality of the financial
information which had been presented by management to the Audit Committee and to
KPMG. During that meeting, the Audit Committee advised KPMG that the Audit
Committee (and not management) had the exclusive decision-making authority and
duties with respect to the Company's financial statements. The Audit Committee
advised KPMG that it agreed with KPMG as to KPMG's preliminary assessment of
these matters and discussed the steps that should be implemented to resolve
these issues, including a restatement of the Company's interim financial
statements.

         Immediately upon KPMG's resignation, the Company's Audit Committee
initiated an internal investigation regarding matters related to the Company's
internal controls and corporate governance. The Committee also engaged
independent counsel to assist the Committee in this investigation. During
September 1998, the independent counsel engaged the Strategic Risk Services
Group of PricewaterhouseCoopers, LLP ("PWC Consulting") to assist the
independent counsel in the investigation. During the course of this engagement,
representatives of the Company discussed numerous issues with representatives of
PWC Consulting regarding the Company's control environment and corporate
governance. During this investigative engagement, PWC Consulting assisted the
Company's independent counsel in various aspects of the investigation. Upon
completion of PWC Consulting's engagement for the Audit Committee's independent
counsel, the Company's Board of Directors requested that PricewaterhouseCoopers,
LLP ("PWC") serve as the Company's independent accountants for the Company's
1998 fiscal year. On October 14, 1998, PWC accepted the engagement with the
Company and agreed to serve as the Company's independent accountants for the
Company's 1998 fiscal year. Subsequently, the Company also determined that it
would restate its 1997 fiscal year financial statements, and engaged PWC to
serve as the independent accountants for such restatement. PWC also restated the
Company's beginning balance sheet as of July 1, 1996 and the balance sheet of
the results of operations for the fiscal year ending June 30, 1997. On June 11,
1999, KPMG informed the Company's Audit Committee that KPMG's 1997 and 1996
auditors' reports should no longer be relied on.

         On October 11, 1999, the Company appointed the accounting firm of Grant
Thornton LLP ("GT") as the Company's independent accountants for fiscal year
2000 and dismissed PWC effective with such appointment. The decision to dismiss
PWC and appoint GT was approved by the Audit Committee of the Company's Board of
Directors. The Company also appointed GT as the Company's independent
accountants for fiscal year 2001.

         PWC's report on the financial statements for fiscal year 1999 did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. The Company
has never had any disagreements with PWC on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
During the course of performing services regarding fiscal year 1999, PWC advised
the Company and its Audit Committee that the internal controls necessary for the
Company to develop reliable financial statements did not exist. No disagreements
arose regarding these matters. Upon the deficiencies in accounting controls
being identified, the Company's Chief Financial Officer began addressing and
correcting these deficiencies. The Company authorized PWC to respond fully to
the inquiries of Grant Thornton LLP concerning this subject matter and any other
matters relating to the Company or its financial reporting.

         The Company provided PWC with a copy of the above disclosures and has
requested that PWC furnish it with a letter addressed to the SEC stating whether
it agrees with the above statements.

                                       31
<PAGE>   52


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders to be filed within 120 days from June 30, 2001, the end of the
Company's fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders to be filed within 120 days from June 30, 2001, the end of the
Company's fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders to be filed within 120 days from June 30, 2001, the end of the
Company's fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item is incorporated herein by
reference to the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders to be filed within 120 days from June 30, 2001, the end of the
Company's fiscal year.

                                       32
<PAGE>   53

10.21    --       Loan and Security Agreement dated December 29, 1997 between
                  the Company, TradeWave Corporation and Coast Business
                  Credit(11)
10.22    --       Amendment Nr. 1 to Loan and Security Agreement dated December
                  29, 1997 between the Company, TradeWave Corporation and Coast
                  Business Credit(11)
10.23    --       Amendment Nr. 2 to Loan and Security Agreement dated October
                  6, 1999 between the Company and Coast Business Credit(3)
10.24    --       Loan Documents dated December 17, 1998 between the Company and
                  Fernwood Partners, LLC(15)
10.25    --       Loan Agreements dated August 26, 1999, between (i) the Company
                  and Fernwood Partners II, LLC; (ii) the Company and certain
                  officers, directors and employees of the Company; and (iii)
                  the Company and David R. Proctor(3)
10.26    --       Amendment No. 1 to Loan Agreement, dated December 29, 2000
                  between the Company and Fernwood Partners II, LLC(17)
10.27    --       Agreements dated January 24, 2001 relating to the conversion
                  of promissory notes and exercise of warrants issued under (i)
                  the Loan Agreement, as amended, between the Company and
                  Fernwood Partners II, LLC, and (ii) the Loan Agreement between
                  the Company and certain officers, directors and employees of
                  the Company(17)
10.28    --       Private Securities Subscription Agreement dated May 15, 1997
                  between the Company and Capital Ventures International(10)
10.29    --       Registration Rights Agreement dated May 15, 1997 between the
                  Company and Capital Ventures International(10)
10.30    --       Manufacturer's Representative Agreement between Marketlink
                  Technologies, LLC and the Company, as amended through July 11,
                  2001.
16.01    --       Letter from KPMG Peat Marwick LLP to the Company, dated
                  August 21, 1998(9)
16.02    --       Letter from KPMG Peat Marwick LLP to the Commission, dated
                  September 30, 1998(19)
16.03    --       Letter from KPMG Peat Marwick LLP to the Commission, dated
                  November 3, 1998(12)
16.04    --       Letter from KPMG Peat Marwick LLP to the Company dated
                  June 11, 1999(15)
16.05    --       Consent of PricewaterhouseCoopers LLP(14)
21.01    --       List of subsidiaries of the Company
23.01    --       Consent of Grant Thornton LLP, Independent Certified Public
                  Accountants
23.02    --       Consent of PricewaterhouseCoopers LLP, Independent Certified
                  Public Accountants
-----------------

(1)  Incorporated herein by reference to Annex A of the Registrant's Definitive
     Proxy Statement as filed on May 24, 1996.

(2)  Incorporated herein by reference to Post-Effective Amendment No. 1 to the
     Company's Registration Statement on Form 10, dated September 29, 1994, File
     No. 0-24544.

(3)  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q filed on November 12, 1999

(4)  Incorporated herein by reference to the Company's Registration Statement on
     Form S-3 dated May 23, 1996 (File No. 333-04407).

(5)  Incorporated herein by reference to the Company's Registration Statement on
     Form S-8 (Commission File Number 333-58262), filed on April 4, 2001.

(6)  Incorporated herein by reference from Exhibit 4.1 to the Company's
     Registration Statement on Form S-8 (Commission File Number 33-88448) filed
     on January 13, 1995.

(7)  Incorporated herein by reference to Annex E of the Registrant's Definitive
     Proxy Statement as filed on May 24, 1996.

(8)  Incorporated herein by reference to the Company's Annual Report on Form
     10-K for fiscal year ended June 30, 1996.

(9)  Incorporated herein by reference to the Company's Current Report on Form
     8-K dated August 21, 1998.

(10) Incorporated herein by reference to the Company's Registration Statement on
     Form S-3 (Commission File Number 333-28693) filed on June 12, 1997.

(11) Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q filed on February 13, 1998.

(12) Incorporated herein by reference to the Company's Current Report on Form
     8-K/A filed on November 4, 1998.

(13) Incorporated herein by reference to the Company's Annual Report on 10-K for
     fiscal year ended June 30, 2000.

(14) Incorporated herein by reference to the Company Current Report on Form 8-K
     filed October 15, 1999.

(15) Incorporated herein by reference to the Company's Annual Report on 10-K for
     fiscal year ended June 30, 1999.

(16) Incorporated herein by reference to the Company's Registration Statement on
     Form S-8 (Commission File Number 333-56768), filed on March 9, 2001.

(17) Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q filed on February 14, 2001.

(18) Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q filed on May 14, 2001.

(19) Incorporated herein by reference to the Company's Current Report on Form
     8-K/A-1 filed on October 13, 1998.

                                       34
<PAGE>   54




                                   SIGNATURES

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

September 28, 2001                       CYBERGUARD CORPORATION

                                         By: /s/ SCOTT J. HAMMACK
                                            ------------------------------------
                                            Scott Hammack
                                            Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

SIGNATURE                                         TITLE                                        DATE
---------                                         -----                                        ----
<S>                                               <C>                                          <C>
/s/      SCOTT J. HAMMACK                         Chairman and Chief Executive Officer         September 28, 2001
-----------------------------------------------   (Principal Executive Officer)
Scott Hammack


/s/      MICHAEL D. MATTE                         Chief Financial Officer (Principal           September 28, 2001
- ---------------------------------------------   Financial and Principal Accounting Officer)
Michael D. Matte


/s/      PATRICK CLAWSON                          President (Principal Executive Officer)      September 28, 2001
---------------------------------------------
Patrick Clawson


/s/      DAVID R. PROCTOR                         Director                                     September 28, 2001
---------------------------------------------
David R. Proctor


/s/      DAVID L. MANNING                         Director                                     September 28, 2001
---------------------------------------------
David L. Manning


/s/      WILLIAM G. SCOTT                         Director                                     September 28, 2001
---------------------------------------------
William G. Scott

/s/      JOHN V. TIBERI, JR.                      Director                                     September 28, 2001
---------------------------------------------
John V. Tiberi, Jr.


/s/      DAVID T. VANDEWATER                      Director                                     September 28, 2001
---------------------------------------------
David T. Vandewater


/s/      RICHARD L. SCOTT                         Director                                     September 28, 2001
---------------------------------------------
Richard L. Scott
</TABLE>

                                       35