UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended ~~September~~June 30, ~~2007~~2008

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From to .

Commission file number 0-27074

SECURE COMPUTING CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

52-1637226

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

4810 Harwood Road, San Jose, CA		95124
55 Almaden Boulevard San Jose, California		95113
(Address of principal executive offices)		(Zip code)

(408) ~~979~~494-~~6100~~2020

Registrant’s telephone number, including area code

~~Not~~4810 ~~Applicable~~Harwood Road, San Jose, California 95124

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See ~~definition~~the definitions of “large accelerated filer,” “accelerated filer” and ~~large~~“smaller ~~accelerated~~reporting ~~filer~~company” in Rule 12b-2 of the Exchange Act. (Check one):

Large ~~accelerate~~ accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date: Common Stock, $.01 par value – 6668,~~859~~178,~~156~~488 shares issued and outstanding as of ~~October~~ July 31, ~~2007~~2008.

SECURE COMPUTING CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1	~~Condensed Consolidated~~ Financial Statements:
	Condensed Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006	3
	Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007	3
	Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 30, 2007 and 2006	4
	Condensed Consolidated Statements of Operations (Unaudited) for the three months and six months ended June 30, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2007 and 2006	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2008 and 2007	5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	6-13
	Notes to the Financial Statements (Unaudited)	6-12
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1412-2220
Item 3	Quantitative and Qualitative Disclosures About Market Risk	2220
Item 4	Controls and Procedures	~~22-23~~20
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	2421
Item 2	Changes in Securities	24
Item 1A	Risk Factors	22
Item 3	Defaults upon Senior Securities	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 4	Submission of Matters to a Vote of Security Holders	24
Item 3	Defaults Upon Senior Securities	22
Item 5	Other Information	24
Item 4	Submission of Matters to a Vote of Security Holders	22-23
Item 6	Exhibits and Reports on Form 8-K	24-26
Item 5	Other Information	23
	Signatures	27
Item 6	Exhibits	23-24
SIGNATURES		25

PART I—FINANCIAL INFORMATION

Item 1. ~~Condensed Consolidated~~ Financial Statements

SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30,2007(Unaudited)			December 31,2006(See Note)
	June 30,2008(Unaudited)			December 31,2007(See Note)
ASSETS
Current assets
Cash and cash equivalents	$	1021,~~170~~312		$	812,~~249~~084
Restricted cash		~~496~~327			~~457~~507
Accounts receivable, net		6061,~~029~~101			6364,~~636~~056
Inventory, net		56,~~369~~556			46,~~078~~725
Other current assets		1518,~~943~~025			1316,~~948~~464
Total current assets		92107,~~007~~321			9099,~~368~~836
Property and equipment, net		1721,~~751~~799			1418,~~300~~595
Goodwill		~~530~~528,~~744~~416			~~533~~528,~~659~~264
Intangibles, net		6553,~~672~~677			7861,~~388~~494
Other assets		9,619			7,413
Other assets, net of current portion		11,268			10,560
Total assets	$	~~715~~722,~~793~~481		$	~~724~~718,~~128~~749
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	1210,~~295~~666		$	12,~~442~~567
Accrued payroll		10,~~593~~107			129,~~035~~886
Accrued expenses		815,~~415~~471			67,~~365~~891
Acquisition reserves		~~1,207~~454			1,~~418~~012
Deferred revenue		94125,~~461~~462			8698,~~612~~751
Total current liabilities		~~126~~162,~~971~~160			~~118~~130,~~872~~107
Acquisition reserves, net of current portion		~~1,019~~657			~~1,591~~721
Deferred revenue, net of current portion		59,~~289~~888			3569,~~671~~429
Deferred tax liability		109,~~082~~906			78,~~672~~729
Debt, net of fees		5341,~~371~~641			8541,~~023~~461
Other liabilities		951,497			—1,359
Total liabilities		~~250~~275,~~827~~749			~~248~~251,~~829~~806
Convertible preferred stock, par value $.01 per share:
Authorized – 2,000,000; issued and outstanding – 700,000 at September 30, 2007 and December 31, 2006		68,339			65,558
Authorized – 2,000,000; issued and outstanding – 700,000 at June 30, 2008 and December 31, 2007		71,213			69,281
Stockholders’ equity
Common stock, par value $.01 per share:
Authorized – 100,000,000; issued and outstanding – 66,783,090 at September 30, 2007 and 65,008,509 at December 31, 2006		669			651
Authorized – 100,000,000; issued and outstanding – 68,170,030 at June 30, 2008 and 67,178,668 at December 31, 2007		683			673
Additional paid-in capital		~~558~~573,~~303~~138			~~538~~564,~~616~~108
Accumulated deficit		(~~161~~197,~~605~~385	)		(~~127~~166,~~249~~028	)
Accumulated other comprehensive loss		(~~740~~917	)		(21,~~277~~091	)
Total stockholders’ equity		~~396~~375,~~627~~519			~~409~~397,~~741~~662
Total liabilities and stockholders’ equity	$	~~715~~722,~~793~~481		$	~~724~~718,~~128~~749

NOTE: The balance sheet at December 31, ~~2006~~2007 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to ~~the~~ ~~condensed consolidated~~ the financial statements.

SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2007			2006			2007			2006
	2008			2007			2008			2007
Revenues:
Products	$	3128,~~006~~687		$	2730,~~884~~722		$	9157,~~899~~767		$	8160,~~586~~893
Services		1819,~~992~~947			1518,~~625~~509			5440,~~901~~973			4335,~~286~~909
Other (See Note)		1013,~~020~~070			~~239~~8,417			2423,~~638~~667			~~239~~14,618
Total revenues		6061,~~018~~704			4357,~~748~~648			~~171~~122,~~438~~407			~~125,~~111,420
Cost of revenues:
Products		911,~~570~~959			78,~~658~~960			2821,~~127~~752			2218,~~534~~557
Services		4,~~020~~454			24,~~989~~646			128,~~151~~636			78,~~993~~131
Other (See Note)		12,~~446~~229			891,399			3,~~934~~817			892,488
Amortization of purchased intangibles		1,924			12,~~049~~050			53,~~905~~848			3,~~025~~981
Total cost of revenues		1620,~~960~~566			1117,~~785~~055			5038,~~117~~053			33,~~641~~157
Gross profit		4341,~~058~~138			3140,~~963~~593			~~121~~84,~~321~~354			9178,~~470~~263
Operating expenses:
Selling and marketing		2930,~~692~~981			2329,~~703~~635			8761,~~794~~363			5758,~~328~~102
Research and development		1112,~~207~~570			811,~~828~~101			3224,~~932~~731			2321,~~554~~725
General and administrative		45,~~310~~221			3,~~469~~702			1110,~~702~~949			97,~~386~~392
Amortization of purchased intangibles		2,~~712~~257			2,~~310~~772			84,~~265~~514			65,~~990~~553
Litigation settlement		—			—			—9,180			~~2,500~~—
Total operating expenses		4751,~~921~~029			3847,~~310~~210			~~140~~110,~~693~~737			9992,~~758~~772
Operating loss		(49,~~863~~891	)		(6,~~347~~617	)		(1926,~~372~~383	)		(814,~~288~~509	)
Other (expense)/income		(1,576	)		501			(5,593	)		2,402
Other expense		(761	)		(1,727	)		(1,856	)		(4,017	)
Loss before taxes		(610,~~439~~652	)		(58,~~846~~344	)		(2428,~~965~~239	)		(518,~~886~~526	)
Income tax (expense)/benefit		(3,613	)		(1,445	)		(6,610	)		5,911
Income tax expense		(396	)		(2,604	)		(1,186	)		(2,997	)
Net (loss)/income		(10,052	)		(7,291	)		(31,575	)		25
Net loss		(11,048	)		(10,948	)		(29,425	)		(21,523	)
Preferred stock accretion		(~~943~~966	)		(~~903~~924	)		(21,~~781~~932	)		(21,~~653~~838	)
Charge from beneficial conversion of preferred stock		—			—			—			(12,603	)
Net loss applicable to common shareholders	$	(12,014	)	$	(11,872	)	$	(31,357	)	$	(23,361	)
Net loss applicable to common shareholders	$	(10,995	)	$	(8,194	)	$	(34,356	)	$	(15,231	)
Basic and diluted loss per share	$	(0.18	)	$	(0.18	)	$	(0.46	)	$	(0.36	)
Basic and diluted loss per share	$	(0.17	)	$	(0.14	)	$	(0.52	)	$	(0.28	)
Weighted average shares outstanding—basic and diluted		67,915			65,756			67,667			65,518
Weighted average shares outstanding—basic and diluted		66,268			57,378			65,772			54,417

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

See accompanying notes to the ~~condensed consolidated~~ financial statements.

SECURE COMPUTING CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months EndedSeptember 30,
	Six Months EndedJune 30,
	2007			2006
	2008			2007
Operating activities
Net (loss)/income	$	(31,575	)	$	25
Net loss	$	(29,425	)	$	(21,523	)
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		54,~~327~~962			23,~~970~~422
Amortization of intangible assets		148,~~768~~761			109,~~331~~927
Loss on disposals of property and equipment and intangible assets		~~160~~49			~~995~~175
Amortization of debt fees		~~348~~180			37252
Deferred income taxes		~~3,701~~617			(61,~~093~~652	)
Share-based compensation		126,~~361~~958			78,~~019~~057
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable		42,~~007~~955			(18,~~149~~770	)
Inventories		~~(1,291~~169	)		(~~324~~489	)
Other current assets		(2,103	)		1,032
Other operating assets		(2,547	)		(2,027	)
Accounts payable		~~272~~(1,683	)		~~6,516~~(919	)
Accrued payroll		~~(1,440~~221	)		1(2,~~771~~059	)
Accrued expenses		27,~~281~~704			(~~3,504~~158	)
Acquisition reserves		(~~867~~177	)		(~~10,371~~595	)
Deferred revenue		3117,~~487~~170			1620,~~753~~174
Net cash provided by operating activities		3715,~~436~~914			2624,~~008~~659
Investing activities
Purchase of property and equipment, net		(8,~~896~~058	)		(86,~~368~~059	)
(Increase)/decrease in intangibles and other assets		(3,400	)		734
Increase in intangibles and other assets, net		(817	)		(1,498	)
(Purchases)/sales of investments, net		(8	)		31,041
Change in restricted cash, net		195			(16	)
Cash paid for business acquisitions, net of cash acquired		—			(256,747	)
Net cash used for investing activities		(8,680	)		(7,573	)
Net cash used for investing activities		(12,304	)		(233,340	)
Financing activities
Repayments of term debt		(32,000	)		—
Proceeds from issuance of common stock		2,082			3,828
Proceeds from term debt, net of fees		—			86,868
Repayment of term debt		—			(22,000	)
Proceeds from issuance of common stock		7,344			7,317
Net cash provided by/(used for) financing activities		2,082			(18,172	)
Proceeds from revolving debt		—			2,000
Effect of exchange rates		(88	)		1,601
Proceeds from issuance of preferred stock and warrant, net of fees		—			69,945
Net increase in cash and cash equivalents		9,228			515
Net cash (used for)/provided by financing activities		(24,656	)		166,130
Cash and cash equivalents, beginning of period		12,084			8,249
Effect of exchange rates		1,445			(927	)
Cash and cash equivalents, end of period	$	21,312		$	8,764
Net increase/(decrease) in cash and cash equivalents		1,921			(42,129	)
Cash and cash equivalents, beginning of period		8,249			50,039
Cash and cash equivalents, end of period	$	10,170		$	7,910
Supplemental Cash Flow Disclosure
Interest paid	$	51,~~011~~505		$	—3,568
Release of deferred tax asset valuation allowance as a reduction to goodwill	$	~~1,367~~660		$	91,~~520~~686
Common stock issued for purchase of CyberGuard Corporation		—		$	188,476
Common stock issued for purchase of CipherTrust, Inc.		—		$	68,100

See accompanying notes to the ~~condensed consolidated~~ financial statements.

SECURE COMPUTING CORPORATION

NOTES TO THE ~~CONDENSED CONSOLIDATED~~ FINANCIAL STATEMENTS

(Unaudited)

1. Organization

Secure Computing isCorporation a(“we,” ~~global leader in enterprise gateway security. Founded in 1989~~“us,” we“our” ~~have~~or ~~been~~“Secure ~~securing~~Computing”) ~~the~~is ~~connections~~a ~~between~~global ~~people~~leader ~~and~~in ~~information for~~enterprise ~~nearly~~security ~~20 years~~solutions. WePowered ~~use~~by ~~our~~TrustedSource™ ~~broad expertise in security~~ technology, toour ~~develop~~award-winning ~~enterprise gateway security~~ solutions proactively ~~that~~protect ~~allow~~our ~~organizations~~customers’ ~~to exchange~~ mission-critical ~~information~~business ~~safely~~applications ~~with~~from ~~their~~all ~~customers,~~manner ~~partners~~of ~~and~~Internet-borne ~~employees using trusted connections~~threats. ~~Specializing~~Our incomprehensive ~~delivering~~portfolio ~~enterprise-class~~of ~~solutions~~Secure ~~that secure~~ Web™, ~~email~~Secure Mail™, ~~and~~Secure ~~network connectivity~~Firewall™, weand ~~are~~Secure ~~proud~~SafeWord™ ~~to be the global security~~ solutions provide ~~provider~~unmatched toprotection ~~some~~for of the ~~most mission-critical network environments in the world~~enterprise.

2. ~~Condensed~~Basis ~~Consolidated~~of ~~Financial~~Presentation ~~Statements~~

The accompanying condensed consolidated financial statements have been prepared by us without audit and reflect all adjustments (consisting of normal ~~and~~ recurring adjustments and accruals) which are, in our opinion, necessary to present a fair statement of the results for the interim periods presented. The consolidated financial statements include our accounts and those of our subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The statements have been prepared in accordance with the instructions for Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission, and, as permitted, omit certain information and footnote disclosures necessary to present the statements in accordance with U.S. generally accepted accounting principles. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. The December 31, ~~2006~~ ~~Condensed~~2007 ~~Consolidated~~condensed ~~Balance~~consolidated ~~Sheet~~balance sheet is derived from our audited ~~Consolidated~~consolidated ~~Balance~~balance ~~Sheet~~sheet as of December 31, ~~2006~~2007. These condensed financial statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2006~~2007, as filed with the Securities and Exchange Commission (SEC).

3. Summary of Significant Accounting Policies

Revenue Recognition

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

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

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

Income Taxes

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

3.We ~~Summary~~adopted the provisions of ~~Significant~~Financial Accounting ~~Policies~~Standards Board Interpretation No. 48 (~~continued~~FIN 48), “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109” on January 1, 2007. FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. At the adoption date, January 1, 2007, we did not have a material liability under FIN 48 for unrecognized tax benefits. Upon implementation of FIN 48 we have recognized a liability of $1.5 million for unrecognized income tax benefits as of June 30, 2008. Due to an offsetting release in valuation allowance on net operating losses (NOL), the liability had minimal impact on our effective tax rate. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We do not expect the amount of unrecognized tax benefits to significantly change within the next 12 months.

~~Income~~Our ~~Taxes~~company is subject to U.S. Federal income tax as well as income tax in multiple state jurisdictions. Generally, tax years from 2004 through the present remain open under the statute of limitations. However, due to NOL carryforwards from prior periods, the Internal Revenue Service could potentially review the losses related to NOL-generating years back to 1989. Our foreign subsidiaries are also subject to income tax in several foreign jurisdictions which have open tax years varying by jurisdiction back to 2002.

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

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

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

Recently Issued Accounting Standards

In ~~February~~September ~~2007~~2006, the Financial Accounting Standards Board (FASB) issued SFAS No. ~~159~~157, “~~The~~ Fair Value Measurements.” ~~Option~~SFAS No. 157 which defines fair value, establishes a framework for ~~Financial~~measuring ~~Assets~~fair value in generally accepted accounting principles and ~~Financial~~establishes ~~Liabilities~~a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value.” SFAS No. ~~159 allows~~157 ~~entities~~also expands disclosures about fair value measurements. SFAS No. 157 is intended to ~~voluntarily~~increase ~~choose,~~consistency atand ~~specified~~comparability ~~election~~among ~~dates~~fair value estimates used in financial reporting. As such, SFAS No. 157 applies to ~~measure~~all ~~many~~other ~~financial~~accounting ~~assets~~pronouncements ~~and~~that ~~financial~~require ~~liabilities~~(or atpermit) fair value. ~~The~~measurements, ~~election~~except isfor ~~made~~the onmeasurement anof ~~instrument~~share-~~by-instrument~~based ~~basis~~payments. ~~and~~SFAS ~~is irrevocable~~No. 157 Ifdoes ~~the~~not ~~fair~~apply ~~value~~to ~~option~~accounting isstandards that require (or permit) measurements that ~~elected~~are ~~for~~similar anto, ~~instrument~~but not intended to represent, fair value. SFAS No. ~~159~~157 ~~specifies~~defines fair value as the price that ~~all~~would ~~subsequent~~be ~~changes~~received to sell an asset or paid to transfer the liability (an exit price) in an orderly transaction between market participants and also establishes a fair value ~~for~~hierarchy ~~that~~which ~~instrument~~requires ~~shall~~an beentity ~~reported~~to inmaximize ~~earnings~~the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS No. ~~159~~157 is effective asfor financial assets and financial liabilities for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FSP 157-2 “Partial Deferral of the ~~beginning~~Effective Date of anStatement ~~entity’s~~157” ~~first~~(FSP ~~fiscal~~157-2), ~~year~~deferred ~~that~~the ~~begins~~effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities to fiscal years beginning after November 15, ~~2007~~2008. WeThe doimplementation ~~not~~of ~~anticipate~~SFAS aNo. 157 ~~material~~for financial assets and financial liabilities, effective January 1, 2008, did not have an impact ~~upon~~on ~~adoption~~our condensed consolidated financial statements. We are currently assessing the impact of SFAS No. ~~159~~157 for non-financial assets and non-financial liabilities on our consolidated financial statements.

In ~~September~~February ~~2006~~2007, the FASB issued SFAS No. ~~157~~159, “The Fair Value ~~Measurements.”~~Option ~~SFAS No. 157 establishes a framework~~ for ~~measuring~~Financial ~~fair~~Assets ~~value in generally accepted accounting principles, clarifies the definition of fair value within that framework,~~ and ~~expands disclosures~~Financial ~~about the use of fair value measurements~~Liabilities.” SFAS No. ~~157~~159 isallows ~~intended~~entities to ~~increase~~voluntarily ~~consistency~~choose, ~~and~~at ~~comparability~~specified ~~among~~election ~~fair value estimates used in financial reporting. As such~~dates, ~~SFAS No. 157 applies~~ to ~~all~~measure ~~other~~many ~~accounting pronouncements~~financial ~~that~~assets ~~require~~and orfinancial ~~permit~~liabilities at fair value. ~~measurements,~~The ~~except~~election ~~for~~is ~~the~~made ~~measurement~~on ofan ~~share~~instrument-~~based~~by-instrument ~~payments.~~basis ~~SFAS~~and Nois irrevocable. ~~157~~ ~~does~~If ~~not~~the ~~apply to accounting standards that require or permit measurements that are similar to, but not intended to represent~~ fair value. ~~Fair~~option ~~value, as defined in SFAS No. 157,~~ is ~~the~~elected ~~price~~for ~~to sell~~ an ~~asset or transfer a liability and therefore represents an exit price~~instrument, ~~not~~SFAS ~~an entry price~~No. 159 ~~The~~specifies ~~exit~~that ~~price~~all issubsequent ~~the~~changes ~~price~~ in ~~the~~fair ~~principal~~value ~~market~~for ~~in which the reporting entity would transact. Further,~~ that ~~price~~instrument isshall ~~not~~be ~~adjusted~~reported ~~for~~in ~~transaction costs~~earnings. SFAS No. ~~157~~159 is effective for fiscal years beginning after November 15, 2007~~, and interim periods within those fiscal years~~. ~~SFAS~~We ~~No. 157~~did ~~will be~~not ~~applied~~elect ~~prospectively as of~~ the ~~beginning~~fair ofvalue ~~the~~option ~~fiscal~~for ~~year~~any infinancial ~~which~~assets itor ~~is initially applied~~liabilities. ~~We are currently assessing the impact of adoption of SFAS No. 157.~~

4In December 2007, the FASB issued SFAS No. 141(R), ~~Acquisition~~“Business Combinations.” SFAS No. 141(R) establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of ~~CipherTrust~~certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration, in-process research and development and certain acquired contingencies. SFAS No. 141(R) requires acquisition-related transaction expenses and restructuring costs to be expensed as incurred rather than capitalized as a component of the business combination. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. Following the adoption of SFAS No. 141(R) any change in an acquisition-related valuation allowance will be reversed to income tax expense rather than goodwill. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. This standard will change our accounting treatment for business combinations on a prospective basis, when adopted.

~~On August 31,~~In ~~2006~~March 2008, ~~we acquired 100% of~~ the ~~outstanding~~FASB ~~common~~issued ~~shares~~SFAS ~~of CipherTrust, Inc~~No. 161, a“Disclosures ~~privately-held~~about ~~company.~~Derivative ~~CipherTrust’s~~Instruments ~~products~~and ~~provide~~Hedging ~~innovative~~Activities ~~layered~~– ~~security~~an ~~solutions~~amendment toof ~~stop~~FASB ~~inbound~~Statement ~~messaging~~No. 133” ~~threats~~(SFAS ~~such~~No. 161). asSFAS ~~spam,~~No. 161 ~~viruses,~~expands ~~intrusions~~quarterly ~~and~~disclosure ~~phishing,~~requirements ~~and~~in ~~protect~~SFAS ~~against~~No. 133 ~~outbound~~about ~~policy~~an ~~and~~entity’s ~~compliance~~derivative ~~violations~~instruments ~~associated~~and ~~with~~hedging ~~sensitive~~activities. ~~data~~SFAS ~~leakage~~No. 161 ~~CipherTrust’s~~is ~~product~~effective ~~line~~for ~~included~~fiscal ~~IronMail®, powered~~years bybeginning ~~TrustedSource™,~~after ~~IronIM™~~November 15, ~~IronMail~~2008. ~~Edge™,~~This ~~IronNet™,~~standard ~~and~~will ~~RADAR™.~~change our Asdisclosures ~~a result~~ of ~~the~~any ~~acquisition~~future wederivative ~~have~~instruments ~~positioned~~and ~~ourselves~~hedging asactivities on a ~~leader~~prospective ~~in the Messaging Gateway Security market. In addition to protecting corporate network infrastructures~~basis, ~~our~~when ~~combined solutions address the fast-growing Web and Messaging Gateway Security needs~~adopted.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of FSP No. 142-3 on our consolidated financial position and results of operations.

4. ~~Acquisition~~Debt ~~of CipherTrust (continued)~~

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

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

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

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

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

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

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

5. Acquisition of CyberGuard

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

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

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

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

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

6. Debt

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

	As ofSeptember 30, 2007			As ofDecember 31, 2006
	As ofJune 30, 2008			As ofDecember 31, 2007
Secured term loan, due August 31, 2013	$	5644,000		$	8844,000
Deferred financing fees, amortized through August 31, 2013		(2,~~629~~359	)		(2,~~977~~539	)
Total debt, net of fees	$	5341,~~371~~641		$	8541,~~023~~461

There were no outstanding amounts on either the revolving credit facility or the swingline loan sub-facility as of June 30, 2008 and December 31, 2007. As of June 30, 2008, there is $800,000 of the revolving credit facility reserved with a standby letter of credit related to the expansion of our St. Paul facility which expires upon termination of our lease.

Senior Secured Credit Facility

On August 31, 2006, we entered into a senior secured credit facility with a syndicate of banks led by Citigroup and UBS Investment Bank. The credit facility provides for a $90.0 million term loan facility, a $20.0 million revolving credit facility, and a swingline loan sub-facility. The proceeds from ~~this~~the ~~transaction~~$90.0 term loan were used to finance a portion of the CipherTrust, ~~acquisition~~Inc. as(“CipherTrust”) ~~noted in Note 4 above~~acquisition. The term loan matures on August 31, 2013 and is payable in 27 scheduled quarterly installments of $225,000, which began in December 2006 with the remaining balance due at maturity. In prior periods, we had been making accelerated payments on the debt with excess cash from operations and, therefore, we were not required to make a ~~final~~quarterly payment offor ~~$83.9~~the ~~million~~quarter ~~due~~ended atJune 30, ~~maturity~~2008. Interest is payable quarterly on the term loan at the London Interbank Offered Rate (“LIBOR”) +3.2500%. The interest rate on the term loan may be adjusted quarterly based on our Leverage Ratio (as defined below) and can range from LIBOR +3.25% to LIBOR +3.00%. The interest rate in effect as of ~~September~~ June 30, ~~2007~~2008 was 85.3670%. Including amortization of deferred financing fees, we incurred $~~1.6~~727,000 ~~million~~ and $51.58 million of interest expense in the three ~~and nine~~ months ended ~~September~~June 30, 2008 and 2007, respectively, and ~~none~~$1.7 and $3.9 million in the ~~same~~six ~~periods of~~months ~~2006~~ended June 30, 2008 and 2007, respectively.

The ~~obligations~~$20.0 ~~under~~million ~~the~~revolving ~~senior secured~~ credit facility ~~are~~expires ~~guaranteed~~on byAugust 31, us2012 ~~and~~with ~~are~~interest ~~secured~~payable byquarterly aat ~~perfected~~LIBOR ~~security~~+ 2.75%. The interest inrate on the ~~substantially~~revolving ~~all~~credit offacility may be adjusted quarterly based on our ~~assets~~Leverage Ratio and can range from LIBOR +3.25% ~~Financing~~to ~~fees~~LIBOR +2.75%. The revolving credit facility also requires that we pay an annual commitment fee of $3.1375%. ~~million~~The ~~incurred~~annual commitment fee, based on our Leverage Ratio and ranging from .5% to .375%, is payable quarterly in ~~connection~~arrears. ~~with~~The Leverage Ratio is defined as the ~~credit~~ratio ~~facility~~of ~~were~~(a) consolidated ~~deferred~~indebtedness to (b) consolidated adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and ~~are~~other ~~included~~adjustments as defined in the agreement). The Leverage Ratio is calculated quarterly on a ~~reduction~~pro toforma ~~our~~basis ~~long-term~~that ~~debt~~includes the four preceding quarters. ~~These~~The ~~fees~~Leverage ~~are~~Ratio ~~being~~calculation ~~amortized~~cannot toexceed ~~interest~~the ~~expense~~following thresholds over the term of the ~~term~~ loan: ~~using~~Fiscal ~~the~~2008—2.50 ~~effective~~to ~~interest~~1.0; ~~rate~~Fiscal ~~method~~2009—2.25 to 1.00; Fiscal 2010 through maturity—2.00 to 1.00.

9The obligations under the senior secured credit facility are guaranteed by us and are secured by a perfected security interest in substantially all of our assets. Financing fees incurred in connection with the credit facility were deferred and are included as a reduction to our long-term debt. These fees are being amortized to interest expense over the term of the term loan using the effective interest rate method.

6. Debt (continued)

Debt Covenants

The credit facility agreement contains various covenants including limitations on additional indebtedness, ~~capital expenditures,~~ restricted payments, the incurrence of liens, transactions with affiliates, and sales of assets. In addition, the credit facility requires us to comply with certain quarterly financial covenants including maintaining leverage and interest coverage ratios and capital expenditure limitations. We ~~are~~were in compliance with all covenants as of ~~September~~June 30, ~~2007~~2008. In order to close the proposed sale of the SafeWord product line described in Note 13, we will be required under the credit facility agreement to either obtain a waiver of the negative covenant regarding assets sales or pre-pay the indebtedness outstanding under the credit facility at the time of closing.

Derivative Instrument

On September 29, 2006, we entered into a 3-month LIBOR interest rate cap agreement to cap the interest rate at 5.5% on $60.0 million, or approximately 67% of the aggregate term loan. The notional amount of the agreement ~~decreases~~decreased $10.0 million each quarter which began March 30, 2007. ~~As of September 30, 2007, the notional amount of the agreement is $30.0 million, or approximately 54% of the aggregate term loan balance.~~ The agreement ~~terminates~~terminated on June 30, 2008. The interest rate cap agreement is was designated as a cash flow hedge and is reflected at fair value in our ~~Condensed~~condensed ~~Consolidated~~consolidated ~~Balance~~balance ~~Sheet~~sheet. The related gains or losses on this contract ~~are~~were deferred in stockholders’ equity as a component of other comprehensive loss. Deferred gains and losses ~~are~~were amortized as an adjustment to expense over the same period in which the related items being hedged ~~are~~were recognized in ~~income. However, to the extent that this contract is not considered to be perfectly effective in~~ ~~offsetting the change in the value of the item being hedged, any change in fair value relating to the ineffective portion of this contract will be immediately recognized in~~ income. The unrealized gain on the interest rate cap agreement ~~is $1,000~~ on our ~~Condensed~~condensed ~~Consolidated~~consolidated ~~Balance~~balance ~~Sheet~~sheet was $0 and $4,000 as of ~~September~~June 30, 2008 and 2007, respectively.

7.8 ~~Equity Financing~~

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

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

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

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

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

85. ~~Comprehensive~~Equity ~~Loss~~Financing

~~During~~On ~~the~~January 12, ~~three~~2006, ~~months~~we ~~ended~~received ~~September 30~~from Warburg Pincus Private Equity IX, ~~2007~~L.P., ~~total~~a ~~comprehensive~~global ~~loss~~private ~~amounted~~equity tofund, $1070.10 million ~~compared~~in togross ~~$7.3~~proceeds ~~million~~from ~~for~~ the ~~same~~issuance ~~period~~of in700,000 ~~2006.~~shares ~~During~~of ~~the~~Series ~~nine~~A ~~months~~Convertible ~~ended~~Preferred Stock ~~September 30,~~(the ~~2007, total~~preferred ~~comprehensive~~stock) ~~loss~~and ~~amounted~~a warrant to ~~$30~~acquire 1.0 million ~~compared~~shares toof ~~$868,000~~our ~~for~~common ~~the~~stock. ~~same~~Based ~~period~~on inthe ~~2006.~~quoted ~~The~~market ~~components~~price of ~~our~~$14.40 ~~comprehensive~~on ~~loss~~January 12, ~~are~~2006 ~~net~~and ~~(loss)/income,~~the ~~foreign~~fair ~~currency~~value ~~translation~~of ~~adjustments,~~the ~~and~~warrant ~~the~~as ~~change~~determined inusing the ~~fair~~Black-Scholes ~~market~~model, ~~value of~~we ~~our~~valued ~~investments~~the ~~and~~preferred ~~interest~~stock ~~rate~~at ~~hedge~~$62.0 ~~Results~~million ofand ~~operations~~the ~~were~~warrant ~~translated~~at ~~using~~$8.0 ~~average~~million. ~~exchange~~The ~~rates~~proceeds ~~throughout~~from ~~the~~this ~~period.~~transaction ~~Translation~~were ~~gains~~used orto ~~losses~~finance ~~are~~most ~~accumulated~~of asthe acash ~~separate~~portion ~~component~~ of ~~stockholders’~~the ~~equity~~CyberGuard ~~and~~Corporation ~~included in comprehensive loss~~acquisition.

9On August 31, 2006, the conversion price for the preferred stock was adjusted from the original price of $13.51 ~~Contingencies~~to $12.75 per share in accordance with an anti-dilution adjustment triggered by the CipherTrust acquisition. Holders of our preferred stock will be entitled to receive benefits not available to holders of our common stock. These benefits include, but are not limited to, the following: (i) beginning in July 2010, shares of preferred stock will be entitled to receive semi-annual dividends, which may be paid in cash or added to the preferred stock liquidation preference, equal to 5% of the preferred stock liquidation preference per year and (ii) each share of preferred stock has an initial liquidation preference of $100 which accretes daily at an annual rate of 5%, compounded semi-annually, until July 2010.

On ~~June~~August 531, 2006, ~~Finjan Software, Ltd. filed a complaint entitled Finjan Software, Ltd. v. Secure Computing Corporation in~~ the ~~United~~exercise ~~States~~price ~~District Court~~ for the ~~District~~warrant ofwas ~~Delaware~~adjusted ~~against~~from ~~Secure~~the ~~Computing~~original ~~Corporation,~~price ~~CyberGuard Corporation,~~of ~~and~~$14.74 ~~Webwasher~~to AG$13.85 ~~The~~per ~~complaint~~share ~~alleged~~also ~~that~~in ~~Secure~~accordance ~~Computing~~with ~~and~~an anti-dilution ~~its~~adjustment ~~named~~triggered ~~subsidiaries~~by ~~infringe~~the ~~U.S.~~CipherTrust ~~Patent No~~acquisition. ~~6,092,194~~ ~~(“‘194~~The ~~Patent”)~~warrant ~~based~~expires on ~~the manufacture~~January 12, ~~use,~~2013. ~~and~~If ~~sale of~~ the ~~Webwasher~~market ~~Secure~~price ~~Content Management~~of ~~suite,~~our ~~CyberGuard~~common ~~TSP,~~stock ~~and~~rises ~~IronMail.~~above Onthe ~~April 10,~~exercise ~~2007~~price, ~~Finjan~~the ~~amended~~warrant ~~its~~will ~~Complaint~~become todilutive ~~allege that Secure Computing~~ and ~~its named subsidiaries infringe U~~1.~~S. Patent No.~~0 ~~6,804,780~~million ~~(“‘780 Patent”) and U.S. Patent~~shares ~~No. 7,058,822~~will ~~(“‘822~~be ~~Patent”)~~immediately ~~based~~included onin the ~~manufacture,~~computation ~~use, and sale~~ of ~~the~~diluted ~~Webwasher~~earnings ~~Secure~~per ~~Content~~share ~~Management~~as ~~suite.~~if ~~Secure Computing denies infringing any valid claims of~~ the ~~‘194~~warrant ~~Patent,~~is ~~the~~exercised ~~‘780~~using ~~Patent, or~~ the ~~‘822~~ ~~Patent.~~treasury ~~The~~stock ~~answer and counterclaims to Finjan’s amended complaint was filed on April 20, 2007~~method. In its counterclaims, Secure Computing alleges that Finjan infringes two Secure Computing patents—U.S. Patent No. 6,357,010 and U.S. Patent No. 7,185,361. Discovery continues with an estimated trial date in March, 2008.

OnThe ~~May 4,~~preferred ~~2007,~~stock ~~Secure~~was ~~Computing filed~~initially arecorded ~~complaint~~at in$62.0 ~~the~~million, ~~United~~which ~~States~~is ~~District~~a ~~Court~~discount ~~for the district~~ of ~~Minnesota against Finjan Software Ltd~~$8.0 ~~and~~million ~~Finjan~~from ~~Software, Inc. In~~ its ~~complaint,~~initial ~~Secure~~liquidation ~~Computing~~value ~~asserts~~of ~~that~~$70.0 ~~Finjan’s~~million ~~load-balancing~~due ~~security solutions, including but not limited~~ to ~~Finjan’s~~the ~~Vital~~fair ~~Security~~value ~~Load~~of ~~Balancer~~warrants ~~NG-5300,~~on ~~infringe~~the ~~U.S.~~effective ~~Patent No~~date. ~~7,171,681.~~ OnThe ~~May 24,~~liquidation ~~2007~~value ~~Secure Computing filed an amended complaint adding additional claims that Finjan is in violation~~ of ~~§43(a) of~~ the ~~Lanham~~preferred ~~Act,~~stock ~~the~~accretes ~~Minnesota~~daily ~~Deceptive~~at ~~Trade~~an ~~Practices~~annual ~~Act,~~rate ~~and~~of ~~Minnesota’s common law~~5%, ~~for~~compounded ~~unfair competition and false advertising~~semi-annually. ~~The~~This ~~complaint~~accretion ~~seeks,~~is ~~among~~recorded ~~other~~as ~~things,~~a ~~unspecified~~reduction ~~monetary damages arising from Finjan’s unauthorized use~~ of ~~Secure~~earnings ~~Computing’s~~attributable ~~patented~~to ~~technology~~common ~~and~~shareholders ratably for ~~Finjan’s~~a ~~continued~~period ~~and~~of ~~willful~~54 ~~false~~months ~~and/or~~after ~~misleading~~date ~~statements in advertising. The matter has been transferred to the United States District Court for the district~~ of ~~Delaware~~issuance.

OnThe ~~January 19,~~preferred ~~2007,~~stock ~~Rosenbaum~~is ~~Capital,~~considered ~~LLC.~~to ~~filed~~be acontingently ~~putative~~redeemable ~~securities~~shares ~~class~~and ~~action~~is ~~complaint~~classified inas ~~the~~temporary ~~United~~equity ~~States~~on ~~District~~our ~~Court~~condensed consolidated balance sheets ~~for~~as the ~~Northern~~change ~~District~~in control of ~~California~~our ~~against~~company ~~Secure~~is ~~Computing~~uncertain and ~~certain~~because ~~directors~~there ~~and~~is ~~officers~~a ofcash ~~the~~feature ~~company.~~related ~~The~~to ~~alleged~~the ~~plaintiff~~settlement ~~class~~of ~~includes~~the ~~persons~~preferred ~~who acquired our~~ stock ~~between~~upon ~~May 4,~~a ~~2006~~change ~~through~~of ~~July 11, 2006~~control. ~~The complaint~~As ~~alleges~~of ~~generally that defendants made false and misleading statements about our business condition and prospects for the fiscal quarter ended~~ June 30, ~~2006,~~2008 inand ~~violation of Section~~December ~~10(b)~~31, ~~and~~2007, ~~20(a)~~none of the ~~Securities~~preferred ~~Exchange~~stock ~~Act~~had ofbeen ~~1934 and SEC Rule 10b-5~~converted. ~~The complaint seeks unspecified monetary damages. The matter is pending.~~

~~On September 21, 2007, Diane Josifovich filed a complaint against Secure Computing in the Superior Court of New Jersey, Somerset County~~6. ~~The~~Comprehensive ~~complaint~~Loss alleges that Secure Computing breached its contract with Ms. Josifovich with respect to payment for commission sales. Related to this allegation, the complaint also alleges claims of promissory estoppel, equitable estoppel, misrepresentation, and breach of the covenant of good faith and fair dealing. The complaint also alleges that Secure Computing retaliated against Ms. Josifovich and created a hostile work environment on the basis of Ms. Josifovich’s gender. The complaint seeks unspecified monetary damages. The matter is pending. We intend to vigorously defend all claims against us.

~~From~~During ~~time~~the tothree ~~time~~months weended ~~may~~June 30, be2008 ~~engaged~~and in2007, ~~certain~~total ~~other~~comprehensive ~~legal~~loss ~~proceedings~~amounted to $11.1 million and ~~claims~~$10.9 ~~arising~~million, inrespectively. During the ~~ordinary~~six ~~course~~months ofended ~~our~~June 30, ~~business.~~2008 ~~The ultimate~~and ~~liabilities~~2007, iftotal ~~any,~~comprehensive ~~which~~loss ~~may~~amounted ~~result~~to $29.2 ~~from~~million ~~these~~and or$19.9 ~~other~~million, ~~pending~~respectively. orThe ~~threatened~~components ~~legal~~of ~~actions~~our ~~against~~comprehensive usloss ~~cannot~~are benet ~~determined~~loss, atforeign ~~this~~currency ~~time.~~translation ~~However~~adjustments, and the change in the ~~opinion~~fair market value of ~~management,~~our ~~the~~interest ~~facts~~rate ~~known~~hedge. atResults ~~the~~of ~~present~~operations ~~time~~were dotranslated using ~~not~~average ~~indicate~~exchange ~~that~~rates ~~such litigation~~throughout ~~will~~the ~~have~~period. aTranslation ~~material~~gains ~~effect~~or onlosses ~~our~~are ~~consolidated~~accumulated ~~financial~~as ~~position~~a orseparate ~~results~~component of ~~operation~~stockholders’ equity and included in comprehensive loss.

107. ~~Income~~Contingencies ~~Taxes~~

~~During~~On ~~the three months ended September~~June 305, ~~2007~~2006, weFinjan ~~recorded~~Software, ~~income~~Ltd. ~~tax~~filed ~~expense~~a ofcomplaint $3entitled Finjan Software, Ltd.6 ~~million~~v. ~~The~~Secure ~~$3.6~~Computing ~~million~~Corporation ~~income~~in ~~tax~~the ~~expense~~United ~~consists~~States District Court for the District of $2 Delaware against Secure Computing Corporation, CyberGuard Corporation, and Webwasher AG.4 ~~million~~The ofcomplaint ~~non-cash~~alleged that Secure Computing and its named subsidiaries infringe U.S. ~~tax~~Patent ~~expense~~No. 6,092,194 ~~associated~~(‘194 ~~with~~Patent) based on the ~~need~~manufacture, touse, ~~provide~~and ~~additional~~sale ~~tax~~of ~~expense~~the ~~for~~Webwasher ~~valuation~~Secure ~~allowance~~Content onManagement ~~net~~suite ~~operating~~and ~~losses~~CyberGuard TSP. ~~$875~~On April 10,~~000~~ ~~tax~~2007, ~~expense~~Finjan ~~for~~amended ~~various~~its ~~foreign~~Complaint ~~income~~to ~~taxes~~allege that Secure Computing and ~~$338,000~~its ~~for~~named ~~United~~subsidiaries ~~States~~infringe ~~Federal~~U.S. ~~and State~~Patent ~~regular~~No. 6,804,780 ~~income~~(‘780 ~~tax~~Patent) ~~expense~~and U.S. ~~This~~Patent isNo. 7,058,822 ~~compared~~(‘822 ~~with~~Patent) anbased ~~income~~on ~~tax~~the ~~expense~~manufacture, ofuse, ~~$1.4~~and ~~million~~sale inof the ~~same~~Webwasher ~~period~~Secure ofContent ~~2006~~Management suite. Secure ~~The~~Computing ~~$1.4~~denies ~~million~~infringing any valid claims of ~~income~~the ~~tax~~‘194 ~~expense~~Patent, ~~was~~the ~~related~~‘780 toPatent, ~~current~~or ~~income~~the ~~tax~~‘822 ~~components~~Patent. ~~such~~The asanswer ~~the~~and ~~utilization~~counterclaims ofto ~~net~~Finjan’s ~~operating losses~~amended complaint were filed on April 20, ~~alternative~~2007. ~~minimum~~In ~~income~~its ~~tax~~counterclaims, Secure ~~and~~Computing ~~state~~alleges that Finjan infringes two Secure Computing patents—U.S. Patent No. 6,357,010 and ~~foreign~~U.S. ~~income~~Patent ~~taxes~~No. 7,185,361.

11The case was tried before a jury in Delaware in March 2008. The jury entered a verdict in favor of the plaintiff on March 12, 2008 and the District Court entered judgment on March 28, 2008. The jury found that Secure Computing infringed certain claims of Finjan’s patents and awarded damages in favor of Finjan in the amount of $9.2 million. The jury also found that the patents asserted by Secure Computing are valid but that Finjan has no liability to Secure Computing under our asserted patents. As a result of the jury verdict in the case, we recorded a $9.2 million pre-tax charge, which is a reasonable estimate of the probable loss, if the jury verdict is not reduced, set aside or overturned. The jury’s verdict, including the damage award, is subject to the outcome of the post-verdict motions described below.

On March 27, 2008, Secure Computing filed a combined motion for judgment as a matter of law, new trial, and/or remittitur, asking the trial court to set aside the jury’s verdict, to reduce or eliminate the damages award, and/or for a new trial, which motions were renewed on April 10, 2008. ~~Income~~On ~~Taxes~~April 4, ~~(continued)~~2008, Finjan filed amended motions for an injunction, enhanced damages, interest, attorneys’ fees, costs, expenses and an accounting of damages. Finjan also filed a motion for judgment as a matter of law to set aside the jury’s verdict that Secure Computing’s patents are valid. On April 7, 2008, Secure Computing filed a motion to stay execution of the judgment pending the post-trial motions. Briefing for these motions was completed on May 16, 2008. All of the motions remain pending. At this time, it is not possible to predict the timing or outcome of these motions or reasonably estimate the additional amount of loss, if any, that Secure Computing might suffer. We believe that the allegations included in the complaint are wholly without merit and intend to defend this litigation vigorously. If necessary, we will appeal the trial court’s decision to the Federal Circuit Court of Appeals.

~~During~~On ~~the nine months ended September~~January 3019, 2007, weRosenbaum ~~recorded~~Capital, ~~income~~LLC ~~tax~~filed ~~expense~~a ofputative ~~$6.6~~securities ~~million.~~class ~~The~~action ~~$6.6~~complaint ~~million income~~in ~~tax~~the ~~expense~~United ~~consists~~States ofDistrict ~~$2.4~~Court ~~million~~for ofthe ~~non-cash~~Northern ~~U.S.~~District ~~tax~~of ~~expense~~California ~~associated~~against ~~with~~Secure ~~the~~Computing ~~need~~and tocertain directors ~~provide~~and ~~additional~~officers ~~tax~~of ~~expense~~Secure ~~for~~Computing. ~~valuation~~The ~~allowance~~alleged onplaintiff ~~net~~class ~~operating~~includes ~~losses,~~persons ~~$2.4~~who ~~million~~acquired ~~tax~~our ~~expense~~stock ~~for~~between ~~various~~May 4, ~~foreign~~2006 ~~taxes~~and July 11, $12006.4 ~~million~~The ~~of non-cash~~complaint ~~foreign~~alleges ~~tax~~generally ~~expense~~that ~~associated~~defendants ~~primarily~~made ~~with~~false ~~the~~and ~~release~~misleading ofstatements about ~~valuation~~our ~~allowance~~business oncondition ~~utilized~~and ~~acquired~~prospects ~~net~~for ~~operating losses where~~ the ~~benefit~~fiscal ofquarter ~~the~~ended ~~release is offset to goodwill~~June 30, ~~and $440~~2006,~~000~~ ~~for~~in ~~United~~violation ~~States~~of ~~Federal~~Section 10(b) and ~~State~~20(a) ~~regular income~~of ~~tax~~the ~~expense.~~Securities ~~This~~Exchange isAct ~~compared~~of ~~with~~1934 anand ~~income~~SEC ~~tax~~Rule ~~benefit of $~~10b-5.9 ~~million~~The incomplaint ~~the~~seeks ~~same~~unspecified ~~period~~monetary ~~of 2006~~damages. After Ofplaintiff ~~this~~filed ~~$5.9~~an ~~million~~amended ~~income~~complaint ~~tax~~on ~~benefit~~July 2, a2007, ~~non-cash~~the ~~benefit~~defendants offiled ~~$7.3~~a ~~million~~motion ~~was related~~ to ~~the~~dismiss. ~~reversal~~The oftrial ~~the~~court ~~previously~~denied ~~recorded~~that ~~tax valuation~~motion ~~allowance~~ on ~~our~~March 4, ~~non-acquired~~2008. ~~net~~The ~~operating~~defendants ~~losses~~filed asanswers ~~we had determined it~~ to bethe ~~more~~amended ~~likely~~complaint ~~than~~on ~~not~~April 25, ~~that~~2008, aand discovery ~~portion~~is ofproceeding. ~~our~~The ~~existing~~next ~~deferred~~status ~~tax~~conference ~~assets~~with ~~would be realized;~~ the ~~remainder~~court ofis ~~the~~scheduled ~~income~~for ~~tax~~November 21, ~~expense~~2008. ~~was~~We ~~related~~believe tothat ~~current income~~our ~~tax~~public ~~components~~statements ~~such~~during as the ~~utilization~~class ofperiod ~~net~~were ~~operating~~timely ~~losses,~~and ~~alternative~~accurate. ~~minimum~~We ~~income~~and ~~tax,~~the ~~and~~other ~~state~~defendants ~~and~~intend ~~foreign~~to ~~income~~defend ~~taxes~~the claims vigorously.

InOn ~~accordance~~September 21, ~~with~~2007, ~~SFAS~~Diane ~~No. 109,~~Josifovich wefiled ~~have~~a ~~assessed~~complaint ~~the~~against ~~likelihood~~Secure ~~that~~Computing in the ~~net~~Superior ~~deferred~~Court ~~tax~~of ~~assets~~New Jersey, ~~will~~Somerset ~~be realized~~County. ~~SFAS~~The Nocomplaint alleges that Secure Computing breached its contract with Ms. ~~109,~~Josifovich ~~“Accounting~~with respect to payment for ~~Income~~commission ~~Taxes,”~~sales. ~~requires~~The ~~the~~complaint ~~consideration~~also ofasserts aclaims ~~valuation~~of ~~allowance~~promissory inestoppel, ~~all~~equitable estoppel, ~~circumstances~~misrepresentation, ifand ~~the~~breach ~~conclusion~~of isthe ~~not~~covenant ~~more~~of ~~likely~~good ~~than~~faith ~~not~~and afair ~~valuation~~dealing. ~~allowance~~The iscomplaint ~~required.~~also Wealleges ~~have~~that aSecure ~~net~~Computing ~~deferred~~retaliated ~~tax~~against ~~liability~~Ms. Josifovich ~~recorded~~and increated ~~our~~a ~~consolidated~~hostile ~~balance~~work ~~sheet~~environment ~~that~~on ~~consists~~the ~~primarily~~basis of ~~indefinite~~Ms. Josifovich’s gender. ~~lived~~The ~~intangible~~complaint ~~assets~~seeks ~~which cannot~~unspecified bemonetary ~~used~~damages. toThe ~~realize~~case ~~additional~~was ~~reversing~~removed ~~deferred~~to ~~tax~~the ~~assets.~~United InStates ~~accordance~~District ~~with~~Court ~~SFAS~~for ~~No. 109,~~the ~~our~~District ~~remaining~~of ~~non-current~~New ~~deferred~~Jersey. ~~tax~~In ~~liabilities~~February ~~are~~2008, ~~netted~~the ~~with~~plaintiff ~~our~~amended ~~non-current~~her ~~deferred~~complaint ~~tax~~to ~~assets~~add ~~and~~some ~~are~~additional ~~presented~~allegations, asincluding a ~~single amount in~~ ~~our~~claim ~~consolidated~~that ~~balance~~she ~~sheet.~~was Weallegedly ~~have~~retaliated ~~determined~~against ~~that~~by ~~the~~being ~~deferred~~placed ~~tax~~on ~~assets,~~a ~~above~~performance ~~the~~improvement ~~amount~~plan ofand ~~non-current~~terminated. ~~deferred~~Secure ~~tax~~Computing ~~liabilities~~has ~~netted~~answered ~~with~~ the ~~deferred~~complaint, ~~tax~~denying ~~assets,~~all ~~are~~of ~~not~~Ms. Josifovich’s ~~more~~claims ~~likely~~and ~~than~~denying ~~not~~any toliability. beThis ~~realized~~matter ~~and~~is pending, aswith ~~such~~discovery aproceeding. ~~full~~We ~~valuation allowance~~intend ~~has~~to ~~been~~vigorously ~~placed~~defend onthe ~~this~~claims ~~remaining~~against ~~amount~~us.

11From time to time we may be engaged in certain other legal proceedings and claims arising in the ordinary course of our business. ~~Related~~The ~~Party~~ultimate ~~Transaction~~liabilities, if any, which may result from these or other pending or threatened legal actions against us cannot be determined at this time. However, in the opinion of management, the facts known at the present time do not indicate that such litigation will have a material effect on our consolidated financial position or results of operations.

~~In February 2005, we made a strategic investment in a privately-held technology company of $2~~8.7 ~~million.~~Income InTaxes July 2007, we made an additional $500,000 investment. As a result of this $3.2 million investment, we have a 15% ownership stake in this company. This investment is reported in other assets on our Condensed Consolidated Balance Sheets and is evaluated for impairment annually.

~~Two~~During the three months ended June 30, 2008, we recorded income tax expense of ~~our~~$396,000. ~~board~~The ~~members~~$396,000 ~~one~~income tax expense consists of ~~whom~~$228,000 isof anon-cash ~~board~~foreign ~~member~~tax expense associated primarily with the release of valuation allowance on utilized acquired NOLs where the benefit ~~investee~~of the release is offset to goodwill, ~~are~~$51,000 ~~individual~~of ~~investors~~non-cash U.S. tax expense related to deferred tax liabilities, $99,000 of cash tax expense for various foreign taxes, and $18,000 associated with state income tax expense for prior periods. This is compared with an income tax expense of $2.6 million in the ~~investee~~same period of 2007. ~~Due~~Of this $2.6 million of income tax expense, $1.7 million is related to ~~their~~non-cash ~~involvement~~foreign tax expense associated primarily with the release of valuation allowance ~~investee~~on utilized acquired NOLs where the benefit of the release is offset to goodwill, ~~these~~$724,000 ~~two~~is ~~board~~related ~~members~~to ~~recused~~various ~~themselves~~other ~~from~~foreign ~~our~~income ~~decisions~~taxes, and $214,000 is related to ~~make~~U.S. ~~the~~Federal ~~investments~~and state income tax expense.

12During the six months ended June 30, 2008, we recorded income tax expense of $1.2 ~~Segment~~million. ~~Information~~The $1.2 million of income tax expense consists of $660,000 of non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired NOLs where the benefit of the release is offset to goodwill, $270,000 of non-cash U.S. tax expense of which a portion relates to deferred tax liabilities, $185,000 of tax expense for various foreign taxes, and $71,000 associated with state income tax expense for prior periods. This is compared with an income tax expense of $3.0 million in the same period of 2007. Of this $3.0 million of income tax expense, $214,000 was related to U.S. Federal and state regular income tax expense, $977,000 was related to various other foreign income taxes, and $1.7 million was related to non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired NOLs where the benefit of the release is offset to goodwill.

WeIn accordance ~~view~~with ~~our~~SFAS ~~operations~~No. 109, ~~and~~“Accounting ~~manage~~for ~~our~~Income ~~business~~Taxes,” aswe ~~one~~have ~~segment~~assessed ~~called~~the ~~enterprise~~likelihood ~~security~~that ~~solutions~~the net deferred tax assets will be realized. ~~Major~~SFAS ~~foreign~~No. 109 ~~markets~~requires ~~for~~the ~~our~~consideration ~~products~~of ~~and~~a ~~services include~~valuation ~~Europe,~~allowance ~~Japan,~~in ~~China~~all circumstances, if the ~~Pacific~~conclusion ~~Rim,~~is ~~and~~not ~~Latin~~more ~~America.~~likely Inthan ~~each~~not ~~market,~~a wevaluation ~~have~~allowance ~~independent~~is ~~channel~~required. ~~partners~~We ~~who~~have ~~are~~recorded ~~responsible~~a ~~for~~deferred ~~marketing,~~tax ~~selling~~liability ~~and~~in ~~supporting~~ our ~~products~~condensed ~~and~~consolidated ~~services~~balance tosheet ~~resellers~~for ~~and~~indefinite ~~end-users~~lived ~~within~~intangible ~~their defined~~assets ~~territories.~~that ~~International~~are ~~sales~~not ~~accounted~~deductible for tax ~~31%~~purposes and ~~32%~~therefore ofcannot ~~total~~be ~~revenue~~used ~~for~~to ~~the~~realize ~~three~~additional ~~months~~reversing ~~ended~~deferred ~~September 30,~~tax ~~2007~~assets. ~~and~~We ~~2006,~~also ~~respectively~~have ~~and~~a ~~34%~~deferred ~~and~~tax ~~40%~~asset ~~for~~that ~~the~~is ~~nine~~able ~~months~~to ~~ended~~be ~~September 30,~~recognized ~~2007~~as ~~and~~a ~~2006,~~result ~~respectively~~of the FIN 48 liabilities that are recorded. ~~The~~ ~~following~~In ~~table~~accordance ~~summarizes~~with SFAS No. 109, our ~~domestic~~remaining ~~and~~noncurrent ~~international~~deferred ~~revenue~~tax ~~(in~~liabilities ~~thousands):~~are netted with our

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

13 noncurrent deferred tax assets and are presented as a single amount in our condensed consolidated balance sheet. ~~Share-Based~~We ~~Compensation~~have determined that primarily all of our net deferred tax assets are not more likely than not to be realized, and as such a full valuation allowance has been placed on this amount.

9. Related Party Transaction

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

One of our board members is currently an individual investor of the investee. At the time that the decisions were made to make both investments, a former board member was also involved with the investee and these two board members recused themselves from the decisions.

10. Segment Information

We view our operations and manage our business as one segment called enterprise security solutions. Major foreign markets for our products and services include Europe, Japan, China, the Pacific Rim, the Middle East, Australia, and Latin America. In each market, we have independent channel partners who are responsible for marketing, selling and supporting our products and services to resellers and end-users within their defined territories. International sales accounted for 36% and 35% of total revenue for the three months ended June 30, 2008 and 2007, respectively, and 39% and 36% of total revenue for the six months ended June 30, 2008 and 2007, respectively. The following table summarizes our domestic and international revenues (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Revenues:
Domestic	$	39,452	$	37,646	$	75,252	$	71,583
International		22,252		20,002		47,155		39,837

Total	$	61,704	$	57,648	$	122,407	$	111,420

11. Share-Based Compensation

Description of Plans

Under our 2002 Stock Incentive Plan (2002 Plan), we are permitted to grant incentive and non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, and other similar types of stock awards, such as phantom stock rights, to our employees and non-employee directors. There were a total of 8 10.50 million shares authorized under the 2002 Plan at ~~September~~June 30, ~~2007~~2008. All options granted under the 2002 Plan through ~~September~~June 30, ~~2007~~2008 have exercise prices equal to the fair market value of our stock on the date of grant. ~~Options~~ Options granted under the 2002 Plan have ten-year terms and typically vest 25% after the first year and then monthly over the following three years. In 2006, we granted restricted stock awards under the 2002 Plan primarily to certain executive officers and non-employee directors. In addition to issuing stock options, during the first quarter of 2007 we began issuing restricted stock awards and restricted stock units for employees at all job levels. Restricted stock awards granted under the 2002 Plan typically vest 25% after the first year and then quarterly over the following three years. Outstanding awards that were originally granted under several predecessor plans also remain in effect in accordance with their terms.

~~The~~Our 1995 Omnibus Stock Plan along with the N2H2 Stock Option Plans, the CyberGuard Stock Option Plans, and the Secure Computing 2000 Stock Plan (formerly the CipherTrust 2000 Stock Option Plan), which were assumed in connection with our acquisitions, are described more fully in Note 10 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, ~~2006~~2007, as filed with ~~Securities~~the ~~and~~SEC. ~~Exchange~~No ~~Commission~~additional awards may be granted under the 1995 Omnibus Stock Plan.

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

Share-Based Compensation Expense

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

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of product revenues	$	74	$	108	$	155	$	211
Cost of service revenues		208		208		239		393
Selling and marketing		1,418		2,461		3,520		4,417
Research and development		953		1,013		1,954		1,935
General and administrative		535		542		1,090		1,101

Increase of loss before taxes	$	3,188	$	4,332	$	6,958	$	8,057

Effect on basic and diluted loss per share	$	0.05	$	0.07	$	0.10	$	0.12

As of June 30, 2008, there was $30.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.8 years.

12. Fair Value Measurement

In September 2006, the FASB issued SFAS No. 157 which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands disclosures about fair-value measurements. We adopted SFAS No. 157 effective January 1, 2008 for all financial assets and liabilities and any other assets and liabilities that are recognized or disclosed at fair value on a recurring basis. Although the adoption of SFAS No. 157 did not impact our financial condition, results of operations or cash flows, we are required to provide additional disclosures within our condensed consolidated financial statements.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer the liability (an exit price) in an orderly transaction between market participants and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy within SFAS No. 157 distinguishes between three levels of inputs that may be utilized when measuring fair value including level 1 inputs (using quoted prices in active markets for identical assets or liabilities), level 2 inputs (using inputs other than level 1 prices such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability) and level 3 inputs (unobservable inputs supported by little or no market activity based on our own assumptions used to measure assets and liabilities). A financial asset or liability’s classification within the above hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Our financial assets measured at fair value on a recurring basis of $19.2 million as of June 30, 2008 consisted of money market funds and commercial paper. We used level 1 inputs to determine the fair value of our financial assets.

13. Subsequent Event

On July 30, 2008 we announced our agreement to sell the Secure SafeWord product line to Aladdin Knowledge Systems for $64.3 million in cash, including acquisition costs. In connection with the proposed sale, certain employees from our SafeWord research and development group and our corporate sales team are expected to be hired by Aladdin Knowledge Systems. The sale is subject to certain closing conditions which are contained in the asset purchase agreement. The transaction is expected to close in late August or September 2008.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

The following discussion contains certain forward-looking statements, including statements regarding our expectations, beliefs, intentions, or strategies regarding the future. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. The risks and uncertainties are summarized in the forward-looking statements below and in the other documents that we file with the Securities Exchange Commission, such as our Annual Report on Form 10-K for the year ended December 31, 2006. These forward-looking statements reflect our view only as of the date of this report. We cannot guarantee future results, levels of activity, performance, or achievement. We do not undertake any obligation to update or correct any forward-looking statements.

EXECUTIVE OVERVIEW

We are a ~~leading~~global ~~provider~~leader of in enterprise ~~gateway~~ security solutions. ~~Our~~that ~~best~~proactively protect our customers’ mission-~~of-breed~~critical ~~portfolio~~business ofapplications ~~Gateway~~and ~~Security~~desktop ~~solutions~~users ~~provides~~from ~~Web~~all ~~Gateway,~~manner ~~Messaging~~of ~~Gateway,~~Internet-borne and ~~Network~~internal ~~Gateway~~threats. ~~Security,~~Our ascomprehensive ~~well~~portfolio asof ~~Identity~~Secure ~~and~~Web, ~~Access~~Secure ~~Management~~Mail, ~~that~~Secure ~~are~~Firewall, ~~further~~and ~~differentiated~~Secure bySafeWord ~~the~~solutions provide ~~proactive~~unmatched protection ~~provided~~for bythe ~~TrustedSource (global intelligence)~~enterprise.

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

We continue to ~~execute~~evolve onall ~~our~~of ~~strategy to significantly increase~~ our ~~presence~~products ~~in the industry and~~ to ~~define~~meet ~~and become~~ the ~~leader~~needs ~~in the enterprise gateway security market. We believe that our acquisitions~~ of ~~CyberGuard and CipherTrust in 2006 have laid a strong foundation for~~ our ~~future~~customers ~~success.~~either ~~During the first quarter of 2007 we completed the~~through ~~development~~maintenance ~~that~~or ~~merged~~feature ~~the~~releases ~~acquired~~each CyberGuard Firewall/VPN technologies (TSP and Classic) with our Sidewinder G2® Security Appliance resulting in our next generation Network Gateway Security appliance called Sidewinder 7.0. During the second quarter ~~of 2007 we expanded our reseller channel through a new channel partner program that rewards partners that register and secure sales opportunities in strategic target market segments~~. In addition, we ~~integrated~~introduced ~~our~~the ~~CipherTrust~~following ~~acquired~~major ~~TrustedSource~~product ~~technology into our CyberGuard acquired SnapGear® firewall~~and/~~VPN~~or ~~appliance~~service ~~for~~releases ~~small and medium-sized businesses (SMB) and remote offices resulting~~ in ~~an industry leading, next generation SMB Network Security Appliance~~2008. We also released a newly enhanced version of our award-winning web filtering solution, SmartFilter® 4.2 with acquired TrustedSource technology which marks our fourth product integration with TrustedSource, our global reputation system. In the ~~third~~first quarter of ~~2007 we completed development and released Webwasher 6.6. In addition~~2008, we completed development on IronMail 6.7 and will be providing that product to our customers in the fourth quarter. With these releases, all current version appliances for our Web, Messaging, and Network Gateway products are ~~consolidated to a common set of appliance platforms.~~

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

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

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

~~International~~ released ~~sales~~SafeWord® ~~accounted~~2008, ~~for~~a ~~31%~~new ~~and~~version ~~34%~~ of ~~total~~our ~~revenue~~award-winning ~~during~~two-factor authentication solution, which is designed for the ~~three~~latest ~~months~~64-bit Windows environments, including Vista and ~~nine~~Windows ~~months ended~~2008 ~~September 30~~Server, ~~2007,~~with ~~respectively~~seamless integration to Microsoft Active Directory. In ~~Major~~the ~~foreign~~second ~~markets~~quarter ~~for~~of ~~our~~2008 ~~products~~we ~~include~~announced ~~Europe,~~the ~~Japan,~~availability ~~China~~of Secure Web Protection Service, the ~~Pacific~~industry’s ~~Rim~~first software-as-a-service (SaaS) Web security solution providing reputation-based protection from malware and ~~Latin~~other ~~America~~Web-borne threats. We Inalso ~~each~~unveiled ~~market~~Secure Firewall Geo-Location, wea ~~have~~new ~~independent~~service ~~channel~~that ~~partners~~allows organizations ~~responsible~~to ~~for~~create ~~marketing,~~policies ~~selling~~that ~~and supporting~~block ~~our~~connections ~~products~~by toan ~~resellers~~IP ~~and~~address ~~end~~(for ~~users~~any network protocol/application) based on country code information.

In April 2008, we took actions to reduce company expenses by approximately 10%. In support of this, we incurred $1.5 million in severance and related costs by eliminating 75 positions throughout the company.

During the second quarter of 2008, we also increased our focus and investments in the enterprise gateway areas of our business with an emphasis on Web and hosted security. We believe that this plan will allow us to better capitalize on the market opportunities in these areas, expand our operational leverage and ultimately provide stronger top and bottom line growth for the company.

On April 22, 2008, John McNulty resigned as our Chief Executive Officer and Chairman of the Board of Directors. As a result, we incurred $719,000 in severance and related costs. The Board of Directors has since appointed Richard Scott, a director since January 2006, as Chairman. Mr. McNulty will continue to serve as a director. On July 15, 2008, the Board of Directors appointed Daniel Ryan as our Chief Executive Officer and he continues to serve as our President.

On July 30, 2008 we announced the sale of the Secure SafeWord product line to Aladdin Knowledge Systems for $64.3 million in cash, including acquisition costs. In connection with the proposed sale, certain employees from our SafeWord research and development group and our corporate sales team are expected to be hired by Aladdin Knowledge Systems. The sale is subject to certain closing conditions which are contained in the asset purchase agreement. The transaction is expected to close in late August or September 2008. The sale of Secure SafeWord enables us to redouble our focus in our areas of greatest strength and expertise – delivering comprehensive and integrated Web, mail and network gateway appliances.

Our Enterprise Security Solutions revenue represented 89% of total revenue in the second quarter of 2008, a 10% or $4.9 million increase over the prior year. The increase was driven by sustained demand for network security solutions. Our Secure SafeWord revenue represented 11% of total revenue in the second quarter of 2008, an 11% or $874,000 decrease over the prior year. This decrease was primarily driven by the launch of our SafeWord^® 2008 product line in the first quarter of 2008 for which we are unable to establish vendor specific objective evidence (VSOE) of fair value on the undelivered elements; therefore, the majority of revenue from this product line has been deferred and is being recognized as revenue over the service period. To a lesser extent, revenue decreased due to fewer significant sized purchases in this period compared to the same period of the prior year.

Our Enterprise Security Solutions revenue represented 88% of total revenue for the six months ending June 30, 2008, a 14% or $12.8 million increase over the prior year. The increase was driven by sustained demand for network security solutions. Our Secure SafeWord revenue represented 12% of total revenue for the six months ending June 30, 2008, an 11% or $1.8 million decrease over the prior year. This decrease was primarily driven by the launch of our SafeWord^® 2008 product line in the first quarter of 2008 for which we are unable to establish VSOE of fair value on the undelivered elements; therefore, the majority of revenue from this product line has been deferred and is being recognized as revenue over the service period. To a lesser extent, revenue decreased due to fewer significant sized purchases in this period compared to the same period of the prior year.

Our global footprint now encompasses more than 22,000 customers operating some of the largest and most sensitive networks and applications in the world. Our partners and customers include the majority of the Dow Jones Global 50 Titans and numerous organizations in the Fortune 1,000, as well as banking, financial services, healthcare, real estate, telecommunications, manufacturing, public utilities, schools and federal, state and local governments. We also have close relationships with the largest agencies in the U.S. government.

International sales accounted for 36% and 39% of total revenue for the three months and six months ended June 30, 2008, respectively. Major foreign markets for our products include Europe, Japan, China, the Pacific Rim, the Middle East, Australia and Latin America. In each market, we have independent channel partners responsible for marketing, selling and supporting our products to resellers and end-users. Our market presence has continued to expand through our extensive worldwide channel of value-added resellers, distributors, and OEM partners. These channel partners generated 92% and 90% of our sales for the three months and six months ended June 30, 2008, respectively, compared to 87% and 86% for the same periods ended June 30, 2007, respectively.

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

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

We incurred a net loss of $1011.10 million in the three months ended ~~September~~June 30, ~~2007~~2008 compared to a net loss of $710.39 million in the same period ~~in 2006.~~of 2007. For the ~~nine~~six months ended ~~September~~June 30, ~~2007~~2008, we incurred a net loss of $3129.64 million, compared to ~~net~~a ~~income of $25,000 for the same period in 2006. The~~ net loss ~~is a result~~ of the acquired and assumed CipherTrust expenses which currently run higher than the corresponding gross profit generated by the acquired CipherTrust product line, along with additional share-based compensation and amortization of acquired intangible assets due to the acquisition$21.5 million ~~Until we are able to~~ establish vendor specific objective evidence (VSOE) on the sales of our Messaging Gateway product line and our revenue outpaces our operating expenses, including share-based compensation and amortization of intangible assets, we expect to generate net losses going forward. For further explanation of VSOE and our revenue recognition policy please refer to the “Critical Accounting Policies and Estimates” section below.

As13 of September 30, 2007, we had $10.7 million in cash, cash equivalents and restricted cash with no outstanding borrowings on our revolving credit facility. We generated $37.4 million in cash from operations for the nine months ended September 30, 2007 of which $32.0 million was used to pay down our outstanding term loan balance. As of September 30, 2007, the outstanding term loan balance, net of deferred financing fees, was $53.4 million and we were in compliance with all debt covenants. We expect to continue to generate cash during 2007 as we expect billings to grow at a faster rate than operating expenses.

for the same period in 2007. Until our revenue outpaces our operating expenses, including share-based compensation and amortization of intangible assets, we expect to generate net losses going forward. For further explanation of VSOE and our revenue recognition policy, refer to Note 3 in the Notes to the Financial Statements.

As of June 30, 2008, we had $21.6 million in cash, cash equivalents and restricted cash with no outstanding borrowings on our $20.0 million revolving credit facility. We generated $15.9 million in cash from operations for the six months ended June 30, 2008. We were not required to make a quarterly payment on our term debt as of June 30, 2008 because we made accelerated payments in prior years. As of June 30, 2008, our term debt balance, net of fees, was $41.6 million and we were in compliance with all debt covenants. We expect to generate cash during 2008 as we expect billings to continue to grow at a faster rate than operating expenses.

RESULTS OF OPERATIONS

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

	Three Months EndedSeptember 30,				Nine Months EndedSeptember 30,
	Three Months EndedJune 30,				Six Months EndedJune 30,
	2007		2006		2007		2006
	2008		2007		2008		2007
Revenues:
Products	5247	%	6453	%	5447	%	6555	%
Services	3132		3632		3234		3532
Other (See Note)	1721		—15		1419		—13
Total revenues	100		100		100		100
Cost of revenues:
Products	1619		1816		1618		1817
Services	7		78		7		67
Other (See Note)	24		—2		23		—2
Amortization of purchased intangibles	3		24		43		34
Total cost of revenues	2833		2730		2931		2730
Gross profit	7267		7370		7169		7370
Operating expenses:
Selling and marketing	4950		5452		5150		4652
Research and development	1920		2019		1920		19
General and administrative	79		86		79		87
Amortization of purchased intangibles	54		65		54		65
Litigation settlement	—		—		—8		1—
Total operating expenses	8083		8882		8291		8083
Operating loss	(816	)	(1512	)	(1122	)	(713	)
Other (expense)/income	(3	)	1		(4	)	2
Other expense	(1	)	(3	)	(1	)	(4	)
Loss before taxes	(1117	)	(1415	)	(1523	)	(517	)
Income tax (expense)/benefit	(6	)	(3	)	(4	)	5
Income tax expense	(1	)	(5	)	(1	)	(3	)
Net (loss)/income	(17	)	(17	)	(19	)	0
Net loss	(18	)	(20	)	(24	)	(20	)
Preferred stock accretion	(1	)	(21	)	(12	)	(21	)
Charge from beneficial conversion of preferred stock	—		—		—		(10	)
Net loss applicable to common shareholders	(19	)%	(21	)%	(26	)%	(21	)%
Net loss applicable to common shareholders	(18	)%	(19	)%	(20	)%	(12	)%

NOTE:

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

Comparison of Three Months Ended ~~September~~June 30, ~~2007~~2008 and ~~2006~~2007.

Revenues. Our total revenues increased 377% to $6061.07 million for the three months ended ~~September~~June 30, ~~2007~~2008 up from $4357.76 million in the same period of ~~2006~~2007. Our products revenues ~~increased~~decreased 117% to $3128.0 7 million for the three months ended ~~September~~ June 30, ~~2007~~2008 updown from $2730.97 million in the same period of ~~2006~~2007. Our services revenues increased 228% to $19.09 million for the three months ended ~~September~~June 30, ~~2007~~2008 up from $1518.65 million in the same period of ~~2006~~2007. Other revenues increased 55% to $1013.01 million for the three months ended ~~September~~June 30, ~~2007~~2008 up from $~~239,000~~8.4 million in the same period of ~~2006~~2007. ~~The~~Other ~~$10.0 million or 17% of total~~ revenue ~~and~~represents ~~the $239,000 were attributable to~~ multiple element sales that lacked VSOE in the prior periods and became recognizable inas ~~the~~services ~~three~~were ~~months~~provided in ~~ended~~2008 ~~September 30, 2007~~ and ~~September 30~~2007, ~~2006,~~ respectively. This revenue is primarily from ~~our Messaging Gateway product line revenues.~~ Because we are unable to establish VSOE of fair value on the undelivered elements, the majority of the revenue from those product lines has been deferred and will be recognized as revenue over the service period. The total revenue growth was driven by a 36% or $13.6 million increase in the Gateway Security solutions revenue which represented 86% of total revenue, was driven by sustained demand, and included an increase of $12.2 million from acquired CipherTrust products, and a 47% or $2.7 million increase in the Identity and Access Management revenue which represented 14% of total revenue.

our Secure Mail product line revenues. Because we are unable to establish VSOE of fair value on the undelivered elements, the majority of the revenue from that product line has been deferred and is being recognized as revenue over the service period. The total revenue growth was driven by a 10% or $4.9 million increase in Enterprise Security Solutions revenue which was primarily driven by sustained demand for network security solutions, and was slightly offset by an 11% or $874,000 decrease in the Secure SafeWord revenue. This decrease was primarily driven by the launch of our SafeWord^® 2008 product line in the first quarter of 2008 for which we are unable to establish VSOE of fair value on the undelivered elements; therefore, the majority of revenue from this product line has been deferred and is being recognized as revenue over the service period. Revenue also decreased due to fewer significant sized purchases in this period compared to the same period of the prior year.

Cost of Revenues and Gross Profit. Total cost of revenues increased 21% to $20.6 million for the three months ended June 30, 2008, up from $17.1 million in the same period of 2007. This increase is the direct result of the increase in total revenues. Gross profit as a percentage of revenue was 67% for the quarter compared to 71% in the same period of 2007. For the three months ended June 30, 2008, gross profit for products decreased to 58% for the quarter compared to 70% in the same period of 2007, primarily due to increased sales volume of products containing a hardware component, which have a lower gross profit than our software products, and an increase in related manufacturing and overhead costs, which includes $189,000 in severance and related costs. Gross profit for services increased to 78% for the quarter compared to 75% in the same period of 2007. This improvement was primarily driven by the growth of our support revenue outpacing increases in support costs.

Operating Expenses. Operating expenses consist of selling and marketing, research and development, general and administrative expenses, amortization of purchased intangible assets, and litigation judgment costs. Total operating expenses increased 8% to $51.0 million for the three months ended June 30, 2008 up from $47.2 million in the same period of 2007. This increase was driven primarily by the severance incurred for the reduction in force and the resignation of our former Chief Executive Officer in April 2008 of $2.0 million, increased legal fees of $855,000 associated with defending the complaints described in Note 7 of the Notes to the Financial Statements, increased headcount and related costs which are in line with the growth of our business, and increased depreciation expense primarily due to capital additions for computer hardware and software throughout the prior and current years for the expansion of our TrustedSource data centers and customer evaluation equipment. To a lesser extent, operating expenses increased as a result of inflationary increases in payroll and related costs. These increases were somewhat offset by the decrease in share-based compensation expense. As a percentage of revenue, total operating expenses were 83% for the quarter compared to 82% in the same period of 2007.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, share-based compensation and benefits related to personnel engaged in selling, marketing, and customer support functions, along with costs related to advertising, promotions, public relations, travel and allocations of corporate costs, which include information technology, facilities and human resources expenses. Our customer support function, which provides support, training and installation services, is also responsible for supporting our sales representatives and sales engineers throughout the sales cycle by providing them and our prospective customers with technical assistance and, as such, a portion of these costs are included here. Selling and marketing expenses increased 5% to $31.0 million for the three months ended June 30, 2008 up from $29.6 million in the same period of 2007. This increase was driven primarily by severance of $819,000 and inflationary increases in payroll and related costs, which was somewhat offset by a decrease in share-based compensation cost. As a percentage of revenue, selling and marketing expense was 50% for the quarter compared to 52% in the same period of 2007. This improvement was primarily driven by the growth in revenue outpacing the increase in selling and marketing expense.

Research and Development. Research and development expenses consist primarily of salaries, share-based compensation and benefits for our product development and advanced technology personnel, and allocations of corporate costs, which include information technology, facilities and human resources expenses. Research and development expenses increased 13% to $12.6 million for the three months ended June 30, 2008 up from $11.1 million in the same period of 2007. This increase was driven primarily by increased research and development headcount and related costs in support of our revenue growth along with severance incurred of $316,000 and to a lesser extent inflationary increases in payroll and related costs. As a percentage of revenue, research and development expenses were 20% for the three months ended June 30, 2008 compared to 19% in the same period of 2007. This increase was primarily driven by the increased amount of dollars invested in research and development to support our revenue growth and severance incurred.

General and Administrative. General and administrative expenses consist primarily of salaries, share-based compensation, benefits and related expenses for our executive, finance and legal personnel, directors and officers insurance, and allocations of corporate costs, which include information technology, facilities and human resources expenses. General and administrative expenses increased 41% to $5.2 million for the three months ended June 30, 2008 up from $3.7 million in the same period of 2007. This increase was driven primarily by severance incurred of $919,000, increased legal fees of $855,000 with defending the complaints described in Note 7 of the Notes to the Financial Statements, and to a lesser extent inflationary increases in payroll and related costs and allocated corporate costs. As a percentage of revenue, general and administrative expenses were 9% for the three months ended June 30, 2008 compared to 6% in the same period of 2007. This increase was primarily due to severance incurred and increased legal fees incurred defending the previously mentioned lawsuits.

Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets consists of the amortization of tradenames and customer lists acquired in the CipherTrust and CyberGuard acquisitions. Amortization expense for these acquired tradenames and customer lists was $2.3 million for the three months ended June 30, 2008 compared to $2.8 million in the same period of 2007. This decrease was primarily driven by certain assets being fully amortized.

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


	Three Months Ended June 30,
	2008		2007
Cost of product revenues	$	74	$	108
Cost of service revenues		208		208
Selling and marketing		1,418		2,461
Research and development		953		1,013
General and administrative		535		542

Total share-based compensation expense	$	3,188	$	4,332

The decrease in share-based compensation expense in selling and marketing and in total is primarily due to the departure of former CipherTrust employees, along with a decrease in expense for acquired CipherTrust options as the options continue to vest.

Other Expense. Other expense, which consists primarily of the interest expense on our term debt, was $761,000 for the three months ended June 30, 2008, compared to $1.7 million in the same period of 2007. The decrease in interest expense is primarily a result of a decrease in interest rates on a lower outstanding term debt balance compared to the prior year.

Income Taxes. During the three months ended June 30, 2008, we recorded income tax expense of $396,000. The $396,000 income tax expense consists of $228,000 of non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired net operating losses where the benefit of the release is offset to goodwill, $51,000 of non-cash U.S. tax expense related to deferred tax liabilities, $99,000 of cash tax expense for various foreign taxes, and $18,000 associated with state income tax expense for prior periods. This is compared with an income tax expense of $2.6 million in the same period of 2007. Of this $2.6 million of income tax expense, $1.7 million is related to non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired net operating losses where the benefit of the release is offset to goodwill, $724,000 is related to various other foreign income taxes, and $214,000 is related to U.S. Federal and state income tax expense.

In accordance with SFAS No. 109, “Accounting for Income Taxes,” we have assessed the likelihood that the net deferred tax assets will be realized. SFAS No. 109 requires the consideration of a valuation allowance in all circumstances, if the conclusion is not more likely than not a valuation allowance is required. We have recorded a deferred tax liability in our consolidated balance sheet for indefinite lived intangible assets that are not deductible for tax purposes and therefore cannot be used to realize additional reversing deferred tax assets. We also have a deferred tax asset that is able to be recognized as a result of the FASB Interpretation (FIN) 48 liabilities that are recorded. In accordance with SFAS No. 109, our remaining noncurrent deferred tax liabilities are netted with our noncurrent deferred tax assets and are presented as a single amount in our condensed consolidated balance sheet. We have determined that primarily all of our net deferred tax assets are not more likely than not to be realized, and as such a full valuation allowance has been placed on this amount.

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

Comparison of Six Months Ended June 30, 2008 and 2007.

Revenues. Our total revenues increased 10% to $122.4 million for the six months ended June 30, 2008 up from $111.4 million in the same period of 2007. Our products revenues decreased 5% to $57.8 million for the six months ended June 30, 2008 down from $60.9 million in the same period of 2007. Our services revenues increased 14% to $41.0 million for the six months ended June 30, 2008 up from $35.9 million in the same period of 2007. Other revenues increased 62% to $23.7 million for the six months ended June 30, 2008 up from $14.6 million in the same period of 2007. Other revenue represents multiple element sales that lacked VSOE in the prior periods and became recognizable as services were provided in 2008 and 2007, respectively. This revenue is primarily from our Secure Mail product line revenues. Because we are unable to establish VSOE of fair value on the undelivered elements, the majority of the revenue from that product line has been deferred and is being recognized as revenue over the service period. The total revenue growth was driven by a 14% or $12.8 million increase in Enterprise Security Solutions revenue which was primarily driven by sustained demand for network security solutions, and was slightly offset by an 11% or $1.8 million decrease in the Secure SafeWord

~~Cost of Revenues and Gross Profit. Total cost of revenues increased 44% to $17.0 million in the~~ ~~three months ended September 30, 2007, up from $11~~revenue.8 ~~million in the same period of 2006.~~ This ~~increase~~decrease iswas ~~the~~primarily ~~direct~~driven ~~result~~by of the ~~increase~~launch ~~in both total revenues and the amortization~~ of ~~acquired~~our ~~developed~~SafeWord® ~~technology~~2008 ~~related~~product toline ~~the CipherTrust~~in ~~acquisition.~~which ~~Gross~~we ~~profit~~are asunable ~~a percentage of revenue was 72% for the quarter compared~~ to ~~73%~~establish inVSOE ~~the same period~~ of ~~2006.~~fair Invalue on the ~~three~~undelivered ~~months~~elements; ~~ended September 30~~therefore, ~~2007, gross profit for products decreased to 69% for~~ the ~~quarter~~majority ~~compared to 73% in the same period~~ of ~~2006,~~revenue ~~primarily~~from ~~due~~this toproduct ~~increased~~line ~~sales~~has ~~volume~~been ofdeferred ~~products~~and ~~containing~~is abeing ~~hardware~~recognized ~~component,~~as ~~which~~revenue ~~have~~over ~~a lower gross profit than our software products. Gross profit for services decreased to 79% for~~ the ~~three~~service ~~months ended September 30, 2007 compared to 81% in the same~~ period ~~of 2006 primarily due to an increase in customer support headcount and related costs~~.

~~Operating~~Cost ~~Expenses. Operating expenses consist~~ of ~~selling~~Revenues and ~~marketing,~~Gross ~~research and development, general and administrative expenses, and amortization of purchased intangible assets~~Profit. Total ~~operating~~cost ~~expenses~~of revenues increased 2515% to $4738.9 1 million for the ~~three~~six months ended ~~September~~June 30, ~~2007~~2008, up from $3833.32 million in the same period of ~~2006~~2007. This increase ~~was~~is ~~driven~~the ~~primarily~~direct byresult ~~increased~~of ~~headcount~~the ~~and~~increase ~~related~~in ~~costs~~total ~~and~~revenues. ~~share-based~~Gross ~~compensation~~profit ~~expense~~ as a ~~result~~percentage of revenue was 69% for the ~~CipherTrust~~ ~~acquisition~~six ~~and~~months ~~our~~ended ~~initiative~~June 30, 2008 compared to ~~invest~~70% in ~~more~~the ~~sales~~same ~~headcount~~period of 2007. For Tothe asix ~~lesser~~months ~~extent~~ended June 30, ~~operating~~2008, ~~expenses~~gross profit for products decreased to 62% compared to 70% in the same period of 2007, primarily due to increased assales volume of products containing a ~~result~~hardware ofcomponent, ~~inflationary~~which ~~increases~~have ina ~~payroll~~lower gross profit than our software products and an increase in related ~~costs.~~manufacturing Asand aoverhead ~~percentage~~costs ofwhich ~~revenue~~includes $189,000 ~~total~~in ~~operating~~severance ~~expenses were~~and 80related costs. Gross profit for services increased to 79% for the ~~quarter~~six months ended June 30, 2008 compared to 8877% in for the same period ofin ~~2006~~2007. This improvement was primarily driven by the growth inof ~~revenue~~our ~~and~~support ~~gross~~revenue ~~profit~~ outpacing ~~the~~increases ~~increase~~ in ~~operating~~support ~~expense~~costs.

~~Selling~~Operating ~~and Marketing~~Expenses. ~~Selling~~Total ~~and~~operating ~~marketing~~ expenses ~~consist~~increased ~~primarily~~19% ofto ~~salaries,~~$110.7 ~~commissions,~~million ~~share-based~~for ~~compensation~~the ~~and~~six ~~benefits~~months ~~related~~ended ~~to personnel~~June 30, ~~engaged~~2008 inup ~~selling,~~from ~~marketing,~~$92.8 ~~and~~million ~~customer~~in ~~support~~the ~~functions,~~same ~~along~~period ~~with~~of ~~costs~~2007. ~~related~~This toincrease ~~advertising,~~was ~~promotions,~~driven ~~public~~primarily ~~relations,~~by ~~travel~~the ~~and~~litigation ~~allocations~~ expense of ~~corporate~~$9.2 ~~costs,~~million ~~which~~and ~~include~~increased ~~information~~legal ~~technology,~~fees ~~facilities~~of ~~and human resources expenses~~$2.5 ~~Our~~million ~~customer~~associated ~~support~~with ~~function,~~defending ~~which~~the ~~provides~~complaints ~~support,~~described ~~training~~in ~~and~~Note ~~installation~~7 ~~services,~~of isthe ~~also~~Notes ~~responsible~~to ~~for~~the ~~supporting~~Financial ~~our~~Statements, ~~sales~~severance ~~representatives~~incurred ~~and~~of ~~sales~~$2.5 ~~engineers~~million ~~throughout~~for the ~~sales~~reduction ~~cycle~~in byforce ~~providing~~in ~~them~~April 2008 and ~~our~~the ~~prospective~~resignation ~~customers~~of ~~with~~two ~~technical~~executive ~~assistance and~~officers, asincreased ~~such,~~headcount aand ~~portion~~related ~~of these~~ costs ~~are~~which ~~included~~is ~~here.~~in ~~Selling~~line ~~and~~with ~~marketing expenses increased 25% to $29.7 million in~~ the ~~three~~growth ~~months~~of ~~ended~~our ~~September 30~~business, ~~2007~~and upincreased ~~from~~depreciation ~~$23.7~~expense ~~million~~due into ~~the same~~capital ~~period~~additions offor ~~2006.~~computer ~~This~~hardware ~~increase~~and ~~was~~software ~~driven~~throughout ~~primarily~~the byprior ~~increased headcount and related costs~~ year as a result of the ~~CipherTrust~~expansion ~~acquisition~~of ~~and~~ our ~~initiative~~TrustedSource todata ~~invest~~centers ~~in more sales headcount~~ and ~~discretionary~~customer ~~marketing~~evaluation equipment. To a lesser extent, ~~selling and~~operating ~~marketing~~expenses ~~expense~~ increased as a result of inflationary increases in payroll and related costs ~~and share-based compensation costs~~. As a percentage of revenue, ~~selling~~total operating ~~and~~expenses ~~marketing~~were ~~expense was 49~~91% for the ~~quarter~~six months ended June 30, 2008 compared to 5483% in the same period of ~~2006~~2007. This ~~improvement~~increase was primarily driven by the ~~growth~~litigation accrual in ~~revenue~~March ~~and~~2008 ~~gross~~related ~~profit~~to the Finjan lawsuit, which is offset by growth in revenue outpacing the increase in ~~selling~~operating ~~and marketing~~ expense.

~~Research~~Selling and ~~Development~~Marketing. ~~Research~~Selling and ~~development~~marketing expenses consist primarily of salaries, share-based compensation and benefits for our product development and advanced technology personnel and allocations of corporate costs, which include information technology, facilities and human resources expenses. Research and development expenses increased 276% to $1161.2 4 million infor the ~~three~~six months ended ~~September~~June 30, ~~2007~~2008 up from $858.81 million in the same period of ~~2006~~2007. This increase was ~~primarily~~ driven primarily by ~~increased~~severance ~~headcount and related costs as a result~~ of ~~the~~$816,000 ~~CipherTrust acquisition~~ and ~~to a lesser extent~~ inflationary increases in payroll and related costs, ~~share-based~~which ~~compensation~~is ~~costs,~~somewhat ~~and~~offset by a ~~increases~~decrease in ~~allocated~~share-based ~~corporate~~compensation ~~costs~~expense. As a percentage of revenue, ~~research~~selling and ~~development~~marketing ~~expenses~~expense were 1950% for the ~~three~~six months ended ~~September~~June 30, ~~2007~~2008 compared to 2052% in the same period of ~~2006~~2007. This improvement was primarily driven by ~~the~~ the growth in revenue ~~and gross profit~~ outpacing the increase in ~~research~~selling and ~~development~~marketing expense.

~~General~~Research and ~~Administrative~~Development. ~~General~~ ~~and~~Research ~~administrative expenses consist primarily of salaries, share-based compensation, benefits~~ and ~~related expenses for our executive, finance and legal personnel, directors and officers insurance and allocations of corporate costs, which~~development ~~include information technology, facilities and human resources~~ expenses. ~~General and administrative expenses~~ increased 2414% to $424.37 million infor the ~~three~~six months ended ~~September~~June 30, ~~2007~~2008 up from $321.57 million in the same period of ~~2006~~2007. This increase was driven primarily by increased ~~share-based~~research ~~compensation~~and ~~costs~~development headcount and anrelated ~~increase~~costs in ~~legal~~support ~~fees~~of our ~~associated~~revenue ~~with~~growth ~~defending~~and ~~the~~to ~~three~~a ~~complaints~~lesser ~~described~~extent inseverance ~~Note~~incurred 9 of ~~the~~$316,000 ~~Notes~~and toinflationary ~~the~~increases ~~Condensed~~in ~~Consolidated~~payroll ~~Financial~~and ~~Statements~~related costs. As a percentage of revenue, ~~general~~research and ~~administrative~~development expenses were 720% for the ~~three~~six months ended ~~September~~June 30, ~~2007~~ 2008 compared to 819% in the same period of ~~2006~~2007. This ~~improvement~~increase was primarily driven by the ~~growth~~increased amount of dollars invested in ~~revenue~~research and ~~gross~~development ~~profit outpacing~~to ~~the~~support ~~increase~~our inrevenue ~~general~~growth and ~~administrative~~severance ~~expense~~incurred.

~~Amortization~~General ofand ~~Purchased~~Administrative. ~~Intangible~~General ~~Assets.~~and ~~Amortization~~administrative ~~of purchased~~expenses ~~intangible~~increased ~~assets~~48% ~~consists~~to of$10.9 million for the ~~amortization~~six ofmonths ~~tradenames~~ended ~~and~~June 30, ~~customer~~2008 ~~lists~~up ~~acquired~~from $7.4 million in the ~~CipherTrust~~same ~~and~~period ~~CyberGuard~~of ~~acquisitions,~~2007. ~~described~~This inincrease ~~Note~~was 4driven ~~and~~primarily by increased legal fees of $2.5 million incurred with defending the complaints described in Note 7 of the Notes to the ~~Condensed Consolidated~~ Financial Statements, and severance incurred of $1.3 ~~respectively~~million. ~~Amortization~~As ofa ~~these~~percentage ~~acquired~~of ~~tradenames~~revenue, general and ~~customer~~administrative ~~lists~~expenses ~~was~~were ~~$2.7~~9% ~~million~~for in the ~~three~~six months ended ~~September~~June 30, ~~2007~~2008 compared to ~~$2.3~~7% ~~million,~~ in the same period of ~~2006~~2007. This increase was aprimarily ~~result~~due ofto the ~~additional intangibles~~increased ~~acquired~~legal infees incurred defending the ~~CipherTrust~~previously ~~acquisition~~mentioned lawsuits and severance incurred.

Amortization of Purchased Intangible Assets. Amortization expense for these acquired tradenames and customer lists was $4.5 million for the six months ended June 30, 2008 compared to $5.6 million in the same period of 2007. This decrease was primarily driven by certain assets being fully amortized.

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


	Six Months Ended June 30,
	2008		2007
Cost of product revenues	$	155	$	211
Cost of service revenues		239		393
Selling and marketing		3,520		4,417
Research and development		1,954		1,935
General and administrative		1,090		1,101

Total share-based compensation expense	$	6,958	$	8,057

~~Share-Based~~Litigation. The ~~Compensation~~litigation ~~Expense~~expense of $9.2 million in the six months ended June ~~Share-based~~30, ~~compensation~~2008 pertained ~~expense~~to a charge related to ~~stock~~litigation ~~options, restricted~~brought ~~stock~~by ~~awards~~Finjan ~~and~~Software ~~shares~~Ltd. ~~purchased~~This ~~under~~expense ~~our~~represents ~~employee~~a ~~stock~~jury ~~purchase~~verdict ~~plan~~in ~~(ESPP)~~favor ~~under~~of ~~SFAS~~the Noplaintiff for $9. ~~123(R)~~2 ~~was~~million. ~~allocated~~We ashave ~~follows~~asked ~~for~~the trial court to set aside the ~~periods~~jury’s ~~indicated~~verdict. (The motion remains pending and has not been ruled on by trial court. Therefore, the timing and amount of total payment have not been finalized. For further details regarding this lawsuit, see Note 7 in ~~thousands):~~the Notes to the Financial Statements.

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

Other Expense. Other expense which consists primarily of the interest expense on our term debt was $1.9 million for the six months ended June 30, 2008, compared to $4.0 million in the same period of 2007. The decrease in interest expense is primarily a result of a decrease in interest rate on a lower outstanding term debt balance.

Income Taxes. During the six months ended June 30, 2008, we recorded income tax expense of $1.2 million. The ~~increase~~$1.2 inmillion ~~share~~of income tax expense consists of $660,000 of non-~~based~~cash ~~compensation~~foreign tax expense isassociated ~~due~~primarily towith ~~increased~~the ~~headcount~~release ~~and~~of valuation allowance on utilized acquired net operating losses where the ~~addition~~benefit of ~~management~~ ~~level~~the ~~employees~~release inis ~~selling~~offset ~~and~~to ~~marketing~~goodwill, ~~and~~$270,000 ~~research~~of ~~and~~non-cash ~~development~~U.S. Intax expense ~~2006~~of which a portion relates to deferred tax liabilities, we$185,000 ~~granted~~of ~~restricted~~tax ~~stock~~expense ~~awards~~for ~~under~~various ~~the~~foreign ~~2002~~taxes, ~~Plan~~and ~~primarily~~$71,000 toassociated ~~certain~~with ~~executive~~state ~~officers~~income tax expense for prior periods. InThis ~~addition~~is tocompared ~~issuing~~with ~~stock~~an ~~options,~~income ~~during~~tax ~~the~~expense ~~first~~of ~~quarter~~$3.0 million in the same period of 2007. weOf ~~began~~this ~~issuing~~$3.0 ~~restricted~~million ~~stock~~of ~~awards~~income tax expense, $214,000 was related to U.S. Federal and~~/or~~ ~~restricted~~state ~~stock~~regular ~~units~~income ~~for~~tax ~~employees~~expense, at$977,000 ~~all~~was ~~job~~related ~~levels~~to various other foreign income taxes, and $1.7 ~~Restricted~~million ~~stock~~was ~~awards~~related ~~granted~~to ~~under~~non-cash foreign tax expense associated primarily with the ~~2002~~release ~~Plan~~of ~~typically~~valuation ~~vest~~allowance ~~25%~~on ~~after~~utilized ~~the~~acquired ~~first~~net ~~year~~operating ~~and~~losses ~~then~~where ~~quarterly~~the ~~over~~benefit of the ~~following~~release ~~three years~~is offset to goodwill.

~~Other~~In ~~(Expense)/Income~~accordance with SFAS No. 109, ~~Other~~we ~~expense~~have ~~was~~assessed ~~$1.6~~the ~~million~~likelihood inthat the ~~three~~net ~~months~~deferred ~~ended~~tax ~~September 30,~~assets ~~2007,~~will ~~compared~~be torealized. ~~other~~SFAS No. 109 requires the ~~income~~consideration of ~~$501,000~~a valuation allowance in all circumstances, if the ~~same~~conclusion ~~period~~is ofnot ~~2006~~more likely than not a valuation allowance is required. ~~The~~We ~~increase~~have recorded a deferred tax liability in ~~other~~our ~~expense~~consolidated balance sheet for indefinite lived intangible assets that are not deductible for tax purposes and therefore cannot be used to realize additional reversing deferred tax assets. We also have a deferred tax asset that is ~~primarily~~able to be recognized as a result of ~~interest~~the ~~expense~~FIN ~~incurred~~48 ~~for~~liabilities ~~debt~~that ~~assumed~~are recorded. ~~for~~In ~~the~~accordance ~~CipherTrust~~with ~~acquisition~~SFAS No. 109, our remaining noncurrent deferred tax liabilities are netted with our noncurrent deferred tax assets and are presented as a ~~decrease~~single amount in ~~interest~~our ~~income~~condensed onconsolidated balance sheet. We have determined that primarily all of our net deferred tax assets are not more likely than not to be realized, and as such a ~~lower~~full ~~average~~valuation ~~cash~~allowance ~~balance~~has been placed on this amount.

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

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

~~Comparison~~LIQUIDITY ofAND ~~Nine~~CAPITAL ~~Months~~RESOURCES ~~Ended September 30, 2007 and 2006.~~

~~Revenues.~~ Our ~~total~~cash ~~revenues~~and ~~increased~~cash ~~37%~~equivalents toincreased by $~~171~~9.42 million ~~for the nine months ended September 30, 2007 up~~ from $~~125~~12.1 million inat ~~the~~December 31, ~~same~~2007 ~~period of 2006. Our products revenues increased 13%~~ to $9121.93 million ~~for~~at ~~the nine months ended September~~June 30, ~~2007 up from $81~~2008.6 ~~million~~For in the ~~same~~six ~~period of 2006. Our services revenues increased 27% to $54.9 million for the nine~~ months ended ~~September~~June 30, ~~2007~~2008 upwe ~~from~~generated $4315.39 million infrom ~~the~~operating ~~same~~activities and ~~period of 2006. Other revenues increased to~~ $242.61 million ~~for the nine months ended September 30, 2007 up~~ from ~~$239,000 in~~ the ~~same~~ ~~period~~exercise of ~~2006.~~stock ~~The~~options ~~$24.6 million or 14% of total revenue~~ and the ~~$239,000~~sale ~~were~~of ~~attributable~~common tostock ~~multiple~~through ~~element~~our ~~sales~~ESPP. ~~that~~We ~~lacked~~used ~~VSOE in the prior periods and became recognizable in the nine months ended September 30, 2007 and September 30, 2006, respectively~~$8.1 ~~This~~million ~~revenue~~to ismake ~~primarily~~capital ~~from our Messaging Gateway product line revenues~~purchases. ~~Because~~We wewere ~~are~~not ~~unable~~required to ~~establish~~make ~~VSOE~~a ofquarterly ~~fair~~payment ~~value~~ on ~~undelivered~~our ~~elements,~~term ~~the~~debt ~~majority~~as of ~~the~~June 30, ~~revenue~~2008 ~~from~~because ~~those product lines~~we ~~has~~made ~~been~~accelerated ~~deferred~~payments ~~and~~in ~~will~~prior ~~be recognized as revenue over the service period~~periods. ~~The total revenue growth was driven by a 39% or $40.7 million increase in the Gateway~~

Net cash provided by operating activities of $15.9 million for the six months ended June 30, 2008 was generated by our net loss adjusted for non-cash expenses and our collections outpacing our operating expenses. Terms for cash collections received from customers and cash payments made to vendors were consistent with normal business practices.

Net cash used for investing activities of $8.7 million during the six months ended June 30, 2008 consisted mainly of $8.1 million for capital additions, which were primarily for leasehold improvements and furniture for our St. Paul, MN office expansion and San Jose, CA office relocation and customer evaluation appliances along with $1.0 million for capitalized software and patents.

Net cash provided by financing activities of $2.1 million for the six months ended June 30, 2008 consisted of proceeds related to the exercise of stock options and the sale of common stock through our ESPP. We made no payments on our term debt in the quarter.

We anticipate using available cash, including proceeds to be received from the sale of our SafeWord product line, to fund growth in operations, invest in capital equipment and leasehold improvements, acquire businesses, license technology or products related to our current line of business, and make additional payments on our term debt. We expect to spend another $4.0 million during the remainder of 2008 on capital expenditures, primarily for computer equipment, technology upgrades, and leasehold improvements and another $1.0 million on customer evaluation equipment.

We believe that we have sufficient financial resources available to fund our current working capital and capital expenditure requirements for at least the next twelve months. In addition to our cash on hand we have a $20.0 million revolving credit facility available pursuant to a credit facility agreement with a syndicate of banks led by Citigroup and UBS Investment Bank which was signed in August 2006. We intend to utilize the funds available through the credit facility for general working capital and ongoing corporate purposes as deemed necessary. At June 30, 2008, we have no outstanding borrowings on this credit facility. However, we have reserved $800,000 of the revolving credit facility with a standby letter of credit related to the expansion of our St. Paul, MN facility.

~~Security~~Our ~~solutions~~credit ~~revenue~~facility ~~which~~agreement ~~represented~~contains ~~85%~~various ofcovenants ~~total~~including ~~revenue~~limitations on additional indebtedness, ~~was~~restricted ~~driven~~payments, bythe ~~sustained~~incurrence ~~demand~~of liens, ~~and~~transactions ~~included~~with anaffiliates ~~increase~~and sales of ~~$33~~assets.0 ~~million~~In ~~from~~addition, ~~acquired CipherTrust~~the ~~products~~credit facility requires us to comply with certain financial covenants on a quarterly basis, including maintaining leverage and ainterest ~~29%~~coverage orratios $5and capital expenditure limitations.6 ~~million~~We ~~increase~~were in compliance with all covenants as of June 30, 2008. In order to close the ~~Identity~~proposed ~~and~~sale ~~Access~~of ~~Management~~the ~~revenue~~SafeWord ~~which~~assets, ~~represented~~we ~~15%~~will be required under the credit facility agreement to either obtain a waiver of ~~total~~the ~~revenue~~negative covenant regarding assets sales or pre-pay the indebtedness outstanding under the credit facility at the time of closing.

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

~~Operating~~Our ~~Expenses.~~discussion ~~Operating~~of ~~expenses~~the ~~consist~~financial ofcondition ~~selling~~ and ~~marketing,~~results ~~research~~of operations ~~and~~are ~~development,~~based ~~general~~upon ~~and~~the ~~administrative~~condensed ~~expenses~~consolidated financial statements, ~~and amortization~~which ofhave ~~purchased~~been ~~intangible~~prepared ~~assets,~~in ~~along~~conformity with aU.S. ~~non-recurring~~generally ~~litigation~~accepted ~~settlement~~accounting ~~cost~~principles. inThe ~~2006.~~preparation ~~Total~~of ~~operating~~our ~~expenses~~financial ~~increased~~statements ~~41%~~requires management to ~~$140.7~~make ~~million~~estimates and ~~for~~assumptions that affect the ~~nine~~reported ~~months~~amounts ~~ended~~of ~~September 30,~~assets ~~2007~~and upliabilities, ~~from~~revenues ~~$99.8~~and ~~million~~expenses, inand ~~the~~related ~~same period~~disclosure of ~~2006.~~any ~~This~~contingent ~~increase~~assets ~~was~~and ~~driven~~liabilities ~~primarily~~at bythe ~~increased~~date ~~headcount~~of ~~and~~the ~~related~~financial ~~costs~~statements. Management regularly reviews its estimates and assumptions, ~~share-~~which are based ~~compensation~~on historical factors and ~~intangible~~other ~~amortization~~factors ~~expense~~that asare abelieved ~~result~~to ofbe relevant under the ~~CipherTrust~~circumstances. ~~acquisition~~Actual ~~and~~results ~~our~~may ~~initiative~~differ tofrom ~~invest~~these inestimates ~~more~~under ~~sales~~different ~~headcount and~~assumptions, inestimates, ~~discretionary~~or ~~marketing~~conditions. ToWe abelieve ~~lesser~~that the ~~extent~~estimates, ~~operating~~assumptions ~~expenses~~and ~~increased~~judgments asinvolved ain ~~result~~the ofaccounting ~~inflationary~~policies ~~increases~~described in ~~payroll~~Management’s Discussion and ~~related~~Analysis ~~costs.~~of AsFinancial aCondition ~~percentage~~and Results of ~~revenue,~~Operations ~~total~~in ~~operating~~our ~~expenses~~Annual ~~were~~Report ~~82%~~on Form 10-K for the ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2007 ~~compared~~have tothe ~~80%~~greatest inpotential ~~the~~impact ~~same~~on ~~period~~our offinancial ~~2006.~~statements, ~~This~~so ~~increase~~we ~~was~~consider ~~primarily~~them ~~driven~~to bybe anour ~~increase~~critical inaccounting ~~selling~~policies and ~~marketing~~estimates. ~~expense~~During asthe asix ~~percentage~~months ofended ~~revenue~~June 30, ~~offset~~2008, bythere awere ~~decrease~~no insignificant ~~litigation~~changes ~~settlement~~to those ~~expense~~critical aspolicies aand ~~percentage of revenue~~estimates.

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

~~Research~~In ~~and~~this ~~Development.~~Quarterly ~~Research~~Report on Form 10-Q and ~~development~~in ~~expenses~~other ~~consist~~written ~~primarily~~or oforal ~~salaries~~statements made from time to time, ~~share-based~~we ~~compensation~~have included and ~~benefits~~may include statements that constitute “forward-looking statements” with respect to ~~for~~the ~~our~~financial ~~product~~condition, ~~development~~results ~~and~~of ~~advanced~~operations, ~~technology~~plans, ~~personnel~~objectives, new products, future performance and ~~allocations~~business of ~~corporate~~Secure ~~costs~~Computing Corporation and its subsidiaries. Statements preceded by, ~~which~~followed by or that include ~~information~~words ~~technology~~such as “may,” “will,” ~~facilities~~“expect,” ~~and~~“anticipate,” ~~human~~“continue,” ~~resources~~“estimate,” ~~expenses.~~“forecast”, ~~Research~~“project,” ~~and~~“believe” ~~development~~or ~~expenses~~similar ~~increased~~expressions ~~40%~~are intended to ~~$32.9~~identify ~~million~~some inof the forward-looking ~~nine~~statements ~~months~~within ~~ended~~the ~~September 30~~meaning of the Private Securities Litigation Reform Act of 1995 and are included, ~~2007~~along upwith ~~from~~this ~~$23.6~~statement, ~~million~~for inpurposes of complying with the ~~same~~safe ~~period~~harbor provisions of ~~2006~~that Act. ~~This~~These ~~increase~~forward-looking ~~was~~statements ~~primarily~~involve ~~driven~~risks and byuncertainties. ~~increased~~By ~~headcount~~identifying ~~and~~these ~~related~~statements ~~costs~~for asyou ain ~~result~~this ofmanner, ~~the~~we ~~CipherTrust~~are ~~acquisition~~alerting ~~and~~you to athe ~~lesser~~possibility ~~extent~~that ~~inflationary increases~~actual inresults ~~payroll~~may ~~and~~differ, ~~related~~possibly ~~costs~~materially, ~~share~~from the results indicated by these forward-~~based~~looking ~~compensation~~statements. ~~costs,~~We ~~and~~undertake ~~increases~~no obligation into ~~allocated~~update ~~corporate~~any ~~costs~~forward-looking statements. AsActual aresults ~~percentage~~may ofdiffer ~~revenue~~materially from those contemplated by the forward-looking statements due to, ~~research~~among others, the risks and ~~development~~uncertainties ~~expenses~~discussed ~~were~~in ~~19%~~Part I, Item 1A of our Annual Report on Form 10-K for the ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2007, and ~~2006~~in Part II, Item 1A of this Quarterly Report on Form 10-Q. Since it is not possible to foresee all such factors, you should not consider these factors to be a complete list of all risks or uncertainties. We believe the most significant factors that could affect our future operations and results are set forth in the list below.

~~General and Administrative~~1. ~~General~~Inability and administrative expenses consist primarily of salaries, share-based compensation, benefits and related expenses for our executive, finance and legal personnel, directors and officers insurance and allocations of corporate costs, which include information technology, facilities and human resources expenses. General and administrative expenses increased 25% to ~~$11.7~~achieve ~~million~~GAAP inoperating ~~the~~profits nine months ended September 30, 2007 up from $9.4 million in the same period of 2006. This increase was driven primarily by increased share-based compensation costs as a result of the CipherTrust acquisition and anremain ~~increase~~cash inflow ~~legal fees associated with defending the three complaints described in Note 9 of the Notes to the Condensed Consolidated Financial Statements~~positive. ~~As a percentage of revenue, general and administrative expenses were 7% for the nine months ended September 30, 2007 compared to 8% in the same period of 2006.~~

~~Amortization of Purchased Intangible Assets~~2. ~~Amortization~~Inability ~~of purchased intangible assets consists of the amortization of tradenames and customer lists acquired in the CipherTrust and CyberGuard acquisitions, described in Note 4 and 5 of the Notes~~ to ~~the~~comply ~~Condensed~~with ~~Consolidated Financial Statements, respectively. Amortization of these acquired tradenames and customer lists was $8.3 million in~~ the ~~nine~~financial ~~months~~covenants ~~ended September 30, 2007 compared to $7.0 million, in the same period~~ of ~~2006.~~our ~~This~~senior ~~increase~~secured ~~was~~credit ~~a result of the additional intangibles acquired in the CipherTrust acquisition~~facility.

Loss of our revolving credit facility and difficulties obtaining, or the inability to obtain, adequate financing to satisfy our working capital needs.

Influences of our Series A Preferred Stockholders and other large stockholders.

Requirements to provide volume price discounts and other allowances and significant costs incurred in customizing our products.

Consolidation among competitors and product introductions by competitors that have advanced technology, better features or lower pricing.

The lack of diversification among our product lines and the inclusion of products similar to ours in vendors’ hardware or software rendering our products obsolete.

Inability to obtain and maintain patents on our devices and concepts.

Adverse developments in litigation, including patent or other intellectual property litigation.

10.

Disclosure of our trade secrets or proprietary information.

11.

Inability to receive hardware components and subassemblies from third party manufacturers on a timely basis.

~~Share-Based Compensation Expense~~12. ~~Share-based~~ ~~compensation~~Functional ~~expense related to stock options, restricted stock awards~~ and ~~shares~~design ~~purchased~~failures ~~under~~of our ~~employee stock purchase plan (ESPP) under SFAS No~~products. ~~123(R) was allocated as follows for the periods indicated (in thousands):~~

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

13.

Loss of one or more significant customers.

~~The~~14. ~~increase~~Failure ~~in share-based compensation expense is due~~ to ~~increased~~collect ~~headcount~~on ~~and~~a ~~the~~timely ~~addition~~basis ~~of management~~amounts ~~level~~owed ~~employees in selling and marketing and research and development. In 2006, we granted restricted stock awards and/or restricted stock units under the 2002 Plan primarily~~ to ~~certain~~us ~~executive~~by ~~officers.~~our ~~In addition to issuing stock options, during the first quarter of 2007 we began issuing restricted stock awards for employees at all job levels~~customers. ~~Restricted stock awards granted under the 2002 Plan typically vest 25% after the first year and then quarterly over the following three years.~~

~~Litigation Settlement~~15. The ~~litigation~~volatility ~~settlement expense~~ of ~~$2.5 million in the nine months ended September 30, 2006 pertained to a charge related to litigation brought by the landlord of~~ our ~~former~~quarterly ~~Concord,~~operating ~~CA office~~results. ~~This expense represented a judgment in favor of the plaintiff for $1.1 million and additional costs of $1.4 million we incurred related to damages. The settlement was paid in July 2006.~~

~~Other (Expense)/Income~~16. ~~Other~~Inability ~~expense~~to ~~was~~attract ~~$5.6~~and ~~million~~retain inhighly ~~the nine~~qualified ~~months~~personnel ~~ended September 30, 2007, compared~~ to ~~other~~develop ~~income~~our ofproducts ~~$2.4 million in the same period of 2006. The increase in other expense is primarily a result of interest expense incurred for debt assumed for the CipherTrust acquisition~~ and ~~a decrease~~manage inour ~~interest income on a lower average cash balance~~business.

~~Income Taxes~~17. ~~During~~A ~~the~~substantial ~~nine~~decline months ended September 30, 2007, we recorded income tax expense of $6.6 million. The $6.6 million income tax expense consists of $2.4 million of non-cash U.S. tax expense associated with the need to provide additional tax expense for valuation allowance on net operating losses, $2.4 million tax expense for various foreign taxes, $1.4 million of non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired net operating losses where the benefit of the release is offset to goodwill, and $440,000 for United States Federal and State regular income tax expense. This is compared with an income tax benefit of $5.9 million in ~~the~~one ~~same~~or period of 2006. Of this $5.9 million income tax benefit, a non-cash benefit of $7.3 million was related to the reversal of the previously recorded tax valuation allowance on our non-acquired net operating losses as we had determined it to be more ~~likely than not that a portion~~ of our ~~existing~~major deferred tax assets would be realized; the remainder of the income tax expense was related to current income tax components such as the utilization of net operating losses, alternative minimum income tax, and state and foreign ~~income taxes~~markets.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in the interest rates on certain outstanding debt. As of ~~September~~June 30, ~~2007~~2008, we had $5644.0 million of outstanding indebtedness. Ofwhich ~~this indebtedness, $26.0 million~~ bears interest at rates that fluctuate with changes in certain prevailing interest rates. Based on the average outstanding debt balance year-to-date for 2008 a 100 basis point change in interest rates would change interest expense approximately $200,000 for the remainder of 2008.

There have been no other changes to our market risks as noted in our Annual Report on Form 10-K for the year ended December 31, ~~2006~~2007.

Item 4.

Controls and Procedures

Material Weakness in Internal Control Over Financial Reporting

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

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

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

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

Evaluation of Disclosure Controls and Procedures

Management of our company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of ~~September~~June 30, ~~2007,~~2008 an evaluation was performed, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~September~~ June 30, ~~2007~~2008, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed in the Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time period required by the Securities and Exchange Commission’s rules and forms and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended ~~September~~June 30, ~~2007~~2008, wethere ~~ensured~~were ~~that~~no ~~the~~changes ~~appropriate~~in ~~levels~~our ofinternal ~~review~~control byover ~~management~~financial ~~and~~reporting ~~the involvement~~that ofmaterially ~~outside~~affected, ~~tax~~or ~~consultants~~are reasonably ~~was~~likely into ~~place~~materially ~~and~~affect, ~~occurred~~our ininternal acontrol ~~timely~~over ~~manner~~financial reporting.

~~Notwithstanding~~20 the foregoing efforts, we are continuing to undertake steps to resolve the material weakness over financial reporting related to the accounting for income taxes. We expect to complete our evaluation of the effectiveness of our internal controls over financial reporting, including with regard to the remediation of this material weakness, as of December 31, 2007. During the quarter ended September 30, 2007, there have been no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

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

OnThe ~~May 4,~~case ~~2007,~~was ~~Secure~~tried ~~Computing~~before ~~filed~~ a ~~complaint~~jury in ~~the~~Delaware ~~United States~~in ~~District~~March ~~Court~~2008. ~~for~~The jury entered ~~the~~a ~~district~~verdict ofin ~~Minnesota~~favor ~~against~~of ~~Finjan~~the ~~Software~~plaintiff on ~~Ltd.~~March 12, 2008, and ~~Finjan~~the ~~Software~~District Court entered judgment on March 28, ~~Inc~~2008. InThe ~~its~~jury ~~complaint,~~found that Secure Computing ~~asserts~~infringed ~~that~~certain claims of Finjan’s ~~load-balancing~~patents ~~security~~and ~~solutions,~~awarded ~~including~~damages ~~but~~in ~~not~~favor ~~limited~~of to Finjan~~’s Vital~~ ~~Security~~in ~~Load~~the ~~Balancer~~amount ~~NG-5300,~~of ~~infringe U~~$9.S.2 ~~Patent No~~million. ~~7,171,681.~~ OnThe ~~May 24,~~jury ~~2007~~also ~~Secure~~found that ~~Computing~~the ~~filed~~patents anasserted ~~amended~~by ~~complaint~~Secure ~~adding~~Computing ~~additional~~are ~~claims~~valid but that Finjan ishas inno ~~violation~~liability ofto ~~§43(a)~~Secure ofComputing ~~the~~under ~~Lanham~~our ~~Act,~~asserted ~~the~~patents. ~~Minnesota Deceptive~~As ~~Trade~~a ~~Practices~~result ~~Act,~~of ~~and~~the ~~Minnesota’s~~jury ~~common~~verdict ~~law,~~in ~~for~~the ~~unfair~~case, ~~competition~~we ~~and~~recorded ~~false~~a ~~advertising~~$9.2 ~~The~~million ~~complaint~~pre-tax ~~seeks~~charge, ~~among~~which ~~other~~is ~~things,~~a ~~unspecified~~reasonable estimate ~~monetary~~of ~~damages~~the ~~arising~~probable ~~from~~loss, ~~Finjan’s~~if ~~unauthorized~~the ~~use~~jury ofverdict ~~Secure Computing’s~~is ~~patented~~not ~~technology~~reduced, ~~and~~set ~~for~~aside ~~Finjan’s~~or ~~continued~~overturned. ~~and~~The ~~willful~~jury’s ~~false~~verdict, ~~and/or~~including ~~misleading~~the ~~statements~~damage inaward, ~~advertising.~~is ~~This~~subject ~~matter was transferred~~ to the ~~United~~outcome ~~States~~of ~~District Court for~~ the ~~district~~post-verdict ofmotions ~~Delaware~~described below.

On ~~January~~March 1927, ~~2007~~2008, ~~Rosenbaum~~Secure ~~Capital,~~Computing ~~LLC.~~ filed a ~~putative~~combined ~~securities~~motion ~~class~~for ~~action~~judgment ~~complaint~~as ina ~~the~~matter ~~United~~of ~~States~~law, ~~District~~new ~~Court~~trial, ~~for~~and/or ~~the~~remittitur, ~~Northern District~~asking ofthe ~~California~~trial ~~against~~court ~~Secure~~to set ~~Computing~~aside ~~and~~the ~~certain~~jury’s ~~directors~~verdict, ~~and~~to ~~officers~~reduce ofor eliminate the ~~company.~~damages ~~The~~award, ~~alleged~~and/or ~~plaintiff~~for ~~class~~a ~~includes~~new ~~persons~~trial, ~~who~~which ~~acquired~~motions ~~our~~were ~~stock~~renewed ~~between~~on ~~May~~April 410, ~~2006~~2008. ~~through~~On ~~July~~April 114, ~~2006.~~2008, ~~The~~Finjan ~~complaint~~filed ~~alleges~~amended motions for an injunction, enhanced damages, ~~generally~~interest, ~~that~~attorneys’ ~~defendants~~fees, ~~made~~costs, ~~false~~expenses and ~~misleading~~an ~~statements~~accounting ~~about~~of ~~our~~damages. ~~business~~Finjan ~~condition~~also ~~and~~filed ~~prospects~~a motion for judgment as a matter of law to set aside the ~~fiscal~~jury’s ~~quarter~~verdict ~~ended~~that ~~June~~Secure Computing’s patents are valid. On April 307, ~~2006~~2008, Secure inComputing ~~violation~~filed a motion to stay execution of ~~Section~~the judgment pending the post-trial motions. Briefing for these motions was completed on May ~~10(b)~~16, ~~and~~2008. ~~20(a)~~All of the ~~Securities~~motions ~~Exchange~~remain ~~Act~~pending. ofAt ~~1934~~this ~~and~~time, ~~SEC~~it is not possible to predict the ~~Rule~~timing ~~10b-5~~or outcome of these motions or reasonably estimate the additional amount of loss, if any, that Secure Computing might suffer. ~~The~~We believe that the allegations included in the complaint ~~seeks~~are ~~unspecified~~wholly ~~monetary~~without ~~damages~~merit and intend to defend this litigation vigorously. If ~~The~~necessary, ~~matter~~we iswill ~~pending~~appeal the trial court’s decision to the Federal Circuit Court of Appeals.

On ~~September~~ January 2119, 2007, ~~Diane~~Rosenbaum ~~Josifovich~~Capital, LLC filed a ~~complaint~~ ~~against~~putative ~~Secure~~securities ~~Computing~~class action complaint in the ~~Superior~~United ~~Court~~States ofDistrict ~~New~~Court ~~Jersey,~~for ~~Somerset~~the ~~County.~~Northern ~~The~~District ~~complaint~~of ~~alleges~~California ~~that~~against Secure Computing ~~breached~~and ~~its~~certain ~~contract~~directors ~~with~~and Msofficers of Secure Computing. ~~Josifovich~~ ~~with~~The ~~respect~~alleged toplaintiff ~~payment~~class ~~for~~includes ~~commission~~persons ~~sales.~~who ~~Related~~acquired toour ~~this allegation~~stock between May 4, ~~the~~2006 ~~complaint~~and ~~also~~July 11, 2006. The complaint alleges ~~claims~~generally ofthat ~~promissory~~defendants ~~estoppel,~~made ~~equitable~~false ~~estoppel~~and misleading statements about our business condition and prospects for the fiscal quarter ended June 30, ~~misrepresentation~~2006, in violation of Section 10(b) and ~~breach~~20(a) of the ~~covenant~~Securities ofExchange ~~good~~Act ~~faith~~of 1934 and ~~fair~~SEC ~~dealing~~Rule 10b-5. The complaint ~~also~~seeks ~~alleges~~unspecified ~~that~~monetary ~~Secure~~damages. ~~Computing~~After ~~retaliated~~plaintiff ~~against~~filed an amended ~~Ms.~~complaint on July ~~Josifovich~~2, ~~and~~2007, ~~created~~the defendants filed a ~~hostile~~motion ~~work~~to ~~environment~~dismiss. onThe ~~the~~trial ~~basis~~court ofdenied ~~Ms.~~that motion on March ~~Josifovich’s~~4, ~~gender~~2008. The defendants filed answers to the amended complaint ~~seeks~~on ~~unspecified~~April 25, ~~monetary~~2008, ~~damages~~and discovery is proceeding. The ~~matter~~next status conference with the court is ~~pending~~scheduled for November 21, 2008. We believe that our public statements during the class period were timely and accurate. We and the other defendants intend to ~~vigorously~~ defend ~~all~~the claims ~~against us~~vigorously.

~~Item~~On 2.September 21, ~~Changes~~2007, Diane Josifovich filed a complaint against Secure Computing in ~~Securities~~the Superior Court of New Jersey, Somerset County. The complaint alleges that Secure Computing breached its contract with Ms. Josifovich with respect to payment for commission sales. The complaint also asserts claims of promissory estoppel, equitable estoppel, misrepresentation, and breach of the covenant of good faith and fair dealing. The complaint also alleges that Secure Computing retaliated against Ms. Josifovich and created a hostile work environment on the basis of Ms. Josifovich’s gender. The complaint seeks unspecified monetary damages. The case was removed to the United States District Court for the District of New Jersey. In February 2008, the plaintiff amended her complaint to add some additional allegations, including a claim that she was allegedly retaliated against by being placed on a performance improvement plan and terminated. Secure Computing has answered the complaint, denying all of Ms. Josifovich’s claims and denying any liability. This matter is pending, with discovery proceeding. We intend to vigorously defend the claims against us.

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

Item 1A.

Risk Factors

In order to complete the sale of the SafeWord product line, we may be required to pre-pay the indebtedness outstanding under our senior secured credit facility and lose access to the related $20.0 million revolving credit facility. In order to close the proposed sale of the SafeWord product line, we will be required under the senior secured credit facility agreement to either obtain a waiver of the negative covenant in the credit facility prohibiting certain assets sales or pre-pay the indebtedness outstanding under the credit facility at the time of closing. If we are unable to obtain a waiver of the negative covenant regarding assets sales, then in addition to being required to pre-pay the indebtedness outstanding under the senior secured credit facility ($44.0 million at June 30, 2008), we may also lose access to the $20.0 million revolving credit facility established under the senior secured credit facility. These developments could have a material adverse effect on our liquidity.

We may incur additional, material litigation costs related to the patent infringement claims made against us by Finjan Software Ltd., and may ultimately be required to pay substantial damages related to such claims and cease selling certain functionality in our Secure Web products. Following the jury verdict against us last March, Finjan moved for an increase in the damages determined by the jury in order to take into account sales made by us after the period of sales considered by the jury. Finjan also requested that the court triple the damage award based on the jury’s finding of willful infringement and also require us to pay the attorney fees incurred by Finjan in their litigation against us. Lastly, Finjan requested an injunction prohibiting us from selling products incorporating the functionality accused of infringing Finjan’s patents. Although we have moved for a judgment as a matter of law on Finjan’s infringement claims, or in the alternative for a decrease in damages or a new trial, and intend to appeal any favorable decision on Finjan’s post-trial motions and any unfavorable decision on ours, the court’s decision to grant any of Finjan’s motions, or to deny any of ours, could have a material adverse effect on our business, results of operations and financial condition.

Other ongoing litigation could adversely affect our results of operations and financial condition. In addition to the Finjan litigation, we are a defendant in the Rosenbaum and Josifovich cases described in Part II, Item 1. Costs incurred in complying with related discovery matters and preparing for and going to trial, and any adverse developments in such litigation, could have a material adverse effect on our results of operations and financial condition.

If we are sued for infringement of a third party’s patents or other proprietary rights, we may incur substantial litigation costs. Other than the ongoing litigation with Finjan Software Ltd., we are not a party to any litigation in which a third party has claimed that we or our products have infringed the third party’s patents or other proprietary rights. However, the computer technology market is characterized by frequent and substantial intellectual property litigation. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict. In the event that a third party were to make a claim of infringement against us, we could be required to devote substantial resources and management time to the defense of such claim, which could have a material adverse effect on our business, results of operations and financial condition.

Our product lines are not diversified beyond providing enterprise gateway security solutions to our customers, and any drop in the demand for enterprise gateway security products and services would materially harm our business. Substantially all of our revenue comes from sales of enterprise gateway security products and related services. We expect this will continue for the foreseeable future. In addition, the proposed sale of the SafeWord product line would reduce the number of our enterprise gateway security products. As a result, a reduction in our sales of these products and services could have a material adverse effect on our business, results of operations and financial condition.

Other than the changes to our risk factors discussed above, there have been no material changes in the risk factors set forth in our 2007 Annual Report on Form 10-K. For further information, see Part I, Item 1A, Risk Factors in our 2007 Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults ~~upon~~Upon Senior Securities

Not applicable

Item 4.

Submission of Matters to a Vote of Security Holders

~~None~~The following matters were voted on at our Annual Meeting of Stockholders held on May 16, 2008:

a) The following director was elected:


	Number of Common and Preferred Shares Voted
Director	For	Withheld
Alexander Zakupowsky, Jr.	67,270,339	3,711,379

Mr. Zakupowsky was elected to a three year term commencing upon election, which expires upon the Annual Meeting of Stockholders in 2011, or until his successor is duly elected.

b) The following amendment to the 2002 Stock Incentive Plan was approved:


2002 Stock Incentive Plan	Number of Common and Preferred Shares Voted			Broker Non Vote
2002 Stock Incentive Plan	For	Against	Abstain	Broker Non Vote
Amendment to the 2002 Stock Incentive Plan to increase the number of shares available for issuance by 1,500,000	32,188,217	27,888,641	395,847	10,509,013

c) The following amendment to the Employee Stock Purchase Plan was approved:


Employee Stock Purchase Plan	Number of Common and Preferred Shares Voted			Broker Non Vote
Employee Stock Purchase Plan	For	Against	Abstain	Broker Non Vote
Amendment to the Employee Stock Purchase Plan to increase the number of shares authorized for issuance thereunder by 1,000,000, to change the eligibility requirements for participants thereunder and to make certain other clarifying and administrative changes as set forth in the Proxy Statement	55,849,495	4,277,793	345,417	10,509,013

d) The following proposal was approved:


	Number of Common and Preferred Shares Voted
Independent Auditors	For	Against	Abstain
Ratification of Ernst & Young LLP as our independent registered public accounting firm for the year ended December 31, 2008	69,391,448	1,250,880	339,390

Item 5.

Other Information

~~None~~On May 27, 2008, the Compensation Committee of the Board of Directors ratified the Separation and Release Agreement between Secure Computing and Mary Budge, our former Senior Vice President, Secretary & General Counsel. The agreement with Ms. Budge is filed as Exhibit 10.6 to this report.

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

(a) Exhibits


Exhibit		Description
3.1		Restated Certificate of Incorporation, effective March 6, 1996, as amended by the Certificate of Amendment of Certificate of Incorporation effective December 11, 1998, is incorporated by reference to Exhibit 3.1 to our Amended Quarterly Report on Form 10-Q/A for the period ended June 30, 2000.

3.2		Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock is incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on August 19, 2005.

3.3		By-Laws.

10.1		2002 Stock Incentive Plan, as amended (2008) is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 22, 2008.

10.2		Letter Agreement with Daniel Ryan is incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on June 2, 2008.

10.3		Separation Agreement with John McNulty is incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on June 6, 2008.

10. 4		Employment Agreement with Daniel Ryan is incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on July 18, 2008.

10. 5		Description of severance arrangements with certain executive officers is incorporated by reference to Item 5.02 of our Current Report on Form 8-K filed with the SEC on July 25, 2008.


Exhibit		Description
10.6		Separation and Release Agreement with Mary Budge dated as of February 11, 2008.

10.7		Offer Letter and Employment Agreement with Steve Kozachok dated as of April 17, 2008 and April 20, 2008, respectively.

10.8		Secure Computing Corporation Change in Control Severance Plan.

10.9		Form of Restricted Stock Unit Award Agreement-Secure Computing Corporation 2002 Stock Incentive Plan.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1		Certification by Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2		Certification by Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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

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

(b) Reports on Form 8-K

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

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

SECURE COMPUTING CORPORATION

SIGNATURES

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

SECURE COMPUTING CORPORATION


	SECURE COMPUTING CORPORATION

	By:	/s/ Timothy J. Steinkopf
DATE: August 11, 2008		Timothy J. Steinkopf
		Senior Vice President of Operations and Chief Financial Officer
		(Duly authorized officer and Principal Financial Officer)

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

27Table of Contents

EXHIBIT INDEX


Exhibit		Description
3.3		By-Laws.

10.6		Separation and Release Agreement with Mary Budge dated as of February 11, 2008.

10.7		Offer Letter and Employment Agreement with Steve Kozachok dated as of April 17, 2008 and April 20, 2008, respectively.

10.8		Secure Computing Corporation Change in Control Severance Plan.

10.9		Form of Restricted Stock Unit Award Agreement-Secure Computing Corporation 2002 Stock Incentive Plan.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1		Certification by Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2		Certification by Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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