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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission file number 0-27074

SECURE COMPUTING CORPORATION

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of March 24, 2003 was $115,877,492 based on the closing sale price for the Company’s Common Stock on that date. For purposes of determining this number, all officers and directors of the Registrant are considered to be affiliates of the Registrant, as well as individual stockholders holding more than 10% of the Registrant’s outstanding Common Stock. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the Registrant or any such person as to the status of such person.

As of March 24, 2003, the Registrant had 29,786,280 shares of Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held May 14, 2003 for the year ended December 31, 2002 are incorporated by reference in Part III hereof.

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Part I

Forward-looking statements made in this Annual Report on Form 10-K or in the documents incorporated by reference herein that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. A number of risks and uncertainties, including those discussed under the caption “Certain Factors That May Affect Future Results” in this Form 10-K and the documents incorporated by reference herein, could affect such forward-looking statements and could cause actual results to differ materially from the statements made. We do not undertake any obligation to update or correct any forward-looking statements.

In this Annual Report on Form 10-K, “Secure Computing,” “we,” “us,” “our,” and “Registrant” refer to Secure Computing Corporation.

Item 1.     Business

With broad expertise in security technology, we develop network security products that help our customers create trusted network environments both inside and outside of their organizations. Our customers operate some of the world’s largest and most sophisticated electronic business operations and include prominent organizations in banking, financial services, healthcare, telecommunications, manufacturing, public utilities, federal and local governments. We work closely with them to deliver secure access control and innovative new features.

Our technologies enable our customers to balance security and accessibility by controlling, managing, and personalizing access for millions of customers, employees, and partners connecting to their businesses. The challenge for organizations conducting business over public networks is to provide application and network solutions that let growing numbers of trusted users into business systems, easily, safely, and privately. Our objective is to solve the most difficult network security challenges our customers face.

We partner with a number of companies in several different capacities. These partnerships include members of our Secure Alliance program, resellers, systems integrators, and companies who include our solutions in their product offerings. These companies include, for example: Alternative Technologies, Blue Coat Systems, Cisco, Computer Associates, CSC, Dell, EDS, F5 Networks, Hewlett-Packard, Network Appliance, NetOne Systems, Northrop Grumman, Ositis, Phoenix Technologies, Radware, Rainbow Technologies, Sun PS, Vertex Link, Wavecrest Computing, Westcon, and 3Com.

Industry Background

Enterprise computing has evolved over the past 25 years from data centers with isolated mainframe computers supporting a number of terminals in a closed environment to open networks of interconnected servers and personal computers which are accessible by outsiders. The rapid adoption of the Internet as a worldwide networking standard has accelerated the distribution and sharing of data and applications, enabling enterprises to adopt new ways of doing business electronically. The rise of e-business has created new challenges for securing IT systems and elevated information security to a critical business issue.

Conducting Business Over Public Networks

Internet-based systems have emerged as the platform for today’s electronic commerce. These systems are a combination of traditional mainframe and client/server computing systems with Web technologies and the Internet. They extend internal systems to the external business environment in order to perform activities such as electronic trading of goods and services, online delivery of digital content, electronic funds transfers and share trading, electronic bills of lading, commercial auctions, collaborative design and engineering, online sourcing, public procurement, direct consumer marketing, and after-sales service.

The key reason organizations are moving rapidly to an e-business model is the direct interaction between the e-business system and its suppliers, customers, and partners. This direct interaction lowers costs of doing business and expedites commerce. A well-designed e-business infrastructure may give any organization a competitive advantage.

Public Network Security Issues

The move to Internet-based business processes brings speed and efficiency, but it also exposes organizations and their partners to increased security risks of theft, downtime, espionage, embarrassment, and infiltration. As e-business evolves, the need for secure, trusted remote access for employees and partners is more important than ever.

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A 2002 FBI/Computer Security Institute study found that 90% of information security professionals surveyed had experienced computer security breaches during the previous year, including theft of proprietary information, outsider penetration of security perimeters, and denial of service attacks. Eighty percent of respondents acknowledged financial losses due to those security incidents.

Concern about network security has become an issue at the forefront of electronic business infrastructure. While outsider attacks receive the most publicity, insider threats are a growing concern. Remote employees, partners, customers, and others who are already inside a company’s security perimeters pose a big risk. Any information sitting on the network must be protected and access rights need to be established to ensure safe business practices.

To mitigate these risks, organizations conducting business over networks must have solid and scalable security architecture, and appropriate security policy. They need exceptional security products that can control the interactive communication they provide to their networks, whether it’s remote access to internal networks, customer and partner access to their online business resources, or employee access to the Internet from inside their organizations.

Market Need and Strategy

Organizations must establish secure, dynamic business relationships with an ever-increasing number of internal and external users. The traditional Internet security perimeter, the hallmark of which was the firewall, is being augmented or replaced with more pervasive solutions that manage access to any size organization.

Corporations realize now more than ever they have to take responsibility to protect their confidential information and their customer’s confidential information. Not only are enterprises realizing and acting on this need but customers and business partners have become knowledgeable about security as well. Customers want to know if their data residing on a given network is secure and demand the assurance that parameters are in place for managing access to their proprietary information.

Our strategy is to provide organizations with the strong security options that are capable of enforcing even the most complex security policies and to continue providing world class support and leading expertise in our related technology. Our goal is to help organizations be confident in the security of their network operations. All of our products are designed to provide the strongest network protection available, comprehensive manageability, and greater scalability and interoperability than other competitive solutions available, along with the flexibility necessary to implement and enforce customized security policies.

Secure Computing Solutions

Our products provide complete solutions separately and they also work well together for a more comprehensive solution, depending upon the goals and needs of our customers. Our solutions are comprised of products and applications that are easy to use, administer, and manage across different systems as they grow. Our products’ ability to scale as an infrastructure increases or as the number of users grows has always been, and continues to be, one of our hallmarks. Our architecture allows security functions to be easily embedded into other platforms. Our solutions run on a variety of platforms and integrate well with other enterprise solutions, making our products a safe and economical choice for corporations world wide.

Remote access to network resources is a requirement for many businesses, but verifying the identity of your remote users is vital for security. Organizations are increasingly realizing the many vulnerabilities of passwords, and they need strong authentication systems that are easy to install and deploy, simple to manage, and able to grow with their needs.

SafeWord PremierAccess meets these needs. It positively identifies users through strong authentication, controls access to protected resources using role-based authorization, and offers unparalleled scalability and ease of use.

SafeWord PremierAccess integrates well with Web, VPN, wireless, Citrix^®, Windows, remote dial-up, UNIX, SSH, Oracle, Novell, and other network applications. SafeWord tokens provide one-time passwords that eliminate the vulnerabilities of the fixed passwords used by many systems and applications. SafeWord PremierAccess also supports a wide range of other authenticators including software tokens, smart cards, digital certificates, USB tokens, biometrics, and MobilePass^™, which sends one-time passwords to your cell phone, pager, or wireless PDA.

SafeWord PremierAcess systems protect thousands of companies and millions of end users because they are highly secure, easy to manage, and practical to deploy. With a single management system, SafeWord PremierAccess lets organizations secure all their remote access points without the expense and complexity of integrating multiple point products. SafeWord PremierAccess

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includes powerful capabilities such as the Universal Web Agent, user self-enrollment, and brokered authentication to external systems, which makes it a complete and flexible strong authentication solution.

In early 2002 we released the Sidewinder Appliance, a hardware appliance firewall utilizing Dell’s custom factory integration services to manufacture and ship the rack-mounted Dell hardware platforms pre-imaged with Sidewinder Appliance software. Also, in early 2002 we acquired the Gauntlet VPN firewall business from Network Associates. We are now delivering a next generation firewall which has been built as a combination of the key features from both Sidewinder and Gauntlet.

In January 2003 we released our new next generation firewall branded Sidewinder G₂ Firewall. Sidewinder G₂ provides enterprise strong^™ protection for the world’s most important networks. With a simple Power-It-On^™ deployment and SecureOS^™ UNIX operating system, the G₂ Firewall and VPN gateway improves manageability and reduces emergency security patches without sacrificing performance. Sidewinder G₂’s hybrid, tunable architecture encompasses the entire range of firewall security mechanisms including stateful inspection, circuit level proxies, application filtering, secured servers, and real-time Strikeback^® intrusion detection and automated response in one package. Our uncompromised SecureOS^™ with patented Type Enforcement^™ technology puts Sidewinder G₂ in a class by itself. A single-site or enterprise-wide deployment of Sidewinder G₂ firewalls can be centrally managed from any Windows^® platform.

Also in January 2003 we released the Sidewinder G₂ Enterprise Manager, a new security appliance that delivers both single-point policy management and a central audit-log and configuration back-up repository for hundreds of distributed Sidewinder G₂ Firewalls. This appliance based enterprise manager resides on our SecureOS ensuring the same protection they receive from our Sidewinder G₂ Firewall.

SmartFilter enables organizations to build and enforce sophisticated Web-usage policies. From informing users real-time on policies, to denying access to specific sites, SmarFilter creates a positive, productive Web culture in any organization. SmartFilter’s Control List, updated continuously, accurately categorizes millions of Web sites into content-specific groups. Management-ready reports detail Web-surfing activity. SmartFilter’s On-Box^TM architecture provides outstanding performance with industry-leading filtering speeds.

SmartFilter has become the market leading de-facto standard for Web filtering on edge or caching devices through original equipment manufacturer (OEM) relationships. SmartFilter’s simple software plug-in architecture provides OEMs a way to integrate a high demand, revenue-generating, capability – Web filtering – directly into their solutions, quickly and easily. We are the only company with OEM relationships for On-Box filtering with all three of the top caching appliance vendors – Blue Coat, Cisco, and Network Appliance, as well as several other vendors.

In 2002, we significantly enhanced the enterprise capabilities of SmartFilter by adding a Java-based software console for centralized remote management. This is a key differentiator in the Web filtering space. In addition, there were considerable enhancements to our global Web filtering coverage in 2002. Currently, SmartFilter has over 4 million entries in the SmartFilter Control List and Web site database entries in 66 unique languages, providing industry leading international coverage.

Our Embedded Firewall technology is commercially available through 3Com. By embedding access control technology inside the network interface cards, independent of the host operating system, the embedded firewall offers a scalable, tamper-resistant, and non-by-passable security solution to manage access control inside the corporate perimeter firewall. The 3Com Embedded Firewall provides the next generation of secure e-business connectivity, allowing employees, partners, and suppliers to access only the information they require. The security technology resident in the embedded firewall, provides for centrally managed packet filtering, auditing, and IP Security Option (IPSec) hardware acceleration.

The embedded firewall uses a centrally managed architecture. The user-friendly graphical user interface (GUI) is designed to allow administrators to quickly and easily define access control policies on the Embedded FirewallPolicy Server. The policy server is a fully replicated system that provides fail-over capabilities for up to 3000 embedded firewall NICs. This flexible, scalable solution allows administrators to securely allow access to resources required by employees, partners, and suppliers, without sacrificing the integrity and confidentiality of the corporate networks. The product is available for desktop, laptop, and server environments.

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Security and Support Services

Our services are designed to ensure that our customers make optimal use of our products when controlling access to their e-business systems. We provide a life cycle of support and services: Solution Planning, Solution Implementation, and Solution Support. These services are described below.

Our Security Services offerings include a variety of options for rapid assessment of a company’s current network architecture and evaluation of the current status of network security. We then compare this information to the company’s business needs, both current and future, to help them plan a scalable, secure e-commerce solution. In addition, we offer security policy services that help customers prepare a policy and plan that transfers their security policy from paper to practice. We provide the following services: network architecture security assessment; security policy assessment and development; and AAA system security assessment.

Our Network Services team offers a full range of rapid-deployment integration services and training to assist our customers through implementation and integration of our products. Both the configuration process of a security system and the security products themselves, by their nature, may have an impact on several areas within a customer’s network. Accordingly, we offer a complete package of product integration assistance to ensure our customers maximize network uptime and maintain productivity during the process. We provide the following services: product implementation; product audit and configuration; and product training.

As part of our Network Services training program, we provide extensive product and network training on-line with our Web-based/tutor assisted training at our training facilities, and on-site worldwide for customers and partners. These services help our customers understand basic and advanced administration rules and tools that enable partners to configure, integrate, and maintain our products as part of a comprehensive e-business solution.

We offer industry leading live answer support services. SecureSupport has a team of technical support engineers that provide customer support around the clock via e-mail, the Web, or telephone. Service options are tailored for each of our network security products. Customers can select the SecureSupport option that best meets their needs. Our support center call statistics are published and posted to our corporate website at www.securecomputing.com.

We designed SecureSupport Online, a tool to assist our customers and channel partners with any problem they may experience with any of our products. Through this process, technical expertise is offered online through a searchable knowledge base, viewable support history, and our customer support newsletters. Product patches and release notes can also be downloaded.

We offer our customers the option to purchase software support and upgrade service for an annual fee. We provide software updates and technical support through this program.

Advanced Technology Contracts

We have traditionally engaged in research and development of information security technology and products through contracts with departments and agencies of the United States government, including the Defense Advanced Research Projects Agency (DARPA), the National Security Agency, and the Department of Energy. Our Advanced Technology Division’s mission is to develop new technologies and drive our solutions into operational environments to meet the ever-changing needs of homeland security. Our strategy is to focus on development contracts that leverage our core products, drive leading edge technology, and provide state-of-the-market, real world solutions for organizations of all types and sizes.

The majority of our contracts require that we perform specified services, for which we are paid a fee and reimbursed for actual costs. Under these cost-reimbursement contracts, we have the ability to recoup all legitimate costs associated with the performance of the contract. Generally, these contracts are also subject to termination at the convenience of the applicable government agency. If a contract is terminated, we typically are reimbursed for our costs to the date of termination plus the cost of an orderly termination and are paid a portion of the fee. Our United States government contracts are subject to audit by the Defense Contract Audit Agency (DCAA). The DCAA has periodically audited our contracts without any cost disallowances. In addition,

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we are seeing an increase in commercially funded, fixed price contracts under which we would be completing specified services, for a specified price.

Customers

Our customers operate some of the largest and most sensitive networks in the world. Our partners and customers include the majority of the Dow Jones Global 50 Titans and organizations in banking, financial services, healthcare, telecommunications, manufacturing, public utilities, and federal and local governments. Secure Computing has close relationships with the largest agencies of the United States government, including contracts for advanced security research. Our customer list also includes numerous international organizations and foreign governments. Overseas, our customers are concentrated primarily in Europe, Japan, China, and the Pacific Rim

No customer accounted for more than 10% of our total revenue in 2002, 2001 or 2000.

Sales

We sell our products and services through both indirect and direct channels, using a worldwide sales organization. For 2002, sales to major end users comprised 47% of total product sales, while indirect channel sales comprised the remaining 53%. Indirect channels include sales made to domestic and international distributors, value-added resellers, major integrators, and OEMs.

Our sales strategy is a hybrid, high-touch model designed to reduce possible channel conflict and allow the customer to decide how best to acquire our products. In this model, our direct sales teams work closely with our channel and OEM partners to ensure that the customer is satisfied. Whether the customer buys our product and services from our salesperson or from a channel or OEM partner, both salespeople are compensated for the transaction. As an enterprise software vendor, our goal is to ensure that our applications are successfully implemented and supported. This model allows the customer to choose their preferred partner for purchase, implementation and support, all of which are endorsed by Secure Computing and our sales force.

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

International sales accounted for 26% of total revenue during 2002. Major foreign markets for our products include Europe, Japan, China, the Pacific Rim and Latin America. In each country, we have independent channel partners that are responsible for marketing, selling, and supporting our products to resellers and end users within their defined territories. Independent market analyst reports indicate that international markets will continue to provide increased opportunities for e-business security products. The following table summarizes information about our international and domestic sales and operations:

Our Advanced Technology contract revenue strategy remains focused only on development contracts that add value to our Products and Services offerings.

Marketing

We market our products to prospects worldwide using a variety of programs. Dedicated marketing personnel are based primarily in our corporate headquarters in San Jose, California. They create and implement marketing programs in each of our major functional market areas — corporate marketing for company and brand awareness, product marketing, and partner marketing.

We use comprehensive targeted marketing programs to generate sales leads and brand awareness. Programs include: direct marketing, web marketing, advertising, seminars, webinars, trade shows, and ongoing customer, channel, and partner events.

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An active public relations program ensures that we receive appropriate press coverage for our various programs and announcements as well as obtain product reviews and speaking engagements. In addition to the marketing programs, we stimulate interest and demand about our e-business solutions through our Web site, partner Web sites and other industry specific Web sites, providing white papers, newsletters, and technical notes. Several of our senior technical staff contribute articles to industry periodicals as well as abstracts for presentations they provide to industry specific summits and events, further extending our ability to educate the industry about e-business and extranet security.

Through our partnering programs, we enter strategic marketing and selling relationships with various vendors of communications, security, and network management products or managed services. These partners recommend our products along with theirs in helping customers build a security solution.

Competition and Market Consolidation

The principal competitors for our existing solutions include:

Backlog

Our backlog for commercial products at any point in time is not significant since products are shipped upon receipt of order. We do not believe that our commercial backlog at any particular point in time is indicative of future sales levels. The timing and volume of customer orders are difficult to forecast because our customers typically require prompt delivery of products and a majority of our sales are booked and shipped in the same quarter. In addition, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced, or canceled prior to shipment with little or no penalty.

Our backlog relating to Advanced Technology contracts as of February 28, 2003 was approximately $1.1 million compared to $900,000 as of February 28, 2002. Backlog historically has represented firm government orders for research and development services. Funded backlog represents that portion of backlog for which our government customers have actually committed to compensate us. As of February 28, 2003, $590,000 of our government contract backlog was funded, compared to none as of February 28, 2002.

Manufacturing

Our manufacturing operations consist primarily of light assembly and packaging associated with our software products. We use subcontractors to duplicate our software media and print our user documentation and product packaging. We then assemble the final software products at our facilities in St. Paul, Minnesota. We also perform some limited hardware manufacturing operations that consist of purchasing hardware components, final assembly, and testing. Hardware components include commercially available servers, computers, memory, and third-party peripherals.

The majority of the materials used in our manufacturing operations are industry-standard parts that are widely available. Typical materials required are media and media duplication services, user documentation and other printed materials, product packaging, and computer systems (personal computers, computer peripherals, memory disk drives, and storage devices).

Our SafeWord product line includes a small token, available in various designs, which is used for user authentication. We source these tokens through ReachOut Ltd., an electronics assembly manufacturer located in China. We are also in the process of developing a second source for the current versions of our tokens with Northgate Innovations, Inc. In addition, we utilize specialized robotic equipment for certain automated deployment services for some of our SafeWord token customers.

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Research and Development

Our internal engineering staff performs internal development of new products and features. Of our 101 engineering employees at March 24, 2003, 19 held postgraduate degrees.

We intend to keep our products broadly compatible with a variety of host computer configurations, other information security products and other applications. In addition, we will introduce new products as market demand develops for such products. We design our products so that they support emerging security standards, such as the Content Vectoring Protocol (CVP), the Public Key Cryptography Standard (PKCS), the IPSec, and the Lightweight Directory Access Protocol (LDAP).

We will continue to seek government research and development contracts to maintain our high-technology base, as well as deploy our existing product solutions into operational environments. We currently have contracts with government agencies, including the DARPA, the United States Navy, and the United States Army. These contracts address the information security requirements that allow for secure and trusted communications between collaboration partners. We will continue to pursue, with these and other government organizations, contracts that advance our products and technologies into these operational environments.

Patents and Proprietary Technology

We rely on patent, trademark, copyright, and trade secret laws, employee and third-party nondisclosure agreements, and other methods to protect our proprietary rights. We currently hold a number of United States and foreign patents relating to computer security software and hardware products. We believe that our patents are broad and fundamental to information security computer products.

Our success depends, in part, upon our proprietary software and security technology. We also rely on trade secrets and proprietary expertise that we seek to protect, in part, through confidentiality agreements with employees, consultants, and other parties.

We have used, registered, and/or applied to register certain trademarks and service marks to distinguish genuine Secure Computing products, technologies and services from those of our competitors in the United States and in foreign countries and jurisdictions. We enforce our trademark, service mark and trade name rights in the United States and abroad.

Employees

As of March 24, 2003, Secure Computing had approximately 362 employees. Of these employees, 108 were involved in sales and marketing, 66 in customer support and services, 121 in research and development, 21 in production, 21 in information technology and 25 in administrative, human resources and finance. No employee of Secure Computing is represented by a labor union or is subject to a collective bargaining agreement. We believe that we maintain good relations with our employees.

Executive Officers

Our executive officers and their ages as of March 24, 2003 are as follows:

JOHN E. MCNULTY is our Chairman and Chief Executive Officer. Mr. McNulty first joined us as President and Chief Operating Officer in May 1999 and assumed the positions of Chairman of the Board and Chief Executive Officer in July 1999. From 1997 until joining us, he served as Senior Vice President of Sales, Services, and Business Development at Genesys Telecommunications Laboratories, a leading independent software company in the computer telephony integration environment. Mr. McNulty was also previously with Intel Corporation, the world’s leading semiconductor manufacturer, where he held a number of positions, including Director of Marketing and Business Development for the Enterprise Server Group, which he launched. Mr. McNulty currently serves on the board of directors of Auspex Systems, Inc., a network storage company.

TIMOTHY P. MCGURRAN has been a director of Secure Computing since January 2002. Mr. McGurran is our President and Chief Operating Officer and is a member of the Board of Directors. Mr. McGurran first joined us as Senior Vice

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President of Operations and Chief Financial Officer in May 1996 and assumed the positions of President and Chief Operating Officer in March 2002. From 1984 until joining us, he was at Ernst & Young LLP, where his last position was Senior Manager.

TIMOTHY J. STEINKOPF is our Senior Vice President and Chief Financial Officer. Mr. Steinkopf first joined us as Treasurer and Director of Investor Relations in September 2000 and assumed the positions of Vice President and Chief Financial Officer in March 2001. Mr. Steinkopf was appointed to Senior Vice President in January 2002. From 1999 until joining us, he served as Chief Financial Officer and Vice President of Finance at Silicon Entertainment, Inc. He was the Vice President of Finance, Secretary and Treasurer at Watt/Peterson Inc. from 1991 to 1999, and prior to that he was at Ernst & Young LLP.

VINCENT M. SCHIAVO is our Senior Vice President of Worldwide Sales. Mr. Schiavo joined us in April 2001. From 1998 until joining us, he served as President of PolyServe, Inc. Prior to that he served as Vice President of Worldwide Sales at Sonic Solutions and in various other sales management roles at Radius, Apple Computer and Data General Corporation.

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

Certain Factors That May Affect Future Results

The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by us from time to time.

We have experienced operating losses in the past and may experience operating losses in the future. In 2002 we had operating profit. However, we have incurred losses in the past. For example, for the quarter ended March 31, 2002, we had an operating loss of $1.5 million, but for the full year 2002 we had operating income of $361,000. We expect to incur a small operating loss in the first quarter of 2003, and we could incur losses after that. If we are unable to attain operating profits in the second, third and fourth quarters, and for the year, our stock price may decline, which could cause you to lose part or all of your investment.

In 2002 we were cash flow positive, however, we have experienced negative cash flow in the past and may experience negative cash flow in the future. If sources of financing are not available, we may not have sufficient cash to satisfy working capital requirements. We believe that our current cash balances are sufficient to satisfy our working capital requirements for at least the next twelve months. We may need to obtain additional financing at that time or sooner if our plans change or if we expend cash sooner than anticipated. We currently do not have any commitments from third parties to provide additional capital. The risk to us is that at the time we will need cash, financing from other sources may not be available on satisfactory terms or at all. Our failure to obtain financing could result in our insolvency and the loss to investors of their entire investment in our common stock.

The potential increase in revenue from our relationships with various vendors of communications, security, and network management products or managed services may be reduced by requirements to provide volume price discounts and other allowances and significant costs incurred in customizing our products. Although we do not intend that such relationships be exclusive, we may be required to enter into an exclusive relationship or forego a significant sales opportunity. To the extent we become dependent on actions by such parties, we could be adversely affected if the parties fail to perform as expected. To minimize our risk, we often set minimum quotas with our customers as a condition of exclusivity.

Competition from companies producing enterprise network and data security products could reduce our sales and market share. The market for network security products is intensely competitive and characterized by rapid technological change. We believe that competition in this market is likely to persist and to intensify as a result of increasing demand for security products. Each of our individual products competes with a different group of competitors and products. Because the market for our products is highly competitive, it may be difficult to significantly increase our market share or our share may actually decline.

Our customers’ purchase decisions are based heavily upon the quality of the security our products provide, the ease of installation and management, the ability to increase the numbers of individuals using our software simultaneously, and the flexibility of our software. If a competitor can offer our customers a better solution in these areas or others and we are unable to rapidly offer a competitive product, we may lose customers. Competitors with greater resources could offer new solutions rapidly and at relatively low costs which could lead to increased price pressure, reduced margins, and a loss of market share.

Many of our competitors and potential competitors have significantly greater financial, marketing, technical, and other competitive resources than we have. Our larger actual and potential competitors may be able to leverage an installed customer base and/or other existing or future enterprise-wide products, adapt more quickly to new or emerging technologies and changes in customer requirements, or devote greater resources to the promotion and sale of their products than we can. Additionally, we may lose product sales to these competitors because of their greater name recognition and reputation among potential customers.

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Our future potential competitors could include developers of operating systems or hardware suppliers not currently offering competitive enterprise-wide security products, including Microsoft Corporation, Sun Microsystems, Inc., IBM, Computer Associates, and Hewlett Packard. If any of those potential competitors begins to offer enterprise-wide security systems as a component of its hardware, demand for our software could decrease. Ultimately, approaches other than ours may dominate the market for enterprise network and data security products.

In the future, we may also face competition from our competitors and other parties that develop or acquire network security products based upon approaches similar to or different from those we employ. There are no guarantees that our approach will dominate the market for network security products. While we believe that we do not compete against manufacturers of other classes of security products, such as encryption, due to the complementary functions performed by such other classes, our customers may perceive such other companies as our competitors.

Consolidation among competitors may erode our market share. Current and potential competitors have established, or may in the future establish, cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. If this were to occur, it could materially and adversely affect the financial condition or results of our operations.

The trend toward multi-function security solutions may result in a consolidation of the market around a smaller number of vendors that are able to provide the necessary breadth of products and services. In the event that we are unable to internally develop all of the products needed for a complete, secure e-business solution, we may need to acquire such technology or be acquired by a larger entity. However, there is no assurance that, in the event that we are not able to internally develop all of the products needed for an enterprise-wide security solution, we will be able to acquire or merge with other entities on terms favorable to us and our stockholders.

The pricing policies of our competitors may impact the overall demand for our product and our profitability. Some of our competitors are capable of operating at significant losses for extended periods of time, increasing pressure on our products. If we do not maintain competitive pricing, the demand for our products, as well as our market share, may decline, having an adverse effect on our business. From time to time, in responding to competitive pressures we lower the price of our products. When this happens, if we are unable to reduce our component costs or improve operating efficiencies, our revenues and margins will be adversely affected.

Other vendors may include products similar to ours in their hardware or software and render our products obsolete. In the future, vendors of hardware and of operating system or other software may continue to enhance their products or bundle separate products to include functions that are currently provided primarily by network security software. If network security functions become standard features of computer hardware or of operating system software or other software, our products may become obsolete and unmarketable, particularly if the quality of these network security features is comparable to that of our products. Furthermore, even if the network security and/or management functions provided as standard features by hardware providers or operating systems or other software is more limited than that of our products, our customers might accept this limited functionality in lieu of purchasing additional software. Sales of our products would suffer materially if we were then unable to develop new network security and management products to further enhance operating systems or other software and to replace any obsolete products.

If an OEM customer reduces or delays purchases, our revenue may decline and/or our business could be adversely affected. We currently have formed relationships with several OEMs including Cisco, Blue Coat, 3Com, and Network Appliance. If we fail to sell to such OEMs in the quantities expected, or if any OEM terminates our relationship, this could adversely affect our reputation, the perception of our products and technology in the marketplace or the growth of our business, and your investment in our common stock may decline in value.

Technology in the network security market is changing rapidly, and if we fail to develop new products that are well accepted, our market share will erode. To compete successfully, we must enhance our existing products and develop and introduce new products in a timely manner. Our net sales and operating results could be materially affected if we fail to introduce new products on a timely basis. The rate of new network security product introductions is substantial, and security products have relatively short product life cycles. Our customer requirements and preferences change rapidly. Our net sales and operating results will be materially affected if the market adopts as industry standards, solutions other than those we employ. In addition, portions of our basic research efforts are funded by government contracts. If those contracts are terminated for any reason, it could reduce our new product stream, which could materially reduce our net sales and operating results.

Denial of our patent applications or invalidation or circumvention of our patents may weaken our ability to compete in the network security market. While we believe that our pending applications relate to patentable devices or concepts, there are no guarantees that any pending or future patent applications will be granted. There is also the risk that a current or future patent,

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regardless of whether we are an owner or a licensee of such patent, may be challenged, invalidated, or circumvented. In addition, there are no guarantees that the rights granted under a patent or under licensing agreements will provide competitive advantages to us.

If another party alleges that we infringe its patents or proprietary rights, we may incur substantial litigation costs. We are not aware of any third-party claims that we or our products have infringed a patent or other proprietary rights. However, the computer technology market is characterized by frequent and substantial intellectual property litigation. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict. In the event that a third party were to make a claim of infringement against us, we could be required to devote substantial resources and management time to the defense of such claim, which could have a material adverse effect on our business and results of operations.

Disclosure of our trade secrets or proprietary information may undermine our competitive advantages. There are no guarantees that the confidentiality agreements protecting our trade secrets and proprietary expertise will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors. In addition, under their contracts with us, United States government agencies have the right to disclose certain technology developed with government funding to our competitors as part of the establishment by the government of second-source manufacturing arrangements or competitive bidding.

If the use of public switched networks such as the Internet does not continue to grow, our market and ability to sell our products and services may be limited. Our sales also depend upon a robust industry and infrastructure for providing access to public switched networks, such as the Internet. If the infrastructure or complementary products necessary to take these networks into viable commercial marketplaces are not developed or, if developed, these networks do not become and continue to be viable commercial marketplaces, our net sales and operating results could suffer.

Our product lines are not diversified beyond providing network security solutions to our customers, and any drop in the demand for network security products would materially harm our business. Substantially all of our revenue comes from sales of enterprise network security products and related services. We expect this will continue for the foreseeable future. As a result, if for any reason our sales of these products and services are impeded, our net sales and operating results will be significantly reduced.

Our stock price is highly volatile, which may cause our investors to lose money and may impair our ability to raise money, if necessary. The price of our common stock, like that of many technology companies, has fluctuated widely. During 2002, our stock price ranged from a per share high of $24.50 to a low of $2.26. Fluctuation in our stock price may cause our investors to lose money and impair our ability to raise additional capital, if necessary. Factors that may affect stock price volatility include:

Quarterly revenues and operating results depend on the volume and timing of orders received, which may be affected by large individual transactions and which sometimes are difficult to predict. Our quarterly operating results may vary significantly depending on a number of other factors, including:

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Sales of our products generally involve a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle for our products is typically lengthy and subject to a number of significant risks over which we have little or no control. We are often required to ship products shortly after we receive orders, and consequently, order backlog, if any, at the beginning of any period has in the past represented only a small portion, if any, of that period’s expected revenue. As a result, our product revenue in any period substantially depends on orders booked and shipped in that period. We typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially.

If customer demand falls below anticipated levels, it could seriously harm our operating results. In addition, our operating expenses are based on anticipated revenue levels, and a high percentage of our expenses are generally fixed in the short term. Based on these factors, a small fluctuation in the timing of sales can cause operating results to vary significantly from period to period.

If our products fail to function properly or are not properly designed, our reputation may be harmed, and consumers may make product liability and warranty claims against us. Our customers rely on our information security products to prevent unauthorized access to their networks and data transmissions. These customers include major financial institutions, defense-related government agencies protecting national security information, and other large organizations. These customers use our products to protect confidential business information with commercial value far in excess of our net worth. Therefore, if our products malfunction or are not properly designed, we could face warranty and other legal claims, which may exceed our ability to pay. We seek to reduce the risk of these losses by attempting to negotiate warranty disclaimers and liability limitation clauses in our sales agreements and by maintaining product liability insurance. However, these measures may ultimately prove ineffective in limiting our liability for damages.

In addition to any monetary liability for the failure of our products, an actual or perceived breach of network or data security at one of our customers could harm the market’s perception of our products and our business. The harm could occur regardless of whether that breach is attributable to our products.

We also face the more general risk of bugs and other errors in our software. Software products often contain undetected errors or bugs when first introduced or as new versions are released, and software products or media may contain undetected viruses. Errors or bugs may also be present in software that we license from third parties and incorporate into our products. Errors, bugs, or viruses in our products may result in loss of or delay in market acceptance, recalls of hardware products incorporating the software, or loss of data. Our net sales and operating results could be materially reduced if we experience delays or difficulties with new product introductions or product enhancements.

If we lose a significant customer, we will incur smaller profits. We derive a significant portion of our revenues from a limited number of customers. For example, our top five customers in products and services made up 18% of our Products and Services revenue in 2002. If we lose any of these customers and fail to replace the customer or fail to increase revenues from other customers, we will incur greater losses. Additionally, if our revenues from any of these customers are reduced, without an increase in revenues from other customers, we will incur greater losses.

If we fail to collect amounts due from our customers on a timely basis, our cash flow and operating results may suffer. Because the timing of our revenues is difficult to predict and our expenses are often difficult to reduce in the short run, management of our cash flow is very important to us. Like most companies, we anticipate that a portion of the amounts owed to us will never be paid. However, if our actual collection of amounts owed to us is less than we have estimated, we will have less cash to fund our operations than we anticipated, and our financial condition and operating results could be adversely affected.

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In addition, collection of amounts due us from sales to resellers, distributors, and international customers generally takes longer than for other sales. Therefore, if our sales to resellers and distributors increase as a percentage of our total revenue, the average number of days it takes for us to collect amounts due from our customers may increase. If there is an increase in the time required for us to collect amounts due us, we will have less cash to fund our operations than we anticipated. This in turn could adversely affect our financial condition and operating results.

We have taken and may from time to time take various forms of action to manage the amounts due us from customers and granting customer discounts in exchange for earlier payment.

The Internet may become subject to increased regulation by government agencies. Due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing and characteristics, and quality of products and services. In addition, the adoption of laws or regulations may slow the growth of the Internet, which could in turn decrease the demand for our products and increase our cost of doing business or otherwise have an adverse effect on our business, operating results or financial condition.

Anti-takeover provisions in our charter documents, share right agreement, and Delaware law could discourage a takeover or future financing. The terms of our certificate of incorporation and share right agreement permit our Board of Directors to issue up to 2,000,000 shares of preferred stock and determine the price, rights, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by our stockholders.

The Board may authorize the issuance of preferred stock with voting or conversion rights that could materially weaken the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of our outstanding voting stock. Further, provisions of Delaware law, our certificate of incorporation and our bylaws, such as a classified board and limitations on the ability of stockholders to call special meetings, and provisions of our share rights agreement could delay or make more difficult a merger, tender offer, proxy contest, or other takeover attempts.

Unanticipated costs and disallowance of costs under our government contracts may harm our business. Under our government contracts, we bear the risk that increased or unexpected costs of providing our services may reduce our profit margin. Any material unanticipated costs could therefore harm our business. In addition, recoverable expenses previously billed by us are subject to review and audit, once every three years, by the DCAA. If the DCAA disallows any of the costs we claim under our contracts, it could adversely affect our operating results.

The ability to attract and retain highly qualified personnel to develop our products and manage our business is extremely important, and our failure to do so could harm our business. We believe our success depends significantly upon a number of key technical and management employees. We may be unable to achieve our revenue and operating performance objectives unless we can attract and retain technically qualified and highly skilled engineers and sales, consulting, technical, financial, operations, marketing, and management personnel. These personnel are particularly important to our research and development efforts and to our growing professional service business, where we employ a large number of technical personnel holding advanced degrees and special professional certification. Competition for qualified personnel is intense, and we expect it to remain so for the foreseeable future. We may not be successful in retaining our existing key personnel and in attracting and retaining the personnel we require. Our operating results and our ability to successfully execute our business plan will be adversely affected if we fail to retain and increase our key employee population.

Our international operations subject us to risks related to doing business in foreign countries. International sales are a substantial portion of our business. Although almost all of our sales are payable in U.S. dollars, several factors could make it difficult for customers from foreign countries to purchase our products and services or pay us for obligations already incurred. Such factors include:

A decline in our international sales or collections of amounts due us from customers could materially affect our operations and financial conditions. For fiscal year 2002, 26% of our total sales came from international sales compared to 25% in 2001. A very large drop in our sales or collections of amounts due us in these specific countries as a result of recession or other economic or political disturbances would likely harm our net sales and operating results.

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In addition, we face a number of general risks inherent in doing business in international markets including, among others:

Other

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on our website, www.securecomputing.com, as soon as reasonably practicable after they are filed with the SEC.

Item 2.     Properties

We are currently headquartered in approximately 11,000 square feet of office space in San Jose, California. We have three separate facilities with a combined square footage of approximately 84,000 square feet in St. Paul, Minnesota, that are occupied by production, research and development, and administration. We have a research facility located in Concord, California, that occupies approximately 17,000 square feet and another research facility located in Gaithersburg, Maryland, that occupies approximately 6,800 square feet. In support of our United States field sales organization, we also lease 5,200 square feet of office space in Reston, Virginia. We occupy these premises under leases expiring at various times through the year 2008. We also have foreign offices in London, England; Sydney, Australia; Munich, Germany; Paris, France; Singapore; Japan; China; and Hong Kong. We believe that our facilities are adequate for our current needs.

Item 3.     Legal Proceedings

In April 1999, purported securities class action complaints were filed in the United States District Court for the Northern District of California against us and certain of our officers and directors. Each complaint alleges that defendants made false and misleading statements about our business condition and prospects during a purported class period of November 10, 1998 through March 31, 1999, and asserts claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. In July 2002, we reached a settlement of the class action complaint. In November 2002, the Court granted final approval of the settlement for $10.1 million. $2.8 million in cash will be covered by our insurance. The $7.3 million balance of the settlement, reflected on the consolidated statement of operations as other non-recurring expense, will be contributed by us in common stock or in a combination of common stock and cash at the date of distribution. The final allocation of the contribution will be determined by us at our sole option. Distribution of the settlement is anticipated sometime in mid-2003.

On February 11, 2002, Herbert Silverberg filed a shareholder derivative action captioned Silverberg v. McGurran, et al., Case No. CV 805193 in California Superior Court in Santa Clara County against certain of our current and former officers and directors. We are named as nominal defendant. Plaintiff alleges that defendants breached their fiduciary duties by making false and misleading statements about our business condition and prospects during the period of November 10, 1998 through March 31, 1999. On April 29, 2002, the Court dismissed the complaint with leave to amend. The parties subsequently negotiated a settlement of $300,000 by which plaintiff will dismiss the action with prejudice. On March 11, 2003 the Court granted final approval of the settlement.

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

No matters were submitted to a vote of the stockholders during the three months ended December 31, 2002.

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Part II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

Our common stock is listed on the NASDAQ national market under ticker symbol: SCUR. As of March 24, 2003, there were approximately 631 registered holders. The number of registered holders represents the number of shareholders of record plus the number of individual participants in security position listings. We believe, however, that many beneficial holders of our common stock have registered their shares in nominee or street name and that there are approximately 8,500 beneficial owners. The low and high price of our common stock during the last eight quarters are as follows:

We have not paid any dividends on our common stock during the periods set forth above. It is presently the policy of the Board of Directors to retain earnings for use in expanding and developing our business. Accordingly, we do not anticipate paying dividends on the common stock in the foreseeable future.

Equity Compensation Plan Information

The following table sets forth information regarding securities authorized for issuance under equity compensation plans:

Beginning in 2003, all new stock option grants under both plans vest 25% after the first year and then monthly over the following three years.

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Item 6.     Selected Financial Data

The consolidated statement of operations data set forth below for the fiscal years ended December 31, 2002, 2001, and 2000, and the consolidated balance sheet data at December 31, 2002 and 2001, are derived from the audited consolidated financial statements included elsewhere in this Form 10-K. The consolidated statement of operations data set forth below for the fiscal years ended December 31, 1999 and 1998, and the consolidated balance sheet data at December 31, 2000, 1999, and 1998, are derived from audited consolidated financial statements which are not included in this Form 10-K. You should read the data set forth below in conjunction with the financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information Regarding Forward-Looking Statements

The following discussion contains forward-looking statements, 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 Item 1 above and in the other documents we file with the SEC. 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.

Results of Operations

The following table sets forth, for the periods indicated, certain items from the statements of operations of our company expressed as a percentage of revenue:

Comparison of Years Ended December 31, 2002 and 2001.

Revenue. Our revenue increased 25.5% to $65.8 million in 2002, up from $52.5 million in 2001. Products and Services revenue was $62.0 million, an increase of 28.1% over the $48.4 million reported in 2001. The growth in Products and Services revenue in 2002 was driven by sustained demand for high assurance solutions and increased traction with our OEM relationships. We expect 2003 revenue from Products and Services to grow 18% over 2002 for the same reasons noted above. Advanced Technology contract revenue was $3.9 million in 2002, a decrease of 5.8% from the $4.1 million reported in 2001, in keeping with our strategy of focusing only on development contracts that add value to our Products and Services offerings. We expect 2003 revenue from Advanced Technology contracts to remain at levels comparable to 2002.

Gross Profit. Gross profit as a percentage of revenue increased from 83.6% in 2001 to 88.5% in 2002. This improvement was driven by increased sales volume on software products, which have higher profit margins. Aggregate gross margins in 2003 are expected to be consistent with the 89.0% that was achieved in the fourth quarter of 2002.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, 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 information technology, facilities and human resources expenses. Selling and marketing expenses increased 5.4% to $37.2 million in 2002, up from $35.3 million in 2001. This increase was driven primarily by an

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increase in payroll and related costs and an increase in commission expense due to expanding revenues. As a percentage of revenue, selling and marketing expenses were 56.5% for the year compared to 67.3% in 2001. This improvement was driven by increased revenue in 2002 while a significant portion of the selling and marketing expenses are fixed in nature. We expect selling and marketing expenses to increase on an actual dollar basis but to continue to decline as a percent of revenue for the full year 2003 when compared to 2002. We expect the increase in selling and marketing expenses in 2003 to be driven by an increase in commission expense due to expanding revenue, an increase in marketing and advertising activities, and inflationary increases in payroll and benefit costs.

Research and Development. Research and development expenses consist primarily of salaries and benefits for our product development personnel and allocations of information technology, facilities and human resources expenses. Research and development expenses increased 5.7% to $15.0 million in 2002, up from $14.2 million in 2001. This increase was driven primarily by an increase in payroll and related costs. As a percentage of revenue, research and development expenses were 22.8% for the year compared to 27.1% in 2001. This improvement was driven by increased revenue in 2002 while a significant portion of the research and development expenses are fixed in nature. We expect research and development expenses to increase on an actual dollar basis but to continue to decline as a percent of revenue for the full year 2003 when compared to 2002. We expect the increase in research and development expenses in 2003 to be driven primarily by inflationary increases in payroll and benefit costs.

General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related expenses for our executive, finance and legal personnel along with allocated information technology, facilities and human resources expenses. General and administrative expenses increased 21.4% to $5.1 million in 2002, up from $4.2 million in 2001. This increase was driven primarily by an increase in directors and officers insurance premiums, legal fees, and to a lesser extent, inflationary increases in payroll and benefits. The executive management team was given payroll increases in 2002. As a percentage of revenue, general and administrative expenses were 7.8% for the year compared to 8.1% in 2001. We expect general and administration expenses to increase on an actual dollar basis and as a percent of revenue for the full year 2003 when compared to 2002. We expect the increase in general and administrative expenses in 2003 to be driven primarily by increases in directors and officers insurance premiums, legal fees, and inflationary increases in payroll and benefit costs.

Separation Costs. In addition to normal operating expenses, we incurred $568,000 of expenses in 2002 related to a 6% reduction in headcount in July 2002.

Non-recurring Expense. Non-recurring expense of $7.3 million in 2002 pertains to a one-time charge for a litigation settlement. In July 2002, we reached a settlement of the class action securities lawsuit that was brought in United States District Court for the Northern District of California on behalf of persons who acquired our common stock between November 10, 1998 and March 31, 1999.

The class action case settled for $10.1 million. $2.8 million in cash will be covered by our insurance. The $7.3 million balance of the settlement will be contributed by us in common stock or in a combination of common stock and cash at the date of distribution. The final allocation of the distribution will be determined by us at our sole option. Distribution of the settlement is anticipated sometime in mid-2003.

Interest and Other Income. Net interest and other income was $421,000 in 2002, a decrease from $870,000 in 2001. The decrease reflects lower average cash and investment balances as well as lower interest rates in 2002 as compared to 2001.

Income Taxes. We recognized no income tax expense or tax benefit for either 2002 or 2001. We believe it is more likely than not that deferred tax assets of $2.7 million at December 31, 2002 will be realized. The computations of our deferred tax assets and valuation allowance are based on taxable income we expect to earn on government contracts, commercial products, and projected interest income over the next three years. Future taxable income of $6.8 million is required to realize the $2.7 million deferred tax asset at December 31, 2002. We had total net operating loss carryforwards of approximately $134.9 million at December 31, 2002. Of these carryforwards, $31.3 million relates to stock option exercises. These deductions currently have a full valuation allowance, and when realized for financial statement purposes, they will not result in a reduction in income tax expense. Rather, the benefit will be recorded as an increase to additional paid-in capital. Of the remaining benefit associated with the carryforwards, approximately $96.8 million have yet to be recognized as a benefit in the consolidated statement of operations. However, there are no assurances that these carryforwards will be available to offset future income tax expense when taxable income is realized.

Comparison of Years Ended December 31, 2001 and 2000.

Revenue. Our revenue increased 34.1% to $52.5 million in 2001, up from $39.1 million in 2000. Products and Services revenue was $48.4 million, an increase of 39.6% over 2000. The growth in Products and Services revenue in 2001 was driven by the addition of 25 direct sales people and over 70 value added resellers, and price increases implemented across all product lines in

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the first half of 2001. Advanced Technology contract revenue was $4.1 million in 2001, a decrease of 8.0% from 2000, in keeping with our strategy of focusing only on development contracts that add value to our Products and Services offerings.

Gross Profit. Gross profit as a percentage of revenue increased from 69.6% in 2000 to 83.6% in 2001. This improvement was driven by increased sales volume on software products, which have higher profit margins.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, 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 information technology, facilities and human resources expenses. Selling and marketing expenses increased 13.2% to $35.3 million in 2001, up from $31.2 million in 2000. This increase was driven primarily by an increase in payroll and related costs due to significant growth in selling headcount and increased Products and Services revenue. As a percentage of revenue, selling and marketing expenses were 67.3% for the year compared to 79.7% in 2000. This improvement was driven by increased revenue in 2001 while a significant portion of the selling and marketing expenses are fixed in nature.

Research and Development. Research and development expenses consist primarily of salaries and benefits for our product development personnel and allocations of information technology, facilities and human resources expenses. Research and development expenses increased 9.1% to $14.2 million in 2001, up from $13.0 million in 2000. This increase was driven primarily by an increase in payroll and related costs. As a percentage of revenue, research and development expenses were 27.1% for the year compared to 33.3% in 2000. This improvement was driven by increased revenue in 2001 while a significant portion of the research and development expenses are fixed in nature.

General and Administrative. General and administrative expenses consist primarily of salaries, benefits and related expenses for our executive, finance and legal personnel along with allocated information technology, facilities and human resources expenses. General and administrative expenses decreased 6.1% to $4.2 million in 2001, down from $4.5 million in 2000. As a percentage of revenue, general and administrative expenses were 8.0% for the year compared to 11.5% in 2000. This improvement was driven by increased revenue in 2001 while a significant portion of the general and administrative expenses are fixed in nature.

Interest and Other Income. Net interest and other income was $870,000 in 2001, a decrease from $2.3 million in 2000. The decrease reflects higher average cash and investment balances in 2001 as compared to 2000 offset by the $1.6 million gain on the sale of the Professional Services group included in 2000.

Income Taxes. We recognized no income tax expense or tax benefit for either 2001 or 2000. We believe it is more likely than not that deferred tax assets of $2.7 million at December 31, 2001 will be realized. The computations of our deferred tax assets and valuation allowance are based on taxable income we expect to earn on government contracts, commercial products, and projected interest income over the next three years. Future taxable income of $6.8 million is required to realize the $2.7 million deferred tax asset at December 31, 2001. We had total net operating loss carryforwards of approximately $128.6 million at December 31, 2001. Of these carryforwards, $29.7 million relates to stock option exercises. These deductions currently have a full valuation allowance, and when realized for financial statement purposes, they will not result in a reduction in income tax expense. Rather, the benefit will be recorded as an increase to additional paid-in capital. Of the remaining benefit associated with the carryforwards, approximately $92.2 million have yet to be recognized as a benefit in the statement of operations. However, there are no assurances that these carryforwards will be available to offset future income tax expense when taxable income is realized.

Liquidity and Capital Resources

Our cash, cash equivalents and short term investments increased by $351,000 from December 31, 2001 to December 31, 2002. The increase is primarily due to cash received from the exercise of stock options and sales of common stock through our employee stock purchase plan, offset by cash used in operating activities and capital additions. We expect to generate cash for the full year 2003 as we expect revenue to continue to grow at a faster rate than operating expenses.

Net cash used in operating activities of $236,000 for the twelve months ended December 31, 2002, net of the effects of the Gauntlet firewall business, was comprised of net loss of $6.5 million, offset by net non-cash related expenses of $3.1 million, a $612,000 increase in current assets, and a $3.7 million increase in liabilities.

Net cash used in investing activities of $116,000 for the twelve months ended December 31, 2002, net of the effects of the acquisition of the Gauntlet firewall business, consisted primarily of net proceeds from sale of investments of $1.7 million offset by $2.1 million of cash used for capital additions, which were made up of computer equipment, technology upgrades, and leasehold improvements.

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Net cash provided by financing activities of $2.6 million for the twelve months ended December 31, 2002 consisted primarily of proceeds received from the exercise of stock options and sales of common stock through our employee stock purchase plan.

As of December 31, 2002 we had working capital of $6.2 million. We anticipate using available cash to fund growth in operations, invest in capital equipment, acquire businesses and to license technology or products related to our line of business.

We believe that we have sufficient financial resources available to fund our current working capital and capital expenditure requirements for at least the next twelve months. We intend to continue to invest our cash in excess of current operating requirements in interest bearing, short term investments.

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 generally accepted accounting principles in the United States. 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 reasonable under the circumstances. Actual results may differ from these estimates under different assumptions, estimates, or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. See Note 1 to the consolidated financial statements for additional discussion of the application of these and other accounting policies.

Revenue Recognition. Our revenue is derived from two primary sources: (1) product and services revenue which includes revenue for software licenses, hardware, royalties, and maintenance for providing product upgrades and customer support, and (2) Advanced Technology contract revenue. 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 revenue is deferred and recognized ratably over the subscription period. Maintenance revenue for providing product upgrades and customer support is deferred and recognized ratably over the service period.

For arrangements with multiple elements we allocate revenue to the various elements based on the fair value of each element sold. We determine the fair value of each element based on its selling price when sold separately. Evidence of fair value includes the approved price list and discount schedule and the actual prices charged for comparable arrangements. These price lists and discount schedules may change from time to time in response to factors including market conditions, value of services and product provided and competitive positioning. Historically, we have not offered significant discounts off of our list prices.

Further, it is our policy that our distributors and resellers are not allowed to hold inventory.

Advanced Technology contract revenues for cost-plus-fixed-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned. Award fees are recognized based upon the percentage of completion and forecasted profit in accordance with SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” A provision is made for the estimated loss, if any, on the contracts in the period the loss becomes probable. Historically, we have not experienced losses on Advanced Technology contracts.

Allowance for Doubtful Accounts. We make estimates regarding the collectibility of our accounts receivables. When we evaluate the adequacy of our allowance for doubtful accounts, we closely analyze specific accounts receivable balances, customer creditworthiness, changes in our customer payment cycles, and current economic trends. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Deferred Tax Assets. The computations of our deferred tax asset and valuation allowance are based on taxable income we expect to earn on government contracts, commercial products, and projected interest income over the next three years. We believe this is a conservative approach in determining the deferred tax asset that may be realized. The risk factors noted above in “Certain Factors That May Affect Future Results,” could adversely affect our ability to generate future taxable income, thereby also adversely impacting our ability to realize the deferred tax asset.

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Inflation

To date, we have not been significantly affected by inflation.

Item 7a.     Quantitative and Qualitative Disclosures About Market Risk

We do not have any material exposure to quantitative and qualitative market risks because we do not own any risk-sensitive financial instruments. We invest our cash in a variety of financial instruments, including bank time deposits and commercial paper. Investments in fixed rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. Our investment securities are held for purposes other than trading.

Item 8.     Financial Statements and Supplementary Data

See Part IV, Item 15 of this Form 10-K.

Item 9.     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

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Part III

Item 10.    Directors and Executive Officers of the Registrant

Incorporated herein by reference is the information under the heading “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” in the Registrant’s Proxy Statement to be filed on or about April 10, 2003. See also Part I, Item 1, “Executive Officers” of this Form 10-K.

Item 11.    Executive Compensation

Incorporated herein by reference is the information appearing in the Registrant’s Proxy Statement which the Registrant anticipates filing on or about April 10, 2003, under the headings “Election of Directors,” “Report of the Compensation Committee,” “Executive Officer Compensation Program,” “Summary Compensation Table,” “Option Grants in Last Fiscal Year,” “Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values,” “Employment Contracts, Termination of Employment and Change-in-Control Arrangements,” and “Performance Evaluation.”

Item 12.    Security Ownership of Certain Beneficial Owners and Management

Incorporated herein by reference is the information appearing under the heading “Security Ownership of Principal Stockholders and Management” in the Registrant’s Proxy Statement that the Registrant anticipates filing on or about April 10, 2003.

Item 13.    Certain Relationships and Related Transactions

Incorporated herein by reference is the information appearing under the heading “Certain Transactions” in the Registrant’s Proxy Statement that the Registrant anticipates filing on or about April 10, 2003.

Item 14.    Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part IV

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Operations for the years ended

December 31, 2002, 2001, and 2000

Consolidated Statement of Stockholders’ Equity for the years

ended December 31, 2002, 2001, and 2000

Consolidated Statements of Cash Flows for the years ended

December 31, 2002, 2001, and 2000

Notes to Consolidated Financial Statements

Report of Independent Auditors

A Form 8-K was not filed during the quarter ended December 31, 2002.

The following exhibits are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2002:

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SECURE COMPUTING CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

See accompanying notes.

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SECURE COMPUTING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

See accompanying notes.

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SECURE COMPUTING CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)