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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

or

For The Transition Period From                      To                     .

Commission file number 0-27074

SECURE COMPUTING CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (408) 979-6100

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  x    No  ¨

The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June 30, 2004 was $415,163,769 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 1, 2005, the Registrant had 35,841,493 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 9, 2005 for the year ended December 31, 2004 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. The words “expect,” “plan,” “anticipate,” “believe,” “predict,” and other similar expressions identify forward-looking statements. In addition, statements which refer to projections of our future financial performance, anticipated growth and trends in our business, and other discussions of future events or circumstances are forward-looking statements. 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

We are a Delaware corporation and were incorporated in July 1989. We use our broad expertise in security technology to develop network security solutions that allow organizations to exchange critical information safely with their customers, partners and employees. To achieve this, they must create trusted connections. Securing these connections, and providing the highest level of industry-recognized security, is at the heart of our mission. 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, and federal and local governments. The premise of our security philosophy, which we build into each product, is that the right people need to be connected with necessary network and application resources, and the wrong people need to be denied connections. We work closely with customers to provide them with reliable access control and innovative new features that are comprehensive, easy to manage and highly effective in securing the connections between people, applications and networks.

Across virtually all industries, organizations use the Internet to expand their business. Our commitment is to support this opportunity for exchanging information by mitigating risks and protecting information assets from the multitude of threats present on the Internet. Along with the opportunity networking provides comes the need to secure the sharing of information resources at every connection point. Our technologies enable customers to achieve this security, and implement a balance between security and accessibility according to their security policy.

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

Industry Background

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. The developing reliance on worldwide connectedness has allowed companies to greatly expand their business opportunities. Activities such as electronic trading of goods and services, online delivery of digital content, electronic funds transfers, and share trading, are now commonplace. But with this growing opportunity comes new challenges for securing IT systems. The very features that give electronic business its power have elevated information security to a critical business issue.

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Today’s enterprise is no longer confined to a set of physical buildings, rather, the enterprise has become virtual. The Internet’s power of connectivity has erased physical barriers, allowing an organization to establish ties around the globe. Many businesses are no longer a single, isolated entity; they are part of a greater whole of interdependent entities whose lifeblood depends on the secure, electronic sharing of information. Organizations must now expand their security measures outward to protect their digital resources beyond their physical buildings. They must also migrate their security measures inward to each individual’s computer or laptop.

The key reason many organizations have rapidly moved to an Internet-based business model is the direct interaction between the e-business system and its suppliers, customers and partners. This direct interaction can lower costs of doing business and expedite commerce. A well-designed e-business infrastructure can give an organization a competitive advantage. 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.

Conducting Business Over Public Networks

As this expanding Internet-based infrastructure broadens, so do the risks associated with this exposure. These risks increase daily and threaten confidentiality, integrity, and secure availability of intellectual property, proprietary data, and computing resources. Such threats present themselves in many forms, including the following:

According to the 2004 CSI/FBI Computer Crime and Security Survey, the risk of cyber attacks continues to be high. Denial of service and theft of intellectual property crimes have caused the greatest financial losses.

More Than Networks Are At Risk—Applications Are Also Vulnerable

In today’s highly complex Internet environment, network attacks have evolved into application-level attacks, and recently, an entirely new class of application-specific threats has arisen that require far more stringent protection. Protecting the network is highly important, but by itself, is not sufficient. The network is the foundation for communication, and the conduit over which people connect to the application resources they need and it is precisely these applications that can expose an organization’s information resources to extreme vulnerability. Our products address every network security issue, whether it’s employees utilizing the Internet, or remote partners and customers accessing the intranet, Web services, and applications from outside the internal network. Our security measures extend beyond the network level, protecting applications and their resources so organizations can conduct their business and expand their reach.

From email applications to Web services, File Transfer Protocol (FTP), customer relationship management (CRM) and sales force automation systems, people connect across networks to applications in order to conduct

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business every day. Misuse of applications and Web portals can result in the loss of valuable resources and millions of dollars. As the applications we use have become more sophisticated, so have the attack capabilities that threaten them. Applications contain inherent vulnerabilities, and sophisticated attackers can exploit these vulnerabilities and undermine an organizations’ ability to conduct its business. Defensive measures must be even more sophisticated in their ability to protect against application-level threats—and our technology is designed with this in mind.

Along with protecting against known threats, today’s security solutions are being challenged to anticipate unknown threats before they enter the network. Our Sidewinder G2^® Security Appliance includes advanced application proxies and other patented technology that defend against both known and unknown threats offering protection against the entire threat matrix. A central part of an organization’s business model must include provisions for safeguarding their business connections from being compromised to the highest degree possible.

Market Need and Strategy

More than ever before, organizations realize that they must take responsibility to protect their own confidential information and that of their customers and partners. Government regulations in recent years, such as the Federal Information Security Management Act, the Health Insurance Portability and Accountability Act, the Gramm-Leach Bliley Act, and the Children’s Internet Protection Act, have heightened awareness and mandated that organizations secure their information across multiple segments—financial, medical, educational, and more. Enterprises must know that the data residing on a given network is secure and that parameters are in place for managing access to their proprietary information.

Our strategy is to provide organizations with broad assistance, beginning with knowledge about security risks and regulations, accompanied by industry-leading security products to assist with mitigating these risks, and lastly, providing comprehensive security management capabilities as well. Our goal is to help organizations have confidence in the overall functionality and security of their network and application operations. We accomplish this by providing scalable, manageable, highly available solutions that meet their needs today and in the future. This objective includes meeting our customers’ requirements for security products that provide broad solutions by integrating with each other and interoperate within current infrastructures. All of our products are designed to provide the strongest network protection available, along with central manageability, scalability, and interoperability.

Providing solutions that are manageable, easy to use and that lead the industry in total cost of ownership are our top objectives. We make the process of securing connections between people, applications, and networks easy and efficient for all concerned. For the administrators configuring the Sidewinder G2 Security Appliance, user authentication, and Web filtering, they experience a fast and easy installation process with customizable options, and simple-to-use system graphical user interfaces (GUIs). In addition, they experience tight integration with existing systems, including user management systems such as Active Directory. For businesses that need access to critical information, SafeWord^® provides strong authentication through reliable, non-expiring tokens, and an authentication process that is simple to use, deploy, and maintain. When accessing the Internet, seamless Web filtering with SmartFilter^® products make Web use simple for administrator and user alike. As a result, business practices and the workplace are kept secure, productive, and easily manageable.

Our strategy also encompasses our award-winning service and support organization. Our worldwide support division has again been acknowledged by Frost and Sullivan as the best in the industry. We provide all of our customers with unwavering, world-class service and support.

Secure Computing Solutions

We have been applying our expertise to solving the most difficult network and application security challenges for over 20 years. 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

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comprehensive, unified, and centrally managed solution. Our products’ ability to scale as the infrastructure or number of users grows has always been, and continues to be, one of our hallmarks. Our solutions run on a variety of platforms and integrate with other enterprise solutions, making our products a safe and economical choice for organizations worldwide.

Organizations need to allow external access for their customers and partners to confidential information, resources, and applications through Web browsers, virtual private networks (VPNs), and dial-up lines. Organizations also need to allow people on the inside of their networks to access the Internet in productive and secure ways. Accomplishing mission-critical tasks depends on securing the connections between all parties involved—making sure that the right people are connected with the necessary network and application resources they require, and also making sure that the wrong people are denied connections. Our primary objectives are to ensure that the right people have access to the right information on the applications and networks they use while securing the information itself that is relayed through those network connections.

We take a three-pronged approach to securing the enterprise by providing technologies in three critical areas: security appliances, strong authentication, and Web filtering.

Sidewinder G2 Firewall

In February 2004, we released our next-generation Sidewinder G2 Security Appliance product line. These appliances provide all-in-one, consolidated protection through standard and optional features, including the world’s strongest firewall, anti-virus, and anti-spam gateways, Web content universal resource locator (URL) filtering, secure domain name system (DNS), VPN, Secure Sockets Layer (SSL) gateways, and more. We are well positioned to satisfy increased market demands for application security, in which we have been a leader for nearly a decade. Of particular importance is our application security performance, which, based on an advanced security proxy architecture, achieves gigabit throughput speeds.

The release of our new Sidewinder G2 Security Appliance, including the complementary Sidewinder^® G2 Enterprise Manager^TM for managing distributed appliances, also represents the completion of our promised two-phase integration of the Sidewinder and Gauntlet^TM firewalls, following the 2002 acquisition of the Gauntlet firewall business from Network Associates.

Sidewinder G2 continues its unique and remarkable track record of never having had a CERT vulnerability posting against it in over 10 years, in great part due to our SecureOS^® operating system protected with our patented Type Enforcement^® technology. It has also achieved the highest level of EAL4+ Common Criteria certification possible. The Common Criteria EAL4+ accomplishment puts us in a very strong position when competing for Sidewinder G2 business in the United States and other Government opportunities all over the world.

Finally, the Sidewinder G2 Security Appliance further extends its value by integrating our award-winning SmartFilter On-Box^™ filtering software and SafeWord^® strong authentication starter system with every purchase, solidifying our position in the new market of security appliances, called Unified Threat Management.

SafeWord Products

Remote access to network resources is a requirement for many businesses and verifying the identity of 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 products meet these needs. Positively identifying users through strong authentication, SafeWord products assure that only the right people can make connections to applications and networks. SafeWord software and SafeWord tokens offer unparalleled flexibility, scalability, and ease of use, and are used by thousands of organizations and millions of end users worldwide every day.

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Web Filtering Products

In 2004, with the release of SmartFilter 4.0, we introduced a combined control list based on our prior URL control list and the URL control list acquired from N2H2 in 2003. The result is a comprehensive list, which solidifies our position as one of the world’s leading suppliers of Web filtering. Containing millions of sites, the new URL control list offers 62 categories and covers over 60 languages. Brought together, the new combined list’s accuracy and breadth of coverage is highly competitive in the industry. Under the brand of SmartFilter products, we sell and support three best-of-breed Web filtering products: SmartFilter, Bess^®, and Sentian^™.

We now offer customers enhanced deployment and platform flexibility with over 30 different Web filtering options. Our customers can choose to run filtering on the same server as the firewall, proxy server or caching system (co-host); they can elect to run filtering on a separate server (off-box), or they can purchase a platform from one of our OEM partners with SmartFilter natively integrated (On-Box).

Embedded Firewall

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 embedded firewall uses a centrally managed architecture. The user-friendly GUI is designed to allow administrators to quickly and easily define access control policies on the Embedded Firewall Policy Server. This

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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 network. The product is available for desktop, laptop, and server environments.

Security and Support Services

Our services are designed to ensure customers make optimal use of our products. We provide a life cycle of support and services: Solution Planning, Solution Implementation, and Solution Support.

As part of our Network Services training program, we provide extensive product and network training on-line with our Web-based training, through our 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 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 on-line through a searchable knowledge base, viewable support history, and email access. 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.

Customers

Our customers operate 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 1000, as well as banking, financial services, healthcare, telecommunications, manufacturing, public utilities, schools, and federal, state and local governments. We have relationships with the largest agencies of the United States government. Our customer list also includes numerous international organizations and foreign governments. Overseas, our customers are concentrated primarily in Europe, Japan, China, the Pacific Rim, and Latin America.

No customer accounted for more than 10% of our total revenue in 2004, 2003 or 2002.

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Sales

We sell our products and services through both indirect and direct channels, using a worldwide sales organization. For 2004, sales to major end users comprised 30% of total product sales, while indirect channel sales comprised 70%. 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 territory sales teams work closely with our channel and OEM partners to ensure that the customer is satisfied. Our direct demand creation representatives in the field are compensated such that whether the customer buys our product and services directly from us or from one of our channel or OEM partners, 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 us.

Our market strategy revolves around our PartnersFirst reseller program, a channel program through which nearly all of our global indirect business is conducted. The program reflects our commitment to a partner-focused sales model, and enhances access to our products by making them available through a large number of resellers via leading distribution partners and streamlined processes. Our channel program makes the process of doing business with us simple, while giving partners enhanced abilities to increase revenue.

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 continues to be a strong market for us.

International sales accounted for 31% of total revenue during 2004. 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 our domestic and international sales (in thousands):

Marketing

We market our products to existing customers and prospects worldwide using a variety of integrated marketing programs. Our marketing team creates and implements marketing campaigns in each of our major functional market areas—corporate marketing for company and brand awareness, product marketing, and partner marketing.

By leveraging relationships with our channel partners, we generate sales leads and brand awareness through customer focused initiatives. Additionally, we work closely with industry analysts and current customers to understand the trends and needs associated with the security marketplace. Our research and experience help drive key marketing initiatives including: direct marketing, Web marketing, print advertising, customer seminars, Web seminars, and trade shows.

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An active international 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 our marketing programs, we stimulate interest and demand for our solutions through our corporate Web site, channel 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 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. With tightly integrated solutions, these partners promote our products along with theirs in helping customers build a security solution.

Competition

The market for network security is highly competitive, and we expect competition to intensify in the future. Our products compete on the basis of quality of security, ease of installation and management, scalability, performance and flexibility. Each of our individual products competes with a different group of competitors and products. Current competitors for our existing products include:

Backlog

Our backlog for products at any point in time is not significant since products are shipped upon receipt of order. We do not believe that our 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.

Manufacturing

Our manufacturing operations consist primarily of light manufacturing of our software and appliance products. For software products, we use subcontractors to duplicate software media and print user documentation and product packaging. For appliance products, we procure computer servers from major computer manufacturers. We then assemble the final software and hardware products at our facilities in St. Paul, Minnesota.

Our SafeWord product line includes a small token, available in various designs, which is used for user authentication. We source these tokens through an electronics assembly manufacturer located in China. In addition, we utilize specialized robotic equipment for certain automated deployment services for some of our SafeWord token customers.

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

Research and Development

Our internal engineering staff performs internal development of new products and features. Of our 86 engineering employees at March 1, 2005, 12 held postgraduate degrees. For the years ended December 31, 2004, 2003, and 2002, our research and development expenses were $16.1 million, $15.2 million, and $14.9 million, respectively.

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 and content standards, such as the Public Key Cryptography Standard (PKCS), the IPSec, the Lightweight Directory Access Protocol (LDAP), Internet Protocol Version 6 (IPv6), Secure Sockets Layer (SSL), Hypertext Transfer Protocol (HTTP), Extensible Markup Language (XML), Simple Mail Transfer Protocol (SMTP), and others.

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 1, 2005, we had approximately 378 employees. Of these employees, 137 were involved in sales and marketing, 54 in customer support and services, 107 in research and development, 29 in production, 23 in information technology and 28 in administrative, human resources and finance. None of our employees are 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 1, 2005 are as follows:

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JOHN E. MCNULTY is our Chairman, President 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. Mr. McNulty was also previously with Intel Corporation, where he held a number of positions, including Director of Marketing and Business Development for the Enterprise Server Group, which he launched.

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 was at Silicon Entertainment, Inc. where his last position was Chief Financial Officer and Vice President of Finance. He was the Vice President of Finance, Secretary and Treasurer at Watt/Peterson Inc. from 1991 to 1999. 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.

MICHAEL J. GALLAGHER is our Senior Vice President of Product Development. Mr. Gallagher rejoined us as Vice President and General Manager of our Network Security Division in 1999 and assumed the position of Senior Vice President of Product Development in August 2003. From 1997 until rejoining us, he was the Vice President of Software and Systems Engineering at Datakey. In 1996 and into 1997, he was employed by us and was responsible for management of several firewall and security initiatives. Prior to that he held various software engineering and technical management positions with increasing responsibility at Unisys Corporation.

MARY K. BUDGE is our Senior Vice President, Secretary and General Counsel. Ms. Budge joined us in November 1996 as corporate counsel and was appointed Senior Vice President in February 2005. Prior to joining us, she was an attorney for Schwegman, Lundberg, Woessner & Kluth where she specialized in trademark and copyright law. Ms. Budge is a member of the Minnesota Bar Association and the American Corporate Counsel Association.

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 2004 we had operating profit. However, we have incurred losses in the past. If we are unable to attain operating profits in each quarter and for the year, our stock price may decline, which could cause you to lose part or all of your investment.

In 2004 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, at that time, 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 if at any time we will need cash, financing from other sources may not be available on satisfactory terms or at all. Our failure to obtain financing at that time could result in our insolvency and the loss to investors of their entire investment in our common stock.

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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.

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 compete successfully against network security products of our competitors. 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

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may need to acquire such technology or be acquired by a larger entity. However, there can be 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, enabling them to sell their products at a lower price. 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 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, 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 and 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.

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 can be no assurances that any pending or future patent applications will be granted. There is also the risk that a current or future patent, regardless of whether we are an owner or a licensee of such patent, may be challenged, invalidated or circumvented. In addition, there are no assurances 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.

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Disclosure of our trade secrets or proprietary information may undermine our competitive advantages.    There can be no assurances 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.

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 reliance on third party manufacturers of hardware components that are used in our Sidewinder appliance and SafeWord token product lines could cause a delay in our ability to fill orders.    We currently purchase the hardware components for our Sidewinder appliance product line from one major supplier. For fulfillment of our SafeWord token sales, we source through a supplier in China. Delays in receiving components would harm our ability to deliver our products on a timely basis and 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 2004, our stock price ranged from a per share high of $19.95 to a low of $5.80. 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:

If our products fail to function properly or are not properly designed, our reputation may be harmed, and customers 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.

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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 realize 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 24% of our revenue in 2004. If we lose any of these customers or if our revenues from any of these customers are reduced, and we fail to replace the customer or fail to increase revenues from other customers, we will incur smaller profits.

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.

In addition, collection of amounts due us from sales to international customers generally takes longer than for other sales. Therefore, if our sales to international customers 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 grant customer discounts in exchange for earlier payment.

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 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.

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.

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 to a large extent 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 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:

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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 2004, 31% of our total sales came from international sales compared to 30% in 2003. 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.

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, free of charge, on our website at 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 two separate facilities with a combined square footage of approximately 73,000 square feet in St. Paul, Minnesota, that are occupied by production, research and development, and administration. We have research facilities located in Concord, California; Gaithersburg, Maryland; and Seattle, Washington that occupy approximately 17,000 square feet, 6,800 square feet and 39,000 square feet, respectively. 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 2010. 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 December 2002, we were named as the defendant in a rental property lawsuit brought by Salvio Pacheco Square LLP in the United States Superior Court of Contra Costa County. The complaint alleges that we had violated our one-time cancellation provision in a lease for our Concord, CA office and asked for relief in the form of compensatory and other damages. The Court entered a judgment in favor of the plaintiff in June 2004 in the amount of $1.1 million. We believe that the allegations included in the complaint are wholly without merit, have filed an appeal to the judgment, and intend to defend this litigation vigorously. It is not possible to predict the timing or outcome of this litigation, however, if we do not prevail in the appeal process, we could incur costs for approximately $1.1-2 million.

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, 2004.

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER                    MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the NASDAQ national market under ticker symbol: SCUR. As of March 1, 2005, there were approximately 1,100 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 15,600 beneficial owners. The low and high sale 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:

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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, 2004, 2003 and 2002, and the consolidated balance sheet data at December 31, 2004 and 2003, 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, 2001 and 2000, and the consolidated balance sheet data at December 31, 2002, 2001 and 2000, 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.

Executive Overview

Our specialized solutions are designed to meet our 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 well with each other for a more comprehensive, unified, and centrally managed solution. Our products’ ability to scale as the infrastructure or number of users grows has always been, and continues to be, one of our hallmarks. Our solutions run on a variety of platforms and integrate well with other enterprise solutions, making our products a safe and economical choice for organizations worldwide. The three product lines that represent the majority of our revenue are the Sidewinder G2 Security Appliance, our SafeWord products and our Web filtering products.

In February 2004, we released our next-generation Sidewinder G2 Security Appliance product line. These appliances provide all-in-one, consolidated protection through standard and optional features, including the world’s strongest firewall, anti-virus, and anti-spam gateways, Web content URL filtering, secure DNS, VPN, and SSL gateways, and more. These appliances are well positioned to satisfy increased market demands for application security.

The release of our new Sidewinder G2 Security Appliance, including the complementary Sidewinder G2 Enterprise Manager for managing distributed appliances, also represents the completion of our promised two-phase integration of the Sidewinder and Gauntlet firewalls, following the 2002 acquisition of the Gauntlet firewall business from Network Associates.

We continue to find innovative distribution and partnership models to expand our presence in the strong authentication market with our SafeWord product line. In 2004, we made tremendous strides in extending the reach of our SafeWord product line into both mid-market organizations and large enterprises. We have also gained traction with our “SafeWord For” partner program introduced in 2003, and in particular with Citrix and Cisco.

In 2004, with the release of SmartFilter 4.0, we introduced a combined control list based on our prior URL control list and the URL control list acquired from N2H2 in 2003. The result is a comprehensive list, which solidifies our position as one of the world’s leading suppliers of Web filtering. Containing millions of sites, the new URL control list offers 62 categories and covers over 60 languages.

With the launch of SmartFilter 4.0 in June, the new control list was introduced, along with its new reporting feature, SmartReporter. SmartReporter adds powerful reporting capabilities to SmartFilter that make reporting on Web usage patterns easy for customers. SmartFilter continues to be the market-leading de-facto standard for Web filtering on edge or caching devices through OEM relationships.

In addition to increasing functionality, platforms and technology integrations of our products, we continued to expand our market presence through an extensive worldwide network of value-added resellers, distributors, and OEM partners. These partners generated 70% of our revenues in 2004.

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Our customers operate 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 1000, as well as banking, financial services, healthcare, telecommunications, manufacturing, public utilities, schools and federal and local governments. We also have close relationships with the largest agencies in the United States government, both federal and local.

International sales accounted for 31% of total revenue during 2004. Major foreign markets for our products include Europe, Japan, China, the Pacific Rim and Latin America. In each country, we have independent channel partners responsible for marketing, selling and supporting our products to resellers and end users.

Each of our individual products competes with a different group of competitors and products. In this highly competitive market, characterized by rapid technological change, our customers’ purchase 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.

In 2004, we focused our efforts on strengthening our core product offerings and developing a stronger worldwide channel. Our year over year improvement in net income from continuing operations was driven by strong revenue growth, strong gross margins and our ability to control operating expenses.

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, 2004 and 2003.

The comparison of years ended December 31, 2004 and 2003 reflects the classification of the AT division as discontinued operations.

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Revenue.    Our revenue increased 22.5% to $93.4 million in 2004, up from $76.2 million in 2003. The increase in revenue in 2004 was driven by growth across all product lines. Our Sidewinder G2 Firewall product line revenue increase was due to demand for our next-generation security appliance line. Our Web filtering product line revenue increase was due to continued traction through OEM relationships and the incremental Bess and Sentian revenue contributed as a result of the N2H2, Inc. acquisition late in 2003. The SafeWord product line revenue increase was driven by sustained demand for high assurance solutions. For 2005, revenues are expected to be in the range of $104 million to $106 million.

Gross Profit.    Gross profit as a percentage of revenue decreased from 90.0% in 2003 to 86.8% in 2004. This decline was driven by increased sales volume on products containing a hardware component, primarily the Sidewinder G2 appliance sales, which have a lower gross profit margin than our software products. Gross margins were also reduced as a result of a larger portion of business being transacted with channel partners versus direct to end users in 2004 as compared to 2003.

Operating Expenses.    Operating expenses consist of selling and marketing, research and development, general and administrative expenses, and separation costs. Total operating expenses increased 15.8% to $68.8 million for 2004, up from $59.4 million in 2003. This increase was driven primarily by an inflationary increase in payroll and related costs and inflationary increases in allocated corporate costs. As a percentage of revenue, total operating expenses were 73.7% for 2004 compared to 78.0% in 2003. This improvement was primarily driven by revenue growth outpacing the growth of operating expenses during 2004 compared to 2003.

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 corporate costs, which include information technology, facilities and human resources expenses. Selling and marketing expenses increased 19.4% to $46.3 million in 2004, up from $38.7 million in 2003. This increase was driven primarily by inflationary increases in payroll and related costs, an increase in commission expense due to expanding revenues, and inflationary increases in allocated corporate costs. As a percentage of revenue, selling and marketing expenses were 49.5% in 2004 compared to 50.8% in 2003. This improvement was primarily driven by revenue growth outpacing the growth of selling and marketing expenses during 2004 compared to 2003.

Research and Development.    Research and development expenses consist primarily of salaries and benefits for our product development personnel and allocations of corporate costs, which include information technology, facilities and human resources expenses. Research and development expenses increased 6.1% to $16.1 million in 2004, up from $15.2 million in 2003. This increase was driven by inflationary increases in payroll, benefits and allocated corporate costs as well as increased facility costs as a direct result of our N2H2 acquisition in late 2003. As a percentage of revenue, research and development expenses were 17.3% for the year compared to 19.9% in 2003. This improvement was primarily driven by revenue growth outpacing the growth of research and development expenses during 2004 compared to 2003.

General and Administrative.    General and administrative expenses consist primarily of salaries, 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 16.6% to $6.5 million in 2004, up from $5.5 million in 2003. This increase was driven primarily by an increase in audit and legal fees, inflationary increases in allocated corporate costs, and to a lesser extent, inflationary increases in payroll and benefits. As a percentage of revenue, general and administrative expenses were 6.9% for the year compared to 7.3% in 2003. This improvement was primarily driven by revenue growth outpacing the growth of general and administrative expenses during 2004 compared to 2003.

Interest and Other Income.    Net interest and other income was $607,000 in 2004, an increase from $141,000 in 2003. The increase reflects higher interest rates on higher cash balances in 2004 as compared to 2003 and a foreign currency translation adjustment related to the liquidation of a foreign entity.

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Net Loss From Disposal of AT Division.    In 2003, we determined that we would no longer invest in our AT division and exited the business. Net loss from discontinued operations was $0 and $757,000 for the years ended December 31, 2004 and 2003, respectively. Loss on disposal of AT division was $0 and $277,000 for the years ended December 31, 2004 and 2003, respectively.

Income Taxes.    We recognized a deferred tax benefit of $345,000 in 2004 and $559,000 in 2003, which offset the tax expense incurred in each of those years. The computations of our deferred tax assets and valuation allowance are based on taxable income we expect to earn on sales of existing products, and projected interest and other income over the next three years. Realization of the $3.6 million of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income and the implementation of tax planning strategies. We believe it is more likely than not that the net deferred tax assets will be realized based on expected levels of future taxable income in the United States and certain foreign jurisdictions and the implementation of tax planning strategies. Future taxable income of $9.0 million is required to realize the $3.6 million deferred tax asset at December 31, 2004. We had total net operating loss carryforwards of approximately $197.9 million at December 31, 2004. Of these carryforwards, $45.1 million relates to stock option exercises and $58.4 million relates to acquired N2H2 net operating losses, which currently have a full valuation allowance, and when realized for financial statement purposes will not result in a reduction in income tax expense. Rather, the benefit from the stock option exercises will be recorded as an increase to additional paid-in capital and the benefit from the N2H2 net operating loss carryforwards will be recorded as a decrease to goodwill. Of the remaining benefit associated with the carryforwards, approximately $85.4 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, 2003 and 2002.

The comparison of years ended December 31, 2003 and 2002 reflects the classification of the AT division as discontinued operations.

Revenue.    Our revenue increased 23.0% to $76.2 million in 2003, up from $62.0 million in 2002. The increase in revenue in 2003 was driven by growth across all product lines. Our Sidewinder G2 Firewall product line revenue increase was due to demand for our next generation firewall released in early 2003. Our Web filtering product line revenue increase was due to continued traction through our OEM relationships and the incremental Bess and Sentian revenue contributed as a result of the N2H2, Inc. acquisition late in the year. Our SafeWord product lines revenue increase was driven by sustained demand for high assurance solutions.

Gross Profit.    Gross profit as a percentage of revenue decreased from 92.4% in 2002 to 90.0% in 2003. This decline was driven by increased sales volume on products containing a hardware component, primarily the Sidewinder appliance sales, which have a lower gross profit margin than our software products.

Operating Expenses.    Operating expenses consist of selling and marketing, research and development, general and administrative expenses, and separation costs. Total operating expenses increased 6.9% to $59.4 million for the full year 2003, up from $55.6 million in 2002. This increase was driven primarily by an inflationary increase in payroll and related costs and inflationary increases in allocated corporate costs. As a percentage of revenue, total operating expenses were 78.0% for the full year 2003 compared to 89.7% in 2002. This improvement was primarily driven by revenue growth outpacing the growth of operating expenses during 2003 compared to 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 corporate costs, which include information technology, facilities and human resources expenses. Selling and marketing expenses increased 10.7% to $38.7 million in 2003, up from $35.0 million in 2002. This increase was driven primarily by an inflationary increase in payroll and related costs, an increase in commission expense due to expanding revenues,

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and inflationary increases in allocated corporate costs. As a percentage of revenue, selling and marketing expenses were 50.8% in 2003 compared to 56.5% in 2002. This improvement was primarily driven by revenue growth outpacing the growth of selling and marketing expenses during 2003 compared to 2002.

Research and Development.    Research and development expenses consist primarily of salaries and benefits for our product development personnel and allocations of corporate costs, which include information technology, facilities and human resources expenses. Research and development expenses increased 1.8% to $15.2 million in 2003, up from $14.9 million in 2002. This increase was driven primarily by inflationary increases in allocated corporate costs. As a percentage of revenue, research and development expenses were 19.9% for the year compared to 24.1% in 2002. This improvement was primarily driven by revenue growth outpacing the growth of research and development expenses during 2003 compared to 2002.

General and Administrative.    General and administrative expenses consist primarily of salaries, 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 8.3% to $5.5 million in 2003, up from $5.1 million in 2002. This increase was driven primarily by an increase in directors and officers insurance premiums, inflationary increases in allocated corporate costs, and to a lesser extent, inflationary increases in payroll and benefits. As a percentage of revenue, general and administrative expenses were 7.3% for the year compared to 8.2% in 2002. This improvement was primarily driven by revenue growth outpacing the growth of general and administrative expenses during 2003 compared to 2002.

Interest and Other Income.    Net interest and other income was $141,000 in 2003, a decrease from $421,000 in 2002. The decrease reflects lower interest rates in 2003 as compared to 2002 and an increase in other expenses for personal property taxes.

Net Loss From Disposal of AT Division.    During the fourth quarter of 2003, we determined that we would no longer invest in our AT division and exited the business. Net loss from discontinued operations was $757,000 and loss on disposal of AT division was $277,000 for the year ended December 31, 2003. Loss from operations improved 42.2% in 2003 compared to 2002 as a result of the gradual contraction of that division.

Income Taxes.    We recognized a deferred tax benefit of $559,000, which offset the tax expense incurred in 2003 and none in 2002. The computations of our deferred tax assets and valuation allowance are based on taxable income we expect to earn on sales of existing products, and projected interest and other income over the next three years. Realization of the $3.3 million of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income and the implementation of tax planning strategies. We believe it is more likely than not that the net deferred tax assets will be realized based on historical earnings, expected levels of future taxable income in United States and certain foreign jurisdictions, and the implementation of tax planning strategies. Future taxable income of $8.3 million is required to realize the $3.3 million deferred tax asset at December 31, 2003. We had total net operating loss carryforwards of approximately $196.1 million at December 31, 2003. Of these carryforwards, $39.0 million relates to stock option exercises and $58.4 million relates to acquired N2H2 net operating losses, which currently have a full valuation allowance, and when realized for financial statement purposes will not result in a reduction in income tax expense. Rather, the benefit from the stock option exercises will be recorded as an increase to additional paid-in capital and the benefit from the N2H2 net operating loss carryforwards will be recorded as a decrease to goodwill. Of the remaining benefit associated with the carryforwards, approximately $90.4 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.

Liquidity and Capital Resources

At December 31, 2004, our principal source of liquidity was $52.3 million of cash, cash equivalents and short term investments, representing an $18.6 million increase from December 31, 2003. The increase is

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primarily due to cash provided by operating activities, cash received from the exercise of stock options, and the sale of common stock through our employee stock purchase plan, offset by capital additions. At December 31, 2004, we have net future payments under non-cancelable operating leases of $6.7 million and have no material commitments for capital expenditures. We expect to generate cash during 2005 as we expect revenue to continue to grow at a faster rate than operating expenses.

Since our inception, we have financed our operations primarily through sales of our equity securities, and more recently, from cash generated from operations.

Net cash provided by operating activities of $13.7 million for the twelve months ended December 31, 2004, was comprised of net income from continuing operations of $12.8 million, offset by net non-cash related expenses of $3.1 million, a $5.6 million increase in current assets, and a $3.4 million increase in liabilities. Net cash provided by operations was driven by the increase in revenue outpacing our increase in operating expenses. Terms for cash collections received from customers and cash payments made to vendors were consistent with normal business practices.

Net cash provided by investing activities of $4.8 million for the twelve months ended December 31, 2004, was comprised primarily of net proceeds from sales/maturities of investments of $7.2 million, offset by $1.6 million of cash used for net capital additions, which were made up of computer equipment, technology upgrades, and leasehold improvements, and $802,000 used for intangible and other asset additions.

Net cash provided by financing activities of $7.2 million for the twelve months ended December 31, 2004 consisted primarily of proceeds received from the exercise of stock options and the sale of common stock through our employee stock purchase plan.

As of December 31, 2004, we had working capital of $51.4 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 expect to spend approximately $3.5 million on capital expenditures in 2005.

A summary of our total contractual cash obligations as of December 31, 2004 is as follows (in thousands):

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.

Disclosures about Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2004 or as of December 31, 2003.

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

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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 of the Notes to Consolidated Financial Statements for additional discussion of the application of these and other accounting policies.

Revenue Recognition.    Our revenue is derived from sales of our software licenses, hardware, royalties and maintenance arrangements to provide product upgrades and customer support. 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. 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 with the exception of international resellers who are allowed to hold inventories of “Safeword for Citrix” (and other ‘Safeword for’ products). This is a low price-point product with disproportionately high overseas freight costs. As such, we allow the reseller to carry a balance of inventory and provide end-user sell-through reporting. Revenue is recognized at the point that we receive evidence of end-user sell-through.

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 consider multiple factors including historical bad debt experience, the need for specific customer reserves, the aging of our receivables, customer creditworthiness, changes in our customer payment cycles, and current economic trends. Historically, our allowance for doubtful accounts has been adequate based on actual results. 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.

Valuation of Long-Lived Assets, Including Goodwill and Other Intangible Assets.    Intangible assets consist of patents, trademarks, capitalized software costs, a purchased customer list, a purchased control list, capitalized developed technology and goodwill, all of which are recorded at cost or fair value. Patents, trademarks, customer and control lists, and capitalized developed technology are amortized using the straight-line method over the estimated useful lives of the assets, which range up to 17 years. See accounting policy of capitalized software costs under Research and Development in Note 1 of Notes to Consolidated Financial Statements. Goodwill is not amortized, but is tested for impairment at least annually at the reporting unit level. If impairment is indicated, a write-down is recorded as an impairment loss in income from operations.

We review our long-lived assets and identified finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, except for goodwill as noted above. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Deferred Tax Assets.    We account for income taxes using the liability method, 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

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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. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some component or all of the deferred tax assets will not be realized. The computations of our deferred tax assets and valuation allowance are based on taxable income we expect to earn on sales of existing products and projected interest and other income over the next three years. The amount of the deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income are reduced.

SFAS No. 109, “Accounting for Income Taxes,” requires the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that benefits of deferred tax assets will not be realized. Realization of the $3.6 million of net deferred tax assets is dependent upon our ability to generate sufficient future taxable income and the implementation of tax planning strategies. However, the amount of the deferred tax assets considered realizable could be reduced in the near term if estimates of future taxable income are reduced or we are unable to implement our tax strategies.

Inflation

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

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs” (SFAS No. 151). SFAS No. 151 requires abnormal amounts of inventory costs related to idle facility, freight handling and wasted material expenses to be recognized as current period charges. Additionally, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The standard is effective for fiscal years beginning after June 15, 2005. We believe the adoption of SFAS No. 151 will not have a material impact on our consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), “Accounting for Stock-Based Compensation” (SFAS No. 123R). SFAS No. 123R establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair value were required. SFAS No. 123R is effective as of the beginning of our first interim or annual reporting period that begins after June 15, 2005, which is our third quarter of 2005.

SFAS No. 123R permits public companies to adopt requirements using one of two methods: (1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. (2) A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under FAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We are currently in the process of evaluating the two methods and have not yet determined which method will be used. The adoption of this new accounting pronouncement will have a material impact on our consolidated financial statements.

On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004 (the Bill). We are currently in the process of evaluating the Bill.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since our sales are currently priced in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets and our accounts receivable more difficult to collect.

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 as available-for-sale.

We believe our operations are currently not subject to significant market risks for foreign currency exchange rates, interest rates, or other relevant market price risks of a material nature.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements required by this item are set forth as a separate section of this report. 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.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”.) Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2004, the end of period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level to timely alert them to material information relating to Secure Computing (including its consolidated subsidiaries) required to be included in our Exchange Act filings.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2004, there have been no significant changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein on page 53.

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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 March 31, 2005. See also Part I, Item 1, “Executive Officers” of this Form 10-K.

We maintain a Code of Business Conduct and Ethics applicable to all our employees. We have also adopted a Code of Ethics for Finance that is applicable to our chief executive officer, chief financial officer, controller, and finance personnel performing functions related to financial reporting. A copy of our Code of Business Conduct and Ethics and our Code of Ethics for Finance, as well as our corporate governance guidelines and the committee charters for each of the committees of the Board of Directors, can be obtained from our Internet website at www.securecomputing.com under the Investor Relations page and will be made available free of charge to any shareholder upon request. We intend to disclose any waivers from, or amendments to, the Code of Business Conduct and Ethics and Code of Ethics for Finance by posting a description of such waiver or amendment on our Internet website. However, we have never granted a waiver from either the Code of Business Conduct and Ethics and Code of Ethics for Finance.

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 March 31, 2005, 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 March 31, 2005.

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 March 31, 2005.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated herein by reference is the information appearing under the heading “Relationship with Independent Registered Public Accounting Firm” in the Registrant’s Proxy Statement that the Registrant anticipates filing on or about March 31, 2005.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

On December 16, 2004, we filed a report on Form 8-K pursuant to Item 5.02, “Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers,” filing the press release issued December 13, 2004 announcing the resignation of Tim McGurran as President, Chief Operating Officer and member of the Board of Directors of Secure Computing Corporation. John McNulty, Chief Executive Officer and Chairman, has assumed Mr. McGurran’s responsibilities.

The following exhibits are filed as part of this Annual Report on Form 10-K for the fiscal year ended December 31, 2004:

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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 STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)