EXECUTIVE OVERVIEW

We are a global leader in enterprise security solutions that proactively protect our customers' mission-critical business applications and desktop users from all manner of Internet-borne and internal threats. Our comprehensive portfolio of Secure Web, Secure Mail, and Secure Firewall solutions provide unmatched protection for the enterprise.

Our specialized solutions are designed to meet customers' needs to balance security and accessibility, and to help them create trusted environments both inside and outside their organizations. We have developed a vision for comprehensive security on the enterprise gateway that embodies the following core design principles: hybrid delivery via appliances, security as a service, and virtual appliances; real-time, reputation-driven intelligence; application and content awareness; centralized policy, management and reporting; bi-directional protection; user management and education; performance; and resiliency.

We continue to evolve all of our products to meet the needs of our customers either through maintenance or feature releases each quarter. In addition, we introduced the following major product and/or service releases in 2008. In the first quarter of 2008, we released SafeWord ® 2008, a new version of our award-winning two-factor authentication solution, which is designed for the latest 64-bit Windows environments, including Vista and Windows 2008 Server, with seamless integration to Microsoft Active Directory. In the second quarter of 2008 we announced the availability of Secure Web Protection Service, the industry's first software-as-a-service (SaaS) Web security solution providing reputation-based protection from malware and other Web-borne threats. We also unveiled Secure Firewall Geo-Location, a new service that allows organizations to create policies that block connections by an IP address (for any network protocol/application) based on country code information. In the third quarter of 2008 we announced the availability of Secure Web Reporter, a highly scalable reporting solution that provides instantaneous views of important Web activity, focusing on security, compliance monitoring and performance assessment.

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

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

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

On July 30, 2008 we announced the sale of the SafeWord product line to Aladdin Knowledge Systems, Ltd. (Aladdin) for $64.3 million in cash, including acquisition costs. In connection with the proposed sale, certain employees from our SafeWord research and development group and our corporate sales team were hired by Aladdin. The transaction closed on September 4, 2008. The divestiture of SafeWord enables us to focus on our areas of greatest strength and expertise-delivering comprehensive and integrated Web, mail and network gateway appliances.

On September 21, 2008, we entered into an Agreement and Plan of Merger (Merger Agreement) with McAfee, Inc. (McAfee) and Seabiscuit Acquisition Corporation, a wholly owned subsidiary of McAfee, pursuant to which McAfee has agreed to acquire all of the outstanding common stock of Secure Computing for $5.75 per share in cash, without interest, representing an equity value for our common stock of approximately of $412.5 million in the aggregate. In addition, pursuant to the Merger Agreement, our outstanding shares of preferred stock will be redeemed for cash as part of the proposed transaction, which would represent approximately an additional $84.8 million calculated as of September 21, 2008. In total, the proposed transaction would be valued at approximately $497.3 million. In connection with the Merger

Agreement we will hold a special meeting with our stockholders, scheduled for November 14, 2008, to consider and vote upon the adoption of the Merger Agreement. After careful consideration, our board of directors has unanimously approved and declared the merger, the Merger Agreement and the transactions contemplated by the Merger Agreement to be advisable, and has determined that it is in the best interests of our stockholders that we enter into the Merger Agreement and consummate the merger on the terms and conditions set forth in the Merger Agreement.

On October 1, 2008, we closed the acquisition of Securify, Inc. (Securify), a privately-held company based in Cupertino, CA for $15.0 million, net of cash received, plus an earn-out of up to $5.0 million. Securify provides an innovative and easy-to-use solution for monitoring and controlling user access to applications with complex and rapidly changing networks. Its "plug-and-play" appliance offers automatic discovery and policy development in intuitive business terms of users, groups and applications. Securify sells primarily into federal government and other high-assurance markets, including financial services. This is consistent with our core firewall market, and it will provide a significant opportunity to deliver complementary value across existing and future customers both domestically and internationally.

Our Enterprise Security Solutions revenue represented 93% of total revenue in the third quarter of 2008, a 13% or $6.9 million increase over the prior year. The increase was driven by sustained demand for network security solutions. Our SafeWord revenue represented 7% of total revenue in the third quarter of 2008, a 47% or $3.9 million decrease over the prior year. This decrease was primarily driven by the divestiture of our SafeWord® product line in the third quarter of 2008.

Our Enterprise Security Solutions revenue represented 89% of total revenue for the nine months ending September 30, 2008, a 13% or $19.7 million increase over the prior year. The increase was driven by sustained demand for network security solutions. Our SafeWord revenue represented 11% of total revenue for the nine months ending September 30, 2008, a 23% or $5.7 million decrease over the prior year. This decrease was primarily driven by the divestiture of our SafeWord® product line in the third quarter of 2008. To a lesser extent, revenue decreased due to fewer significant sized purchases in this period compared to the same period of the prior year.

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

International sales accounted for 28% and 35% of total revenue for the three months and nine months ended September 30, 2008, respectively. Major foreign markets for our products include Europe, Japan, China, the Pacific Rim, the Middle East, Australia and Latin America. In each market, we have independent channel partners responsible for marketing, selling and supporting our products to resellers and end-users. Our market presence has continued to expand through our extensive worldwide channel of value-added resellers, distributors, and original equipment manufacturer (OEM) partners. These channel partners generated 91% and 90% of our sales for the three months and nine months ended September 30, 2008, respectively, compared to 81% and 84% for the same periods ended September 30, 2007, respectively.

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

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

We recognized net income of $47.4 million in the three months ended September 30, 2008 compared to a net loss of $10.1 million in the same period of 2007. For the nine months ended September 30, 2008, we recognized net income of $17.9 million compared to a net loss of $31.6 million for the same period in 2007.

As of September 30, 2008, we had $50.3 million in cash, cash equivalents and restricted cash. We generated $27.2 million in cash from operations for the nine months ended September 30, 2008. As a result of the divestiture of our SafeWord product line in September 2008 we paid the outstanding balance on our term debt.

RESULTS OF OPERATIONS

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



                                                  Three Months Ended             Nine Months Ended
                                                    September 30,                  September 30,
                                                 2008            2007           2008           2007
Revenues:
Products                                             48 %            52 %           47 %           54 %
Services                                             31              31             33             32
Other (See Note)                                     21              17             20             14

Total revenues                                      100             100            100            100

Cost of revenues:
Products                                             18              16             18             16
Services                                              6               7              7              7
Other (See Note)                                      4               2              3              2
Amortization of purchased intangibles                 3               3              3              4

Total cost of revenues                               31              28             31             29

Gross profit                                         69              72             69             71

Operating expenses:
Selling and marketing                                42              49             48             51
Research and development                             20              19             20             19
General and administrative                            8               7              8              7
Amortization of purchased intangibles                 3               5              4              5
Litigation settlement                                -               -               5             -
Goodwill impairment                                  24              -               8             -

Total operating expenses                             97              80             93             82

Operating loss                                      (28 )            (8 )          (24 )          (11 )
Gain on divestiture of SafeWord product
line                                                112              -              38             -
Other expense                                        (4 )            (3 )           (2 )           (4 )

Income/(loss) before taxes                           80             (11 )           12            (15 )
Income tax expense                                   (5 )            (6 )           (2 )           (4 )

Net income/(loss)                                    75             (17 )           10            (19 )
Preferred stock accretion                            (1 )            (1 )           (2 )           (1 )

Net income/(loss) applicable to common
shareholders                                         74 %           (18 )%           8 %          (20 )%

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

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

Revenues. Our total revenues increased 5% to $63.0 million for the three months ended September 30, 2008 up from $60.0 million in the same period of 2007. Our products revenues decreased 2% to $30.2 million for the three months ended September 30, 2008 down from $31.0 million in the same period of 2007. Our services revenues increased 2% to $19.5 million for the three months ended September 30, 2008 up from $19.0 million in the same period of 2007. Other revenues increased 32% to $13.3 million for the three months ended September 30, 2008 up from $10.0 million in the same period of 2007. Other revenue represents multiple element sales that lacked VSOE in the prior periods and became recognizable as services were provided in 2008 and 2007, respectively. This revenue is primarily from our Secure Mail product line revenues. Because we are unable to establish VSOE of fair value on the undelivered elements, the majority of the revenue from that product line has been deferred and is being recognized as revenue over the service period. The total revenue growth was

driven by a 13% or $6.9 million increase in Enterprise Security Solutions revenue, which was primarily driven by sustained demand for network security solutions, and was offset by a 47% or $3.9 million decrease in the SafeWord revenue due to the divestiture of the SafeWord product line in September 2008.

Cost of Revenues and Gross Profit. Total cost of revenues increased 13% to $19.2 million for the three months ended September 30, 2008, up from $17.0 million in the same period of 2007. This increase is primarily the result of the increase in total revenues. Gross profit as a percentage of revenue was 69% for the quarter compared to 72% in the same period of 2007. For the three months ended September 30, 2008, gross profit for products decreased to 63% for the quarter compared to 69% in the same period of 2007, primarily due to increased sales volume of products containing a hardware component, which have a lower gross profit than our software products, and an increase in related manufacturing and overhead costs. Gross profit for services increased to 80% for the quarter compared to 79% in the same period of 2007. This improvement was primarily driven by the growth of our support revenue outpacing increases in support costs.

Operating Expenses. Operating expenses consist of selling and marketing, research and development, general and administrative expenses, amortization of purchased intangible assets, and litigation judgment costs. Total operating expenses increased 28% to $61.4 million for the three months ended September 30, 2008 up from $47.9 million in the same period of 2007. This increase was driven primarily by the goodwill impairment charge of $15.4 million resulting from our announced merger with McAfee. This increase was offset by decreases in salaries and stock-based compensation as a result of the workforce reduction that occurred in April 2008 and the divestiture of our SafeWord product line in September 2008. As a percentage of revenue, total operating expenses were 97% for the quarter compared to 80% in the same period of 2007.

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, share-based compensation and benefits related to personnel engaged in selling, marketing, and customer support functions, along with costs related to advertising, promotions, public relations, travel and allocations of corporate costs, which include information technology, facilities and human resources expenses. Our customer support function, which provides support, training and installation services, is also responsible for supporting our sales representatives and sales engineers throughout the sales cycle by providing them and our prospective customers with technical assistance and, as such, a portion of these costs are included here. Selling and marketing expenses decreased 10% to $26.7 million for the three months ended September 30, 2008 down from $29.7 million in the same period of 2007. This decrease was driven primarily by the April 2008 workforce reduction. As a percentage of revenue, selling and marketing expense was 42% for the quarter compared to 49% in the same period of 2007. This improvement was primarily driven by the decrease in selling and marketing expense.

Research and Development. Research and development expenses consist primarily of salaries, share-based compensation and benefits for our product development and advanced technology personnel, and allocations of corporate costs, which include information technology, facilities and human resources expenses. Research and development expenses increased 11% to $12.4 million for the three months ended September 30, 2008 up from $11.2 million in the same period of 2007. This increase was driven primarily by increased research and development headcount and related costs in support of our revenue growth and to a lesser extent inflationary increases in payroll and related costs. As a percentage of revenue, research and development expenses were 20% for the three months ended September 30, 2008 compared to 19% in the same period of 2007. This increase was primarily driven by the increased amount of dollars invested in research and development to support our revenue growth.

General and Administrative. General and administrative expenses consist primarily of salaries, share-based compensation, benefits and related expenses for our executive, finance and legal personnel, directors and officers insurance, and allocations of corporate costs, which include information technology, facilities and human resources expenses. General and administrative expenses increased 8% to $4.7 million for the three months ended September 30, 2008 up from $4.3 million in the same period of 2007. This increase was driven primarily by increased legal fees with defending the complaints described in Note 9 of the Notes to the Financial Statements, and to a lesser extent inflationary increases in payroll and related costs and allocated corporate costs. As a percentage of revenue, general and administrative expenses were 8% for the three months ended September 30, 2008 compared to 7% in the same period of 2007. This increase was primarily due to increased legal fees incurred defending the previously mentioned lawsuits.

Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets consists of the amortization of tradenames and customer lists acquired in the CipherTrust and CyberGuard acquisitions. Amortization expense for these acquired tradenames and customer lists was $2.2 million for the three months ended September 30, 2008 compared to $2.7 million in the same period of 2007. This decrease was primarily driven by certain assets being fully amortized.

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

                                                      Three Months Ended
                                                        September 30,
                                                       2008         2007
           Cost of product revenues                 $       72    $     57
           Cost of service revenues                        203         220
           Selling and marketing                         1,133       2,490
           Research and development                        769         838
           General and administrative                      648         699

           Total share-based compensation expense   $    2,825    $  4,304

The decrease in share-based compensation expense in selling and marketing and in total is primarily due to the departure of former CipherTrust employees, along with the workforce reduction in April 2008.

Goodwill.Goodwill impairment charge reduced the book value of our equity to its implied fair value, which was determined based on the announced merger with McAfee. The implied fair value calculation resulted in recording a goodwill impairment charge of $15.4 million for the three months ended September 30, 2008 (see Note 4). There was not a similar charge in the same period of 2007.

Gain on Divestiture of SafeWord Product Line. We recorded a gain on the divestiture of the SafeWord product line of $70.7 million for the three months ended September 30, 2008 (see Note 5). There was not a similar benefit in the same period of 2007.

Other Expense. Other expense of $2.9 million for the three months ended September 30, 2008, consists primarily of interest expense, including the write-off of the deferred financing costs, related to the term debt, compared to $1.6 million in the same period of 2007.

Income Taxes. During the three months ended September 30, 2008, we recorded income tax expense of $2.8 million. Income taxes related to the gain on the divestiture of the SafeWord product line were substantially offset by the release of valuation allowance on NOLs where the benefit of the release is recorded in the condensed consolidated statement of operations. The $2.8 million income tax expense consists of $213,000 of non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired net operating losses (NOLs) where the benefit of the release is offset to goodwill, $51,000 of non-cash U.S. tax expense related to deferred tax liabilities, $54,000 of cash tax expense for various foreign taxes, and $2.5 million is related to U. S. federal and state income tax expense. This is compared with an income tax expense of $3.6 million in the same period of 2007. Of this $3.6 million of income tax expense, $2.4 million is related to non-cash foreign tax expense associated primarily with the release of valuation allowance on utilized acquired NOLs where the benefit of the release is offset to goodwill, $875,000 is related to various other foreign income taxes, and $338,000 is related to U.S. federal and state income tax expense.

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

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

Comparison of Nine Months Ended September 30, 2008 and 2007.

Revenues. Our total revenues increased 8% to $185.4 million for the nine months ended September 30, 2008 up from $171.4 million in the same period of 2007. Our products revenues decreased 4% to $88.0 million for the nine months ended September 30, 2008 down from $91.9 million in the same period of 2007. Our services revenues increased 10% to $60.4 million for the nine months ended September 30, 2008 up from $54.9 million in the same period of 2007. Other revenues

increased 50% to $36.9 million for the nine months ended September 30, 2008 up from $24.6 million in the same period of 2007. Other revenue represents multiple element sales that lacked VSOE in the prior periods and became recognizable as services were provided in 2008 and 2007, respectively. This revenue is primarily from our Secure Mail product line revenues. Because we are unable to establish VSOE of fair value on the undelivered elements, the majority of the revenue from that product line has been deferred and is being recognized as revenue over the service period. The total revenue growth was driven by a 13% or $19.7 million increase in Enterprise Security Solutions revenue which was primarily driven by sustained demand for network security solutions, and was offset by a 23% or $5.7 million decrease in the SafeWord revenue due to the divestiture of the SafeWord product line in September 2008.

Cost of Revenues and Gross Profit. Total cost of revenues increased 14% to $57.3 million for the nine months ended September 30, 2008, up from $50.1 million in the same period of 2007. This increase is the direct result of the increase in total revenues. Gross profit as a percentage of revenue was 69% for the nine months ended September 30, 2008 compared to 71% in the same period of 2007. For the nine months ended September 30, 2008, gross profit for products decreased to 63% compared to 69% in the same period of 2007, primarily due to increased sales volume of products containing a hardware component, which have a lower gross profit than our software products, and an increase in related manufacturing and overhead costs. Gross profit for services increased to 79% for the nine months ended September 30, 2008 compared to 78% for the same period in 2007. This improvement was primarily driven by the growth of our support revenue outpacing increases in support costs.

Operating Expenses. Total operating expenses increased 22% to $172.1 million for the nine months ended September 30, 2008 up from $140.7 million in the same period of 2007. This increase was driven primarily by goodwill impairment of . . .