SECURE COMPUTING CORP, S-1, 1999-10-18

SECURE COMPUTING CORP
S-1, 1999-10-18
COMPUTER PROGRAMMING SERVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1999
REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------------------

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

SECURE COMPUTING CORPORATION
(Exact Name of Secure Computing Corporation as Specified in Its Charter)

DELAWARE 7371 52-1637226
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)

ONE ALMADEN BLVD., SUITE 400, SAN JOSE, CALIFORNIA 95113
(Address, including zip code, and telephone number, including area code,
of Secure Computing Corporation' principal executive offices)

JOHN MCNULTY
ONE ALMADEN BLVD., SUITE 400, SAN JOSE, CALIFORNIA 95113
(Name, address, including zip code, and telephone number, including area
code, of agent for service)

----------------------

COPIES TO:
AUGUST J. MORETTI STEPHEN M. SCHULTZ
KYLE GUSE CHRISTOPHER P. DAVIS
HELLER EHRMAN WHITE & MCAULIFFE KLEINBERG, KAPLAN, WOLFF & COHEN, P.C.
2500 SAND HILL ROAD, SUITE 100 551 FIFTH AVENUE
MENLO PARK, CALIFORNIA 94025-7063 NEW YORK, NEW YORK 10176
TELEPHONE: (650) 234-4229 TELEPHONE: 212 986-6000
FACSIMILE: (650) 234-4299 FACSIMILE 212 986-8866

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE FOLLOWING THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT.

IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: _______________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: _______________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]

----------------------

CALCULATION OF REGISTRATION FEE

================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(2) FEE
- --------------------------------------------------------------------------------
Common Stock, $.01 par value 5,000,000 $2.7969 $13,984,500 $3,887.69
- --------------------------------------------------------------------------------
Total 5,000,000 $2.7969 $13,984,500 $3,887.69
================================================================================
(1) In accordance with Rule 416 under the Securities Act of 1933, common stock
offered hereby shall also be deemed to cover additional securities to be
offered or issued to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the high and low prices of the common
stock on the Nasdaq National Market on October 11, 1999, as reported in The
Wall Street Journal.

SECURE COMPUTING CORPORATION HEREBY AMENDS THIS REGISTRATION
STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE
UNTIL SECURE COMPUTING CORPORATION SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================

<PAGE>

PROSPECTUS

SECURE COMPUTING CORPORATION

5,000,000 SHARES
COMMON STOCK

This prospectus may be used only for the resale of up to 5,000,000
shares of common stock, by Manchester Securities Corp. See "Selling Security
Holder." Manchester may acquire these shares from us pursuant to the common
stock investment agreement which we executed with Manchester on October 4, 1999,
and pursuant to the warrant we issued to Manchester on October 5, 1999.
Manchester will receive all of the proceeds from the sale of the shares and will
pay all underwriting discounts and selling commissions, if any, applicable to
the sale of the shares. Under the investment agreement, however, we will receive
the proceeds from the sale of the shares to Manchester in an aggregate total
amount of up to $25,000,000. Pursuant to this prospectus we will pay the
expenses incurred in registering the shares, including legal and accounting
fees, subject to certain limitations.

Our address is One Almaden Blvd., Suite 400, San Jose, California
95113, telephone number (408) 918-6100.

Our common stock trades on the Nasdaq National Market under the symbol
"SCUR". On October 11, 1999, the closing price for our common stock, as reported
on the Nasdaq National Market, was $2.7813 per share.

Beginning on page 3, we have listed several "RISK FACTORS" which you
should consider. You should read the entire prospectus carefully before you make
your investment decision.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this prospectus is October 14, 1999.

You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. Manchester is offering to sell, and seeking
offers to buy, shares of Secure Computing's common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of the shares.

In this prospectus, "Secure Computing", "we", "us" and "our" refer to
Secure Computing Corporation.

----------------------

i
<PAGE>

TABLE OF CONTENTS

SUMMARY INFORMATION............................................................1

RISK FACTORS...................................................................3

USE OF PROCEEDS...............................................................11

THE INVESTMENT AGREEMENT......................................................11

SELLING SECURITY HOLDER.......................................................12

PLAN OF DISTRIBUTION..........................................................13

THE BUSINESS..................................................................15

PROPERTIES....................................................................28

MARKET FOR SECURE COMPUTING'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...............................................29

SELECTED FINANCIAL DATA.......................................................30

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................................31

MANAGEMENT....................................................................38

EXECUTIVE COMPENSATION........................................................40

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES.............................................42

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................46

CERTAIN TRANSACTIONS..........................................................48

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.......................48

DESCRIPTION OF CAPITAL STOCK..................................................48

LEGAL MATTERS.................................................................50

EXPERTS.......................................................................50

INDEX TO FINANCIAL STATEMENTS................................................F-1

REPORT OF INDEPENDENT AUDITORS...............................................F-2

ii
<PAGE>

----------------------

SUMMARY INFORMATION

Forward looking statements made in this prospectus or in the documents
incorporated by reference herein that are not statements of historical fact are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. A number of risks and uncertainties, including those discussed under
the caption "Risk Factors" below 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.

SECURE COMPUTING CORPORATION

THOSE INTENDED TO PREVENT UNAUTHORIZED ACCESS TO COMPUTER AND NETWORK BASED DATA
AND INFORMATION:

* firewalls; and

* web (URL) filtering software.

THOSE INTENDED TO AUTHENTICATE/IDENTIFY NETWORK USERS AND CONTROL ACCESS TO
NETWORK RESOURCES OR APPLICATIONS:

* authenticators (hardware and software tokens, digital
certificates, and others);

* authentication, authorization and audit; and

* security access control management software.

Finally, in addition to our products, we provide security centered professional
services for:

* vulnerability assessment and analysis;

* penetration testing; and

* security architecture design & implementation.

We originated as a small division of Honeywell Inc. which pioneered the
principles of modern data security in the 1970s. We spun off from Honeywell in
1989 to develop and market core security for the National Security Agency (NSA)
and other departments and agencies of the United States government. We
anticipated an increased need for a product to provide security to enterprise
information systems. We therefore acquired firewall, authentication and URL
filtering companies in 1996. We have subsequently created a Professional
Services Division, recruited several well-known security experts and built our
internal consulting staff.

We now market a range of interoperable, standards-based e-commerce
security products and services worldwide. Our customers include:

* fortune 500 companies and their branch offices;

1
<PAGE>

* mid-to large size companies domestically and internationally;
and

* government agencies.

Our goal is to provide security software solutions, which enable
organizations to conduct electronic business safely and confidentially.

THE OFFERING

We and Manchester entered into a investment agreement on October 4, 1999.
Pursuant to that agreement, we are entitled to sell from time to time up to
$25,000,000 of common stock to Manchester. On October 5, 1999, we issued a
warrant to Manchester which gives Manchester the right to purchase shares of our
common stock. We also entered into a registration rights agreement which
required us to file a registration statement covering the resale of the shares
by Manchester. This prospectus is part of that registration statement.

Common Stock offered by Manchester.......... 5,000,000 shares of Common
Stock.
Offering Price.............................. Determined at the time of resale
by Manchester.
Common Stock outstanding as of September
30, 1999................................... 21,184,940 shares.
Use of Proceeds............................. Secure Computing will not
receive any of the proceeds from
sales by Manchester pursuant to
this prospectus. Any proceeds
from the sale of shares by us to
Manchester will be used for
general corporate purposes.
Nasdaq National Market Symbol............... SCUR.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------------------------------
(In thousands, except per share amounts)
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:

Revenue $ 17,795 $ 27,930 $ 40,262 $ 46,976 $ 61,442 $ 27,300 $ 13,739
Operating expense 5,900 13,712 47,938 33,944 45,237 24,944 29,664
Operating income/(loss) 1,220 (633) (26,473) (5,734) (4,933) (7,070) (28,807)
Net income/(loss) 1,541 (632) (25,094) (4,251) (3,262) (6,396) (29,406)
Net income/(loss) per share:
Basic and diluted .17 (.05) (1.76) (.27) (.20) (.40) (1.71)

BALANCE SHEET DATA: December 31
(In thousands)
----------------------------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
----------------------------------------------------------- ---------

Working capital $ 1,991 $ 34,292 $ 18,886 $ 17,175 $ 34,017 $ 13,134
Total assets 7,727 44,261 36,775 31,054 54,348 31,796
Long-term debt, less current --
Portion and redeemable
Convertible preferred stock 10,659 1,879 -- -- --
Stockholders' equity/(deficit) (5,996) 36,208 26,232 24,800 43,053 21,509
</TABLE>

2
<PAGE>

RISK FACTORS

You should carefully consider the following and other information
contained in this prospectus before making an investment decision. If any of the
events or circumstances described in the following risks actually occurs, our
business, financial condition, or results of operations could be materially
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or a part of your investment.

You should consider carefully whether an investment in Secure Computing
is an appropriate investment for you. We do not intend to issue any dividends in
the foreseeable future, so the only purpose of investment in Secure Computing's
shares is to enjoy a potential increase in the shares' value. Because of the
risks mentioned here, and other risks not mentioned specifically here, it is
possible that Secure Computing's shares will decline in value in the future. For
at least some period of time in the future Secure Computing's shares may decline
in value. If you cannot afford to lose the full value of your investment, in
either the short or long term, purchasing Secure Computing shares is not
appropriate for you.

WE ARE EXPERIENCING OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY.

We have incurred losses in the past and we incurred a sizeable loss for
our quarter ended June 30, 1999 and expect that we will continue to incur losses
for at least the next four quarters. We may continue to incur losses thereafter.
If these losses continue, our stock price may continue to decline, which could
cause you to lose part or all of your investment.

THE CONDITIONS TO OUR SELLING STOCK TO MANCHESTER MAY NOT BE SATISFIED AND OTHER
SOURCES OF FINANCING MAY NOT BE AVAILABLE.

Our revenues and cash balances are not sufficient to satisfy working
capital needs. Financing from Manchester or other sources is therefor necessary
to continue operations.

The proposed arrangement with Manchester is subject to a number of
restrictions which could restrict our ability to sell stock to Manchester,
including, for example:

* the registration statement, of which this prospectus forms a
part, must be accurate and effective when we sell stock to
Manchester and for some time thereafter;

* our representations and warranties set forth in the investment
agreement must be accurate;

* our stock must be listed for trading;

* Manchester shall not have acquired more than 9.99% of our
stock; and

* certain limitations on the trading volume shall not have been
exceeded.

These restrictions are discussed elsewhere in this prospectus (see "The
Investment Agreement"). The risk to Secure Computing is that at the time we will
need cash, the stock sale arrangement with Manchester may be unavailable or
insufficient to meet our cash needs. Moreover, financing from other sources may
not be available on satisfactory terms or at all. Our failure to obtain
financing could result in our insolvency and the loss to investors of their
entire investment in our common stock.

DELAYS IN PURCHASES HAVE MATERIALLY REDUCED OUR REVENUES DURING 1999 AND WILL
LIKELY CONTINUE TO REDUCE OUR REVENUES THROUGH THE END OF 1999.

In recent months we have experienced delays in customer purchasing
decisions. In the government sector these delays relate to the recent conflict
in Kosovo. We believe the conflict in Kosovo has caused government agencies to
focus government spending on matters related to the Kosovo conflict rather than
our products and services. In the private sector the delays result from year
2000 compliance concerns and lengthening of the sales cycle resulting from
increases in enterprise-wide transactions. Enterprise-wide transactions
typically involve complex sales of bundled security products. Our customers take
longer to reach purchasing decisions for these enterprise-wide transactions,
thus slowing our sales cycle. We believe that these delays, particularly year
2000 related delays, will continue to adversely affect our revenues for the
balance of 1999. However, we have not been able to determine the extent of this
reduction in revenues.

3
<PAGE>

THE COMMON STOCK SOLD IN THIS OFFERING SIGNIFICANTLY INCREASES THE SUPPLY OF OUR
COMMON STOCK ON THE PUBLIC MARKET, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.

The sale of shares pursuant to the investment agreement with Manchester
and the issuance of shares upon exercise of the warrant issued to Manchester
will have a dilutive impact on our security holders. Although the exact amount
of dilution cannot be predicted, the maximum number of shares that may be sold
under the investment agreement (but exclusive of the warrant issued to
Manchester) amounts to approximately 20% of our outstanding common stock as of
the date of the investment agreement. As a result, our net income or loss per
share could be significantly affected in future periods causing a reduction in
the market price of our common stock.

In addition, the common stock to be issued under the investment
agreement will be issued at a discount to the recent market price of the common
stock. The price of the stock to be sold to Manchester will be based on 98% of
the average of the two lowest daily trade prices during the six trading days
before the date Manchester notifies us that it is buying stock. The exercise
price per share of common stock is, at Manchester's option, equal to 120% of the
average of the closing bid prices of our common stock for the 10 trading days
starting (i) September 29, 1999, or (ii) the trading day following the day we
file our quarterly report on Form 10-Q with the SEC for the quarter ending
September 30, 1999. As calculated in accordance with clause (i) above, the
number of shares would be 526,685 and the exercise price per share would be
$3.56.

The exercise price may therefor be less than the
market price of our stock when the warrant is exercised. These sales below the
market price could have an immediate adverse effect on the market price of the
common stock and could result in dilution to the holders of our common stock.

OUR PREFERRED STOCK FINANCING HAS RESULTED IN AN INDETERMINABLE DILUTION TO
HOLDERS OF OUR COMMON STOCK AND POTENTIAL DOWNWARD PRESSURE ON THE PRICE OF OUR
STOCK.

The agreements with the purchasers of the Series C preferred stock and
our warrants issued to them contain terms and covenants that could result in
substantial dilution to our stockholders. For so long as our common stock trades
at a price less than $19.0035 per share, the Series C preferred stock will be
convertible into shares of our common stock at variable rates based on the
trading prices of the common stock. All shares of common stock issuable upon
conversion of the Series C preferred stock and warrants have been registered for
resale. Such shares are therefore eligible for immediate and unrestricted resale
into the public market. For a more detailed discussion of the conversion price
see "Description of Capital Stock" on page 47.

The number of shares of common stock that may ultimately be issued upon
conversion of shares of Series C preferred stock is presently indeterminable,
but will increase if the price of our stock drops. This would in turn place
additional downward pressure on the price of our stock. A decline in the price
of our stock could result in the loss of substantially all your investment.

As of September 30, 1999 we have issued 3,937,324 shares of common
stock upon conversion of Series C preferred stock which is equal to
approximately 19% of our outstanding shares on September 30, 1999. As of
September 30, 1999, there were 3,600 shares of Series C preferred stock
outstanding.

Based on the average closing bid price of $3.175 for the five trading
days ended September 29, 1999, and a hypothetical conversion on the following
day, September 30, 1999 of the 3,600 shares of Series C preferred stock then
outstanding and the exercise of outstanding warrants to purchase 174,464 shares
of our common stock, we would hypothetically have issued 1,308,322 shares of
common stock. These shares would then have constituted approximately 6.2% of the
outstanding shares of common stock as of September 30, 1999.

The following table sets forth the number of shares of common stock
issuable upon conversion of the outstanding Series C preferred stock and
percentage of ownership that each represents assuming:

* the market price of the common stock is 25%, 50%, 75% and 100%
of the market price of the common stock on September 29, 1999,
which was $3.1875 per share at the close of trading;

* the number of shares of Series C preferred stock outstanding
is the number of shares of Series C preferred stock
outstanding on September 29, 1999, which was 3,600 shares;

* the number of shares of common stock outstanding is the number
of shares of common stock outstanding on September 30, 1999,
which was 21,184,940;

* the variable conversion price feature of the preferred stock
that was in effect;

* the maximum conversion prices of the preferred stock was not
adjusted as provided in our certificate of incorporation or
the amount of shares issuable is otherwise limited by the
transaction agreements; and

4
<PAGE>

* excludes shares issuable in respect of any default amounts.

Percent of Common Stock
(Market Price) Issuable Shares Underlying Percentage
-------------- --------------- ---------------------
25% ($.80) 4,500,000 21.2%
50% ($1.59) 2,264,151 10.7%
75% ($2.39) 1,506,276 7.1%
100% ($3.19) 1,129,412 5.3%

Limitations in the transaction agreements and the certificate of
incorporation preclude the holders of Series C preferred stock from achieving
these levels of beneficial ownership. The restrictions on the levels of
beneficial ownership in those documents do not, however, restrict the holders of
Series C preferred stock from converting shares of Series C preferred stock up
to those limitations, selling shares of common stock to decrease their level of
beneficial ownership, and converting additional shares of Series C preferred
stock into shares of common stock. This could result in additional dilution to
the holders of our common stock and a potential decrease in the price of that
stock.

SHORT SELLING OF OUR STOCK MAY FURTHER DEPRESS OUR STOCK PRICE.

The significant downward pressure on our stock price as a result of the
conversion of Series C preferred stock and the sale of material amounts of the
common stock could encourage short sales of our stock. Ongoing sales of common
stock to Manchester and the right granted to Manchester to purchase our stock
from time to time could also encourage Manchester and others to sell our stock
short. During the term of the investment agreement, however, Manchester is
prohibited from selling our common stock short if as a result Manchester would
have a net short position in excess of the amount of stock Manchester has the
right or obligation to buy. Short sales could place further downward pressure on
the price of our common stock.

COMPETITION FROM COMPANIES PRODUCING ENTERPRISE NETWORK AND DATA SECURITY
PRODUCTS COULD REDUCE OUR SALES AND MARKET SHARE.

Our principal products are network and data security products which
enable organizations to conduct electronic business safely and confidentially.
Because the market for these products is highly competitive it may be difficult
to significantly increase our market share and 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 and we are unable to rapidly offer a competitive
product we may lose customers. Additionally, barriers to entry into our market
are relatively low, and competitors could offer new solutions rapidly and at
relatively low costs. This 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 most significant competitors currently include:

* ActivCard S.A.;

* Axent Technologies Ltd.;

* CheckPoint Software Technologies Ltd.;

* Network Associates, Inc.; and

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<PAGE>

* RSA Security, Inc.

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.,
Lucent Technologies, Inc., Nortel Networks, 3Com Corporation, Cisco Systems,
Inc. and Novell, Inc. If any of those potential customers begin to offer
enterprise-wide security systems as a component of their hardware, demand for
our software could decrease. Ultimately, approaches other than ours may dominate
the market for enterprise network and data security products.

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. For example, a group of companies, including Microsoft, IBM, Compaq,
and Hewlett-Packard, recently formed an alliance for the purpose of developing
standard security specifications. We may be at a competitive disadvantage if any
such standards gain market acceptance and are adopted by competitors and if we
are unable to take advantage of such standards. 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 was 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.

TECHNOLOGY IN THE ENTERPRISE NETWORK AND DATA SECURITY MARKETS IS CHANGING
RAPIDLY, AND IF WE FAIL TO DEVELOP NEW PRODUCTS WHICH 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 and data security product
introductions is substantial, and security products have relatively short
product life cycles. Our customer requirements and preferences change rapidly.
Our net sales and operating results will be materially affected if the market
adopts as industry standards solutions other than those we employ. In addition,
a portion of our basic research efforts are funded by government contracts. If
those contracts are terminated for any reason, it could reduce our new product
stream, which could materially reduce our net sales and operating results.

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 WILL 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 make these networks into
viable commercial marketplaces are not developed, or, if developed, these
networks do not become and continue to be viable commercial marketplaces, our
net sales and operating results could suffer.

OUR PRODUCT LINE IS NOT DIVERSIFIED, AND ANY DROP IN THE DEMAND FOR NETWORK AND
DATA SECURITY PRODUCTS WOULD MATERIALLY HARM OUR BUSINESS.

Substantially all of our revenue comes from sales of enterprise network
and data 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. The same would occur if we face difficulties or delay in
diversifying our product offerings to lessen our dependency on those products.

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<PAGE>

OUR STOCK PRICE AND OUR QUARTERLY OPERATING RESULTS ARE HIGHLY VOLATILE, WHICH
MAY IMPAIR OUR ABILITY TO RAISE MONEY AND CAUSE OUR INVESTORS TO LOSE MONEY.

The price of our common stock, like that of many technology companies,
has fluctuated widely. In addition, our revenues and operating results have
fluctuated significantly from period to period, which tends to increase the
volatility of our common stock price. We expect that our quarterly results will
continue to fluctuate significantly. Fluctuation in our results and stock price
may cause our investors to lose money and impair our ability to raise additional
capital. Factors that may affect stock price volatility include:

* unexpected fluctuations in operating results;

* Secure Computing or its competitors announce technological
innovations or new products;

* developments with respect to our patents or other proprietary
rights or those of our competitors;

* our ability to successfully execute our business plan and
compete in the network security industry; and

* analyst reports and media stories.

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. Historically we have
recognized a substantial portion of our license revenues in the last week of
each quarter. This increases our uncertainty about the results of any given
quarter. Our quarterly operating results may vary significantly depending on a
number of other factors, including:

* the timing of the introduction or enhancement of products by
us or our competitors;

* the size, timing and shipment of individual orders;

* market acceptance of new products;

* changes in our operating expenses;

* personnel changes, mix of products sold; and

* changes in product pricing, and development of our direct and
indirect distribution channels.

THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND WE MAY INCUR SUBSTANTIAL EXPENSES
AND INVENTORY FOR SALES THAT DO NOT OCCUR WHEN ANTICIPATED.

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 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. Recently,
we have experienced a lengthening of our sales cycle as a consequence of
increases in enterprise-wide transactions. We believe that an increase in
enterprise-wide purchasing involving extensive bundling of security products
causes this extension of the sales cycle.

IF OUR PRODUCTS FAIL TO FUNCTION PROPERLY OR ARE NOT PROPERLY DESIGNED, OUR
REPUTATION MAY BE HARMED AND CONSUMERS MAY MAKE PRODUCT LIABILITY AND WARRANTY
CLAIMS AGAINST US.

7
<PAGE>

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

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

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

WE MAY BE REQUIRED TO REDEEM OUR SERIES C PREFERRED STOCK AND WE CURRENTLY LACK
SUFFICIENT FUNDS FOR REDEMPTION; WE MAY ALSO BE REQUIRED TO PAY PENALTIES WHICH
WOULD MATERIALLY AFFECT OUR CASH POSITION AND BUSINESS.

The Series C preferred stock financing agreements require us to redeem
up to all of the Series C preferred stock if we fail to satisfy our obligations.
For a description of circumstances requiring potential redemption see
"Description of Capital Stock" on page 47. These redemption obligations arise
upon breach of our obligations including our representations and warranties and
covenants to the holders of our Series C preferred stock.

If the holders of Series C preferred stock become entitled to have
their Series C preferred stock redeemed, we may not be able to fund that
redemption. In addition, even if funding is available, the substantial payment
required to fund that redemption could materially affect our financial
condition. If we fail to pay a redemption amount when due, we may become
obligated to pay a default premium at a rate of 24% per annum, and may be
subject to additional dilution which would require us to issue up to twice the
number of shares of common stock otherwise issuable.

Under the terms of the agreement with the holders of our Series C
preferred stock, we are subject to a number of ongoing obligations. For example,
our stock must be quoted in the Nasdaq Stock Market, or listed on the New York
Stock Exchange or the American Stock Exchange. Additionally, we must maintain
the effectiveness of the registration statement covering the resale of the
common stock issuable upon conversion of the Series C preferred stock. If we
fail to satisfy our ongoing obligations we are subject to penalties. The
potential penalty generally consists of a cash payment equal to 1.5% per month
of the stated value of the Series C preferred stock and/or a downward adjustment
to the conversion price of the Series C preferred stock.

We received a communication dated September 27, 1999 from one of the
holders of Series C preferred stock claiming that pursuant to this penalty
provision we are obligated to make a cash payment calculated as of that date to
the holder of $300,225. The holder also claims that the conversion ratio of the
Series C preferred stock should be adjusted downward. We are in the process of
evaluating the merits of this claim. The risk to us is that if the holders of
any of the Series C preferred stock are successful in imposing such penalties,
our cash would be depleted and our stockholders would be diluted.

YEAR 2000 ISSUES ARE DELAYING CUSTOMER BUYING DECISIONS IN FISCAL YEAR 1999,
WHICH IS SIGNIFICANTLY REDUCING OUR SALES; OTHER YEAR 2000 ISSUES COULD ALSO
HARM OUR BUSINESS.

The following information constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.

Many currently installed computer systems and software products are
programmed to use only two digit dates rather than four. This could result in
system and processing failures of date-related data because computer programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than 2000. We believe that our products and systems sold after
December 31, 1998 are Year 2000 compliant. We have completed preparation and
testing of our products and systems, and have verified compliance of third party
computer software that we use. However, we have not verified Year 2000
compliance of all semiconductors embedded in other (third-party) equipment that
we use, nor have we established the costs and risks associated with such
external equipment.

The failure of third-party equipment to operate properly with regard to
the Year 2000 and thereafter could materially affect our operating results and
financial condition. This failure could also require us to incur material
unanticipated expenses to remedy any problems. In addition, the business,
operating results and financial condition of our customers could be adversely
affected to the extent that they utilize third-party software and other products
that are not Year 2000 compliant.

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<PAGE>

Further, Year 2000 issues may affect the purchasing patterns of
customers or potential customers as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures could
materially affect our net sales and operating results as a result of customers
or potential customers having reduced funds available to purchase our products
and services. In addition, we believe that some customers or potential customers
who have undertaken Year 2000 compliance programs are now delaying additional
software purchases in order to insure that all systems will remain Year 2000
compliant on January 1, 2000. We further believe that these delays are
materially reducing our sales in the current year. Recently, it has become
apparent to us, and many of our competitors have stated, that a significant
number of enterprise networks will make no additional purchases of network
security software until after January 1, 2000.

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

We have taken and may from time to time take various forms of action to
manage the amounts due us from customers, including selling the debt owed us to
lenders at a discount and granting customer discounts in exchange for earlier
payment.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, DELAWARE LAW, AND OUR
AGREEMENTS WITH THE HOLDERS OF OUR SERIES C PREFERRED STOCK COULD DISCOURAGE A
TAKEOVER OR FUTURE FINANCING.

The terms of our certificate of incorporation and share rights
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 bylaws, such as a classified
board and limitations on the ability of shareholders 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.

Our agreements with the purchasers of the Series C preferred stock
contain covenants that could impair our ability to engage in various corporate
transactions in the future, and a possible change-in-control or acquisition of
us, or that could otherwise disadvantage us and the holders of our common stock.

UNANTICIPATED COSTS AND DISALLOWANCE OF COSTS UNDER OUR GOVERNMENT CONTRACTS MAY
HARM OUR BUSINESS.

Under our government contracts, we bear the risk that increased or
unexpected costs of providing our services may reduce our profit margin. Any
material unanticipated costs could therefore harm our business. In addition,
recoverable expenses previously billed by us are subject to review and audit by
the Defense Contract Audit Agency. If the Defense Contract Audit Agency
disallows any of the costs we claim under our contracts, it could adversely
affect our operating results. We have not previously experienced any material
disallowance of costs respecting our government contracts.

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<PAGE>

THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO DEVELOP OUR
PRODUCTS AND MANAGE OUR BUSINESS IS EXTREMELY IMPORTANT AND OUR FAILURE TO DO SO
COULD HARM OUR BUSINESS.

We believe our success depends significantly upon a number of key
technical and management employees. We may be unable to achieve our revenue and
operating performance objectives unless we can attract and retain technically
qualified and highly skilled engineers, 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 FOREIGN CURRENCY FLUCTUATIONS AND
OTHER INHERENT RISKS RELATED TO DOING BUSINESS IN FOREIGN COUNTRIES.

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

* severe economic decline in one of our major foreign markets;
and

* substantial decline in the exchange rate for foreign
currencies with respect to the U.S. dollar.

A decline in our international sales or collections of amounts due us from
customers could materially effect our operations and financial conditions. In
1998, 24% of our total sales came from international sales. Of this 24%, Japan
and Sweden accounted for the largest sources of foreign sales. 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:

* unexpected changes in regulatory requirements;

* tariffs and other trade barriers;

* potentially greater difficulty in collecting amounts due us;

* longer periods of time to collect amounts due us; and

* a higher rate of piracy of our products in countries with a
high incidence of software piracy.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly, and current reports, proxy statements, and
other documents with the SEC. You may read and copy any document we file at the
SEC's public reference room at Judiciary Plaza Building, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more
information on the public reference room. The SEC maintains an internet site at
http://www.sec.gov where you can find certain information regarding issuers
(including Secure Computing).

This prospectus is part of a registration statement that we filed with
the SEC (Registration No. __________). The registration statement contains more
information than this prospectus regarding Secure Computing Corporation and its
common stock, including certain exhibits and schedules. You can get a copy of
the registration statement from the SEC at the address listed above or from its
internet site.

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<PAGE>

USE OF PROCEEDS

Secure Computing will not receive any of the proceeds from the sale of
the shares by Manchester pursuant to this prospectus. We will use any proceeds
we receive from selling shares to Manchester for general corporate purposes.

THE INVESTMENT AGREEMENT

On October 4, 1999, we entered into the investment agreement with the
selling security holder, Manchester Securities Corp. According to the agreement
and subject to the satisfaction of certain conditions, we may issue and sell,
from time to time, up to an aggregate of $25,000,000 of our common stock. We may
sell stock to Manchester up until October 3, 2001.

The investment agreement provides for successive "investment periods"
that each last for approximately 30 days. The first investment period starts on
the later of (i) the sixth trading day after the registration statement, of
which this prospectus forms a part, is declared effective by the SEC, and (ii)
the tenth trading day after we provide written notice to Manchester of an
anticipated declaration of effectiveness.

To sell stock to Manchester in any investment period, we must first
deliver a "draw notice" to them at least five trading days in advance of the
upcoming investment period. The draw notice must indicate the dollar amount of
stock we intend to sell to Manchester, with a minimum of $250,000 and a maximum
of $2,000,000 per draw notice. The dollar amount of any draw notice may be made
subject to a downward adjustment for the amount of any shares that Manchester
did not inform us it was purchasing in the preceding investment period, as
described in the following paragraph.

After Manchester receives a draw notice, it is then obligated, subject
to a number of conditions described below, before the end of the investment
period to purchase the dollar amount of our common stock indicated in the draw
notice. Manchester then chooses the dates to purchase our stock during the
investment period by giving us one or more "purchase notices" indicating the
dollar amount of shares that it is buying. We are required to complete the sales
of stock to Manchester three trading days after each purchase notice.

Manchester also has the "call right" to purchase additional shares of
our common stock during the investment period at an amount equal to 50% of the
amount indicated in the draw notice.

Stock Manchester purchases under the investment agreement is at a price
equal to 98% of the average of the two lowest daily stock trade prices during
the six consecutive trading days ending on the day prior to the date Manchester
gives us a purchase notice. We may, however, specify a "floor price" of not less
that $1.50 per share. The result of the floor price is that we cannot sell stock
to Manchester if the price to Manchester calculated as set forth above is more
than 2% below the floor price. Accordingly, a consequence of setting too high a
floor price is that if the stock does not trade above the floor price, our
ability to sell stock to Manchester will be limited.

Certain conditions must be satisfied before we can complete the sale of
stock to Manchester, including, but not limited to, the following:

* our common stock shall not have been delisted nor suspended
from trading on a principal market;

* our representations and warranties to Manchester set forth in
the investment agreement must be accurate when made and as of
the date we are to complete each sale to Manchester;

* our legal counsel must deliver a legal opinion related to the
issuance of the stock to Manchester, the registration
statement, of which this prospectus forms a part, and certain
other matters;

* no statute, rule, regulation, executive order, decree, ruling
or injunction shall be in effect which prohibits any of the
transactions the investment agreement contemplates;

* the registration statement, of which this prospectus forms a
part, must be accurate and must have been declared effective
by the SEC;

* we must be in compliance with the transaction documents with
Manchester; and

* a major transaction, such as a merger, shall not have occurred
or be pending.

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<PAGE>

We may not be able to satisfy all conditions required under the
investment agreement. Therefore, we may not be able to sell any shares to
Manchester. Other limits on our ability to sell stock to Manchester under the
investment agreement include:

* the number of shares Manchester may beneficially own cannot
exceed 9.99% of the total amount of our common stock
outstanding;

* we cannot sell more than 4,190,494 shares of common stock to
Manchester under the investment agreement without obtaining
stockholder approval; and

* the amount of shares that Manchester is required to purchase
in any investment period shall not exceed the amount in the
draw notice and cannot exceed the lesser of the following:

-- 8% of the dollar trading volume of our common stock
for the preceding investment period; or

-- 8% of the aggregate daily dollar trading volume of
our common stock during the trading days in the same
investment period on which the lowest completed trade
price of that trading date exceeded our specified
floor price.

Manchester, however, has the right but not the
obligation in its sole discretion to waive either of the above
8% limits.

If our common stock is delisted or suspended from trading, Manchester
has the right to sell stock back to us that it purchased under the investment
agreement during the 30 days prior to such delisting or suspension (subject to a
grace period). The price at which we must repurchase such stock may be lower
than the market price on the date of the repurchase.

In connection with the investment agreement, on October 5, 1999 we
issued a warrant to Manchester to purchase common stock having an aggregate
exercise price of $1,875,000. The exercise price per share of common stock is,
at Manchester's option, equal to 120% of the average of the closing bid prices
of our common stock for the 10 trading days starting (i) September 29, 1999, or
(ii) the trading day following the day we file our quarterly report on Form 10-Q
with the SEC for the quarter ending September 30, 1999. As calculated in
accordance with clause (i) above, the number of shares would be 526,685 and the
exercise price per share would be $3.56. The warrant is exercisable on a "net"
basis only. The net exercise provision works by providing that the number of
shares to be issued to Manchester upon exercise is equal to the number of shares
surrendered upon exercise times the difference between the fair market value and
the exercise price. The resulting amount is then divided by the fair market
value of the common stock. In this way, Manchester does not have to pay cash to
exercise the warrant.

Under the investment agreement, we agreed to register the common stock
issuable to Manchester under the investment agreement and the warrant for resale
by Manchester to permit the resale from time to time in the market or in
privately-negotiated transactions. We will prepare and file such amendments and
supplements to the registration statement as may be necessary in accordance with
the Securities Act, and the rules and regulations promulgated thereunder, in
order to keep it effective until December 4, 2001.

We have agreed to indemnify Manchester against liabilities arising
under the Securities Act. The registration rights agreement provides that we
will reimburse Manchester for expenses it incurs in connection with
investigating or defending against claims based upon untrue statements (or
alleged untrue statements) or omission (or alleged omissions) of material facts
in Secure Computing's filings with the SEC. In addition, we will indemnify
Manchester against claims based on Secure Computing's violation (or alleged
violation) of the Securities Act or other federal or state securities
regulations.

As explained in the "Plan of Distribution", we have agreed to bear
certain expenses (other than broker discounts and commissions, if any) in
connection with the registration statement.

SELLING SECURITY HOLDER

The following table sets forth certain information regarding beneficial
ownership of Secure Computing Corporation's common stock by the selling security
holder as of September 30, 1999 (these amounts may change in the future).
Manchester is a member firm of the NASD. Because Manchester may sell some or all
of the shares offered hereby, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares by
Manchester, we cannot give an estimate as to the actual amount of shares that
Manchester will hold after completion of such distribution. See "Plan of
Distribution."

Manchester has not had a material relationship with Secure Computing
within the past three years, except as a result of entering into the investment
agreement with Secure Computing dated October 4, 1999 and the related
transaction documents. Pursuant to a prime brokerage agreement entered into by
Manchester, Manchester has acquired the right to borrow 830,900 shares of our
common stock. Manchester will have the right to sell any shares of our common
stock that it elects to borrow. Manchester may be deemed to be the beneficial
owner of the 830,900 shares covered by this arrangement, within the meaning of
section 13(d) of the "Exchange Act."

Common Stock Common Stock
Beneficially Owned Common Beneficially Owned
Prior to Offering Stock After Offering
------------------ to be ---------------
Number sold Number Percent
-------- -------- --------- ------ -------

Manchester Securities Corp. 830,900 3.9% 5,000,000 -- --

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PLAN OF DISTRIBUTION

All or a portion of the shares offered hereby by Manchester may be
delivered and/or sold in transactions from time to time on the over-the-counter
market, on the Nasdaq National Market, in negotiated transactions, sales on any
market where our stock is traded, any other legal method of disposition,
delivery of shares in settlement of option/short sales transactions, block
trades, or a combination of such methods of sale, at market prices prevailing at
the time, at prices related to such prevailing prices or at negotiated prices.
Manchester may effect such transactions by selling to or through one or more
broker-dealer, and such broker-dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from Manchester. Manchester
is an "underwriter" within the meaning of the Securities Act. Any broker-dealer
that participates in the distribution may under certain circumstances also be
deemed to be "underwriter" within the meaning of the Securities Act, and any
commissions such broker-dealer receives and any profits it realizes on the
resale of shares may be deemed to be underwriting discounts and commissions
under the Securities Act. Secure Computing has agreed to indemnify Manchester
with respect to the shares offered hereby against certain liabilities,
including, without limitation, certain liabilities under the Securities Act, or,
if such indemnity is unavailable, to contribute toward amounts required to be
paid in respect of such liabilities.

Any broker-dealer participating in such transactions as agent may
receive commissions from Manchester (and, if it acts as agent for the purchaser
of such shares, from such purchaser). Broker-dealers may agree with Manchester
to sell a specified number of shares at a stipulated price per share, and, to
the extent such a broker-dealer is unable to do so acting as agent for
Manchester, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to Manchester. Broker-dealers who acquire
shares as principal may thereafter resell such shares from time to time in
transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such shares commissions computed as described above. To
the extent required under the Securities Act, a supplemental prospectus will be
filed, disclosing:

* the name of any such broker-dealers;

* the number of shares involved;

* the price at which such shares are to be sold;

* the commissions paid or discounts or concessions allowed to
such broker-dealers, where applicable;

* that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus, as supplemented; and

* other facts material to the transaction.

Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the resale of shares may not
simultaneously engage in market making activities with respect to the common
stock of Secure Computing for a period of two business days prior to the
commencement of such distribution. In addition, Manchester will be subject to
applicable provisions of the Exchange Act, and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of shares of Secure Computing's common
stock by the selling security holder.

Manchester will pay all commissions, transfer taxes, and certain other
expenses associated with the sale of securities by them. The shares offered
hereby are being registered pursuant to contractual obligations of Secure
Computing, and Secure Computing has paid the expenses of the preparation of this
prospectus.

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<PAGE>

Rochon Capital Group, Ltd. is acting as placement agent in connection
with the investment agreement in this offering. In exchange for such services,
Rochon will receive from Secure Computing a cash fee of $462,500 and
reimbursement of expenses up to $25,000.

We have also agreed to reimburse the selling security holder for
certain costs and expenses incurred in connection with this offering up to
$75,000 through the start of the first investment period and up to $22,000 for
each of the three following investment periods. If expenses are less than these
limits in an investment period, then such shortfall is carried over to increase
the limit in the subsequent investment period. Cost and expenses of the selling
security holder in excess of such limits shall be split equally between us and
the selling security holder.

The price at which we will issue the common stock to Manchester shall
be at a price equal to 98% of the average of the two lowest daily stock trade
prices during the six consecutive trading days ending on the day prior to the
date Manchester gives us a purchase notice. Assuming $25 million of stock is
sold to Manchester and the price at which Manchester buys from us is 2% less
than the price Manchester sells such stock, then the commission to Manchester
would equal $500,000.

Other estimated expenses in connection with the offering include
Securities and Exchange Commission registration fee in the amount of $3,887.69,
accounting fees in the amount of $50,000, legal fees and disbursements in the
amount of $400,000 (including estimated fees and disbursements of counsel for,
and other out of pocket expenses of, Manchester that we agreed to pay) and
miscellaneous expenses in the amount of $10,000.

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<PAGE>

THE BUSINESS

THOSE INTENDED TO PREVENT UNAUTHORIZED ACCESS TO COMPUTER AND NETWORK BASED DATA
AND INFORMATION:

* firewalls; and

* web (URL) filtering software.

THOSE INTENDED TO AUTHENTICATE/IDENTIFY NETWORK USERS AND CONTROL ACCESS TO
NETWORK RESOURCES OR APPLICATIONS:

* authenticators (hardware and software tokens, digital
certificates, and others);

* authentication, authorization and audit; and

* security access control management software.

Finally, in addition to our products, we provide security centered professional
services for:

* vulnerability assessment and analysis;

* penetration testing; and

* security architecture design & implementation.

We now market a range of interoperable, standards-based e-commerce
security products and services worldwide. Our customers include:

* fortune 500 companies and their branch offices;

* mid-to large size companies domestically and internationally;
and

* government agencies.

Our goal is to provide security software solutions, which enable
organizations to conduct electronic business safely and confidentially.

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INDUSTRY BACKGROUND

THE PATH TO E-COMMERCE

Enterprise computing has evolved over the past 25 years from mainframe
computers supporting a number of terminals to networks of inter-connected
personal computers. As the cost of personal computers has decreased, businesses
and other organizations increasingly have begun to connect personal computers
into local-area networks allowing them to share data and applications within
work groups. As network technology has advanced, organizations have connected
together geographically dispersed local-area networks into wide-area networks.
Organizations have also standardized using Transmission Communication
Protocol/Internet Protocol (TCP/IP) based networking to connect a broad range of
computer applications. These applications include:

* remote/branch office access to home office computer
systems/applications;

* e-mail;

* electronic commerce; payment processing, order transmission,
etc.;

* digital cash;

* video conference and data application sharing;

* electronic software distribution; and

* mobile computing/internet access.

The adoption of standard computing and networking platforms, especially TCP/IP
and the Internet, have fueled the development of the first generation of
e-commerce solutions.

THE INTERNET

The Internet allows any computer connected to it to communicate with
any other computer in the world that is also connected to the Internet. In
particular, the Internet is key to providing a common network that can connect
users and organizations to each other electronically. It is a lower cost
solution than the private networks of the past, but also poses much greater
security risks and challenges. The Internet and WWW (world wide web) share
common attributes, such as the ability to run networked computer applications
around the world and the use of open standards base construction. These common
attributes make the Internet and the WWW, and the applications they host
vulnerable to hackers.

THE INTERNET AND ELECTRONIC COMMERCE SECURITY

Networks and network transmissions are vulnerable to a variety of
attacks that can compromise the secrecy and/or the integrity of critical data.
They can also cause the loss of services critical to an organization. The
National Institute of Standards and Technology (the NIST) has identified the
TCP/IP protocol suite and the Internet as particularly vulnerable to attacks.
Individuals have been able to exploit weaknesses in the protocol suite and
network configurations to gain unauthorized access to network transmissions and
individual computers. They have also used such assess to alter or steal data or,
in some cases, to launch destructive attacks on data and computers within a
network. Moreover, the Internet itself creates a security risk since it is built
on published standards. Knowledge of attacks and the software required to mount
these attacks spread quickly through the hacker community.

Despite the inherent risks associated with the Internet, security
conscious industries such as financial services, insurance, healthcare,
high-tech, telecommunications and defense are rapidly adopting Internet and WWW
technologies in order to take advantage of the e-commerce opportunity. Industry
analysts have been quick to point out that a key challenge to the successful
deployment of e-commerce solutions is building an integrated set of security
products. These products should enable a corporation to connect safely to the
Internet by controlling access

16
<PAGE>

and preventing unauthorized access and attacks. In addition, the products need
to enable a corporation to rapidly reconfigure its information security policy
as the business climate and alliances change. A significant commercial
opportunity for providers of electronic commerce security products and services
is presented by a combination of:

* security concerns described above; and

* the relatively small number of business offering
comprehensive, flexible, scalable, e-commerce security
solutions suitable for critical applications.

ELEMENTS OF E-COMMERCE SECURITY

We have identified what we believe are the key features of an effective
e-commerce security solution, including the following:

* SECURITY POLICY - the means by which an organization
determines which users have access to its network, which
actions each user is permitted to take, and how the network
will be managed. Security products must be flexible enough to
support a variety of policies and easy to reconfigure when an
organization's policies change.

* IDENTIFICATION AND AUTHENTICATION - the means by which the
organization identifies users attempting to gain access to a
network and confirms the source of transmissions over the
network.

* ACCESS CONTROL/AUTHORIZATION - the means by which a user is
allowed access to approved applications/uses. Conversely, this
is the means by which a user is prevented from taking
unauthorized actions, such as importing/exporting information
to/from the Internet.

* ENCRYPTION - the means by which information, whether in
storage or in transmission, is kept private and its secrecy is
maintained in the event that a transmission is intercepted or
the storage medium is stolen or tampered with.

* ADMINISTRATION - the ability of a network administrator to
configure the network's security features to implement the
organization's security policy.

* AUDIT - the ability to monitor activity in the network, to
detect and respond to abuse of information assets, and to hold
users accountable for their actions.

* SECURITY ARCHITECTURE AND IMPLEMENTATION SERVICES -
professional network security expertise, support and education
services. These services enable ongoing management and
development of security policies and enforcement measures.

SECURE COMPUTING'S SOLUTION

We understand e-commerce security risks and the limitations of
competitors' products and services. We believe that our products and services
will enable us to provide a comprehensive e-commerce security solution while
offering innovations in architecture, interfaces and features. These innovations
have strategic business benefits, such as ease of management, reduced human
error and lower total cost of ownership. These innovations are also flexible and
comprehensive. We can assess and advise organizations about their security needs
and provide a scalable distributable set of products that control access to
e-commerce applications. We can also furnish the means to manage this access
dynamically and provide education and support services tailored to each product.

TECHNOLOGIES

Our technologies provide the following benefits:

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FIREWALLS

Secure Computing firewalls are designed to provide an optional set of
capabilities to meet different requirements. Our firewalls deliver robust
security by using a firewall-specific operating system integrated with the
firewall application. Our firewalls that run on a commercial operating system
are designed for companies that want ease of use and administration. Our
firewalls have the following characteristics:

- multi-homed application-level gateways that
understand and interpret network protocols, and
increase access control in any direction;

- support of a comprehensive suite of network services;
and

- addresses can be translated so that they are hidden
from untrusted networks.

* ACCESS CONTROL

Access control rules determine how the firewall reacts to requests for
connections from users on internal and external networks. Our access control
features ensure consistent and automatic enforcement of the security policy
regardless of its complexity. These features enable organizations to define
rules for enforcing security policy on internal and external network connection
attempts. These features are also unique and range from simple to complex.

* VIRTUAL PRIVATE NETWORKS (VPN)

VPNs are encrypted connections between firewalls, or between a firewall
and an end user computer. VPNs can reduce the costs of creating a private
network for connecting geographically dispersed resources.

We have regularly introduced VPN innovations that are compliant with
Internet Protocol Security (IPSec). Examples of these VPNs include:

- VPN support with integrated third party software for
local access to the Internet from any major business
center in the world; this is an important option for
organizations with remote and mobile employees; and

- firewall support for embedded VPNs with granular
access control options, automated key management,
X.509 digital certificate handling and
inter-operability with standard certificate
authorities.

* SECUREOS(TM)

Secure Computing's SecureOS is a robust security operating system which
enables security-sensitive organizations in every industry to avoid the risks
and costs associated with maintaining separate operating systems. SecureOS
removes the inherent risks of layering a firewall on top of a discrete
commercial operating system. This avoids exposing the firewalls' integrity to
threat from inside and outside the organization.

* REGIONS

In March 1998, we introduced an approach called "regions" in our new
family of firewalls. Regions are groupings of physical interfaces/network cards
and VPNs. Regions allow administrators to define both physically and virtually
connected global networks into grouped items for easy management. Regions also
help view configurations, establish rules, and set policies at increasing levels
of detail through a powerful, visual object-based design.

Regions can be named as desired, and network access policies can be
applied for any region to region communication. Furthermore, administrators can
define network address translation to hide addresses between regions, rather
than specifying one as the trusted network and exposing untrusted network
addresses.

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* TYPE ENFORCEMENT(TM)

Our patented Type Enforcement technology was initially developed for
classified government agencies and it is now incorporated into our Unix firewall
architectures. Type Enforcement technology secures the underlying firewall
operating system and protects network services by dividing them into individual
domains. Each domain is granted permission to access specific file types and
domains. As a result, each domain provides a self-contained, discrete layer of
protection which cannot be changed. Firewalls with Type Enforcement protect
against known network penetration and destructive and malicious attacks.

* CENTRALIZED AND REMOTE MANAGEMENT

Centralized control features include:

- an easy-to-use management interface,

- encrypted and authenticated remote management

- remote systems configuration, and

- real-time monitoring of suspicious activities on the
network.

Administrators can use Simple Network Management Protocol (SNMP) agents
to send alarms to SNMP-compliant network management stations located on an
internal or external network.

* COMPREHENSIVE AUDIT AND LOGGING

Our firewalls provide comprehensive audit, logging and report
generation tools which bring unauthorized access attempts to the immediate
attention of the administrator. For example, an organization may configure its
firewall with traps which trigger an alarm, alerting a network administrator (by
paging the administrator if desired), to the attack in progress. Moreover, the
firewall can be configured to lure the unauthorized user to continue the attack
by making it appear that the attack is succeeding, while software logs the
attack and traces it to its source. The triggers can also be configured to
immediately terminate access.

* TRANSPARENCY

Our transparency technology allows a firewall to integrate into a new
or existing network without interfering with legitimate corporate network
services and business requirements. As a result, our firewalls do not alter the
work behavior of internal users nor do they require changes to existing or new
software that are being used on the protected network.

AUTHENTICATION, IDENTIFICATION AND AUTHORIZATION

Our authentication, identification and authorization technology results
from more than a decade of efforts in network authenticating technology.
Authentication products enable corporations to identify remote users and
business partners and to authorize their access to a company's network
resources. We currently have three patents for this technology.

* DYNAMIC PASSWORDS

Dynamic password technology is compatible with existing computing and
networking equipment that most organizations use. Since each password can only
be used one time, methods of electronically trying many passwords have an
extremely low mathematical probability of being successful. Physical observation
or electronic interception of the entered password will not enable the
eavesdropper to gain access, without calculating a subsequent authorized dynamic
password. This process is extremely unlikely when using the Data Encryption
Standard (DES) algorithm, which is widely recognized as a government certified
and industry-tested standard.

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Databases of user authentication codes and authorizations are themselves
encrypted using the DES algorithm for further protection from unauthorized
access.

* AUTHENTICATION PROTOCOLS AND INTERFACE MODULES

This technology supports existing and emerging authentication
protocols, including four TCP/IP based protocols. Many manufacturers of access
equipment adopted certain of these authentication protocols which permit
transmission of a user's name and password from numerous connection points and
through various network connectors, gateways, routers, servers and ports to the
authentication server. In addition, a linkable library of files allows customers
to create support for other levels of authentication at either the application
or the transaction level. A customer can link the application interface with
virtually any application or new or customized authentication products. Once the
linking takes place, executing the application permits the application or
product to transmit a name and password to the application interface. The
application, after it communicates through the software, returns the result of
the authentication query to the application or product.

* FULLY DOWN-LOADABLE, ALL SOFTWARE SOLUTION

The technology permits a down-loadable, all software solution and
reduces the aggregate cost of the authentication systems. Through a combination
of our network authentication software and software password generators, or
`tokens," an organization can achieve an all-software authentication solution
for its network.

* OPEN ARCHITECTURE AND INTER-OPERABILITY

Our identification and authentication technology has been designed to
operate on a wide variety of platforms and to be compatible with a wide range of
telecommunications products and protocols. This allows multiple solutions for
different types of security needs. This is important to organizations operating
a diverse computing environment. Moreover, it supports multiple token types
manufactured by Secure Computing and others within a single network.

* SCALABILITY

The ability to support large numbers of simultaneous users is a major
requirement for enterprises that need to manage hundreds of thousands of users
without affecting the enterprises' performance. With our technology, one
database can support greater than one million users, and each authentication
server can contain several databases. In addition, our authentication software
allows the support of a high volume of user authentication requests through the
use of multiple servers which are automatically synchronized.

* FAULT TOLERANCE

With this feature, databases are automatically mirrored on up to four
servers on a network to achieve fault tolerance. As a result, one server's
hardware failure does not prevent the authentication of users.

WEB MONITORING AND FILTERING

Our Web monitoring and filtering product is installed on a proxy server
and blocks access to objectionable Web sites or alternatively "deprioritizes"
requests to a non-work site.

* CONTROL LIST

This is a database of URLs for major Internet protocols (HTTP, FTP,
NNTP, and Gopher) representing sites, portions of sites, or discrete documents
available on the Internet that meet the criteria of one or more of the 27
categories that the control list currently supports. The distributed form of the
control list is binary, using a secure hash algorithm to both protect the actual
contents of the database, and to form the basis of efficient runtime access for
URL filtering. We use proprietary tools to update the control list efficiently
and effectively, including Human-Computer Interface and automated Web robots
(variations on the spiders used by most Internet search engines). These provide
candidate URLs from a variety of sources for review by list technicians.

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* MULTIPLE PLATFORM FUNCTIONALITY

This feature includes:

- web proxies for Unix and Windows NT;

- plug-ins for leading general-purpose proxies such as
Netscape Proxy Server and Microsoft Proxy Server; and

- proxy-based enhancements to our line of firewall
products.

In all cases, the monitoring and filtering application support the
widely accepted concept of proxies for fundamental Internet protocols.

* PROGRAMMING TOOLKIT

This toolkit is an application-programming interface to the core
functionality of the control list. It is used as a high-level development tool
for developing customized monitoring and filtering applications. Third-party
vendors use the Programming Toolkit both internally and externally.

PRODUCTS

Our security products are designed to provide integrated enterprise
security solutions for corporate networks. These products include the following:

* SecureZone(TM)

SecureZone is a firewall product which delivers advanced security
technologies developed for government and military agencies, including our
patented Type Enforcement, SecureOS, and Strikeback intrusion
detection/response.

In addition, organizations requiring a highly sophisticated level of
security protection pay a lower ownership cost. The intuitive, visual interface
simplifies and speeds all aspects of security administration, including access
control, entities of trust and VPNs SecureZone is the first network security
solution to deliver application gateway strengths with embedded VPNs and
commercially available integrated X.509 digital certificate management.

* Sidewinder(TM) Security Server

Sidewinder is a firewall product which uses features such as SecureOS,
Type Enforcement and Strikeback intrusion detection/response. It enforces
complex security policies and stringent security thresholds for both government
and commercial organizations, and permits high granular control over network
access rules, message filtering and intrusion detection. Sidewinder provides all
the features of a robust application gateway firewall plus additional
technologies and filters, allowing safe connections to and through untrusted
networks.

* SafeWord(TM)

The SafeWord family provides server software, hard tokens and soft
tokens for secured network access. SafeWord enables load balancing, real-time
mirroring and recovery while it combines one-time encrypted password protection
with standards-based inter-operability. This results in a wide choice of servers
and tokens. SafeWord runs on a wide range of platforms and supports multiple
token types from other manufacturers.

* SmartFilter(TM)

SmartFilter, a web filtering software, helps businesses manage
productivity, preserve network bandwidth and reduce legal liability through
industry-leading Web monitoring and filtering. Businesses can manage and monitor
Internet access through the SmartFilter Control List. For ease of
administration, the Control List is organized into 27 selectable

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content categories and can be customized to business needs, interests and
policies. SmartFilter capabilities mix in unique ways with each of our network
security solutions and complement a selection of recognized firewalls
participating in our Partner's First program.

SERVICES

Our services are designed to assist our customers during all states of
network growth. Our three types of services are summarized below:

* Professional Services

We provide a focused portfolio of professional services, ranging from
internal and external network penetration testing to security site assessment,
security policy development and secure architecture services. Service is
provided by our team of accredited, certified security experts, including 20
Certified Information Systems Security Professionals (CISSP). The CISSP
designation is awarded to a security professional who has passed a rigorous
examination which encompasses all major elements of the industry's widely
accepted and recognized information systems security common body of knowledge.

We investigate and analyze a client's operational and information
security issues, taking into consideration the client's critical information
assets and systems, business objectives and operational environment. We also
identify potential threats and risks to the client's network. We document our
work in written reports and oral presentations which clearly describe what
action the client should take to improve its security posture. Recommended
actions may include network redesign, policies, procedures and training.
Recommendations may also include specific technology such as cryptography,
authentication tools and firewalls.

Additional professional services include customized security policies,
security architecture, and a variety of either standard or customized security
related training. We also provide fully customized consulting, based on specific
customer needs.

* SecureSupport(TM)

SecureSupport provides expert customer support through e-mail, the Web
or telephonically. Service options are tailored for each of our network security
products.

Customers may purchase software support and upgrade service for an
annual fee. Product feature upgrades are released when new features or
capabilities are made available to software support subscribers. We provide
basic hardware support pursuant to our basic warranty terms. Extended warranties
are available for an annual fee. A customer may purchase enhanced hardware
support at varying rates either to provide service during normal business hours
or at all times (24 hours a day, 7 days a week) for up to three years. We
currently provide hardware support through contracts with third party support
vendors and by using our employees. When necessary, we provide software updates
and technical support through program fix releases to customers to fix bugs or
to provide enhancements to existing software features.

We provide limited hardware and software warranties to users for one
year from acceptance of a product. We will also provide contractual maintenance,
service of the hardware and upgrades of software for a fee after warranty
expiration. In many instances, our warranties are in turn supported by
warranties we receive from our manufacturers and suppliers.

* Education and Training Services

We provide extensive product training and security education
opportunities through classes, workshops and seminars around the world for
customers and channel partners. These services help our customers to maintain
security integrity by updating their security policy, configuring their
products, and integrating products into cohesive solutions.

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ADVANCED TECHNOLOGY CONTRACTS

From our inception, we have engaged in research and development of
information security technology by acquiring and executing contracts with
departments and agencies of the United States government, including the NSA.
These contracts provided us with the financial resources to establish a group of
scientists and engineers specializing in computer systems security. As a result,
we were able to incorporate the technology acquired under government contracts
into our commercial product and service offerings.

The majority of our contracts require that we perform specified
services, for which we are reimbursed for actual cost plus a fee. Under these
cost-reimbursement contracts, we bear the risk of increased or unexpected costs
beyond the scope of the contract. These increased costs may reduce our
profitability. The cost-reimbursement contracts generally are also subject to
termination at the convenience of the applicable government agency. If a
contract is terminated, we typically are reimbursed for our costs to the date of
its termination plus the cost of an orderly termination and are paid a portion
of the fee. Our United States government contracts are subject to audit by the
Defense Contract Audit Agency (DCAA). The DCAA has periodically audited our
contracts without any material cost disallowances.

CUSTOMERS

Our current commercial customers are likely to consider network
security solutions a high priority, because they routinely deal with proprietary
or highly sensitive information. Our customers include fortune 500 companies and
their branch offices, and mid-to large size companies domestically and
internationally.

Our customer list within the United States government includes the
Department of Defense (both directly and through the NSA), the U.S. Air Force,
and other agencies within the United States government.

Our customer list also includes foreign governments and businesses. We
sell our products in Western Europe, the Middle East, Australia and the Pacific
Rim, mainly through reseller channels.

SALES

We sell our products and services through both indirect and direct
channels, using a worldwide sales organization of 48 individuals, as of
September 30, 1999. For 1998, indirect channel sales comprised 63% of total
product sales, while direct sales to major end-users comprised the remaining
37%. Indirect channels include sales made to domestic and international
distributors, value-added resellers, major integrators and original equipment
manufacturers (OEM's). The typical end-users buying directly from us are larger,
Fortune 1000 companies requiring both professional services and product sales
for an enterprise-wide solution.

We have continued our emphasis toward an indirect sales model. We
formed dedicated sales teams that manage each segment of the indirect sales
channels. In addition, in 1998, we launched a new "partners first" channel
program, that provides increased benefits to business partners selling our
products. In 1998, we formed a dedicated corporate sales team to target only
named-accounts. This strategy provides greater customer attention to larger
corporate customers, reduces possible channel conflicts, and allows the end-user
to decide how best to acquire our products.

We continue to have a United States federal government sales team.
Since the United States government continues to be the world's largest buyer of
security products, we believe having a dedicated account team is a strategic
advantage for us. Major awards resulted from this effort during 1998, including
the United States Air Force, the National Security Agency, the National
Institute of Standards and Technology, and the United States Army. Beginning in
1999, we initiated a state government level sales program.

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International sales accounted for 24% of total revenue during 1998.
Major foreign markets for our products include Europe and the Pacific Rim, with
the United Kingdom, Germany, Scandinavia and Japan being particularly strong. In
each country, we have independent channel partners who 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
security products in the years ahead. The following table summarized information
about our international and domestic sales and operations:

YEAR ENDED DECEMBER 31,
(in thousands)
------------------------------------------------
1998 1997 1996
---- ---- ----

Revenues:
United States sales $46,464 $31,944 $31,683
International sales 14,978 15,032 8,579
------------------------------------------------
Total $61,442 46,976 40,262
================================================

MARKETING

We market our products using a wide variety of mediums, including
advertisements, direct mail, seminars, trade shows, symposiums and Web-based
marketing. Marketing campaigns are centralized functions performed out of our
corporate headquarters in San Jose, California. Dedicated marketing personnel
create and implement these marketing campaigns in each of our major functional
market areas:

* corporate marketing;

* product marketing; and

* channel marketing and co-marketing with industry partners.

An active public relations program ensures that we receive appropriate
press coverage for our various programs and announcements. In addition, it is
responsible for securing product reviews and speaking engagements.

As of September 30, 1999, we had 19 marketing employees. We use
comprehensive targeted marketing programs to generate sales leads and brand
awareness. Programs include:

* direct marketing;

* Web marketing;

* advertising;

* seminars and trade shows; and

* ongoing customer, channel and partner communications programs.

In addition to the marketing programs, we seek to stimulate interest in
network security through our public relations program, speaking engagements,
white papers, technical notes, and other publications.

Through the partners first alliance program, we have entered into
strategic marketing relationships with various vendors of communications,
security, and network management products. Certain of these vendors recommend
our products along with their solutions in helping customers to meet their
security needs. the potential increase in revenues from such relationships 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

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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.

COMPETITION AND MARKET CONSOLIDATION

The market for e-commerce security products is intensely competitive an
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 e-commerce security products. Each of our individual products competes with
a different group of competitors and products. The principal competitors for our
existing products are:

* ActivCard;

* Axent;

* CheckPoint Software Technologies Ltd.;

* Network Associates; and

* RSA Security Inc.

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

We believe that the principal competitive factors affecting the market
for e-commerce and network security products include:

* level of security;

* technical features and capabilities;

* total cost of ownership;

* ease of use, reliability and manageability;

* scalability and performance;

* customer service and support; and

* price and distribution channels.

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 security 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 large-scale e-commerce security solutions may result
in a consolidation of the e-commerce security market around a smaller number of
vendors who are able to provide the necessary e-commerce products and services.
In the event that we are unable to internally develop all of the products needed
for an e-commerce security solution, we may need to acquire such technology, or
be acquired by a larger entity. However, there are no assurance that, in the
event that we are not able to internally develop all of the products needed for
an

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enterprise-wide security solution, we will be able to acquire or merge with
other entities on terms favorable to us and our shareholders.

BACKLOG

Our backlog for commercial products at any point in time is not
significant since products are shipped on receipt of order. We do not believe
that our commercial backlog at any particular point in time is indicative of
future sales levels.

Our backlog relating to government contracts as of September 30, 1999,
was approximately $4.0 million, compared to $4.5 million as of September 30,
1998. Backlog historically has represented firm government orders for research
and development services. Funded backlog represents that portion of backlog for
which our government customers have actually committed to compensate us. As of
September 30, 1999, approximately $1.5 million of our government contract
backlog was funded, compared to $2.1 million as of September 30, 1998. The
timing and volume of customer orders are difficult to forecast because our
customers typically require prompt delivery of products and a substantial
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 with little or no penalty.

MANUFACTURING

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

The majority of the materials used in our manufacturing operations are
industry standard parts that are widely available. Typical materials required
are media and media duplication services, user documentation and other printed
materials, product packaging, and computer systems (PC's, computer peripherals,
memory disk drives, and storage devices). Interruptions or delays in shipments
of software supplies, certain computer systems or peripherals could materially
and adversely affect the results of operations.

Our SafeWord product line includes a small calculator style token which
is used for user authentication. We have two subcontractors for these tokens:
ReachOut Ltd., an electronics assembly manufacturer located in the Peoples
Republic of China, and Lan Plus, Inc., a California company with manufacturing
facilities located in Taiwan. While we have generally been able to obtain
adequate supplies of these products in a timely manner, delays, interruptions in
supply, or a significant increase in manufacturing costs could materially and
adversely affect the results of operations.

RESEARCH AND DEVELOPMENT

Our internal engineering staff performs internal development of new
products and features. Of Secure Computing's total of 113 engineering employees
at September 30, 1999, 32 held post-graduate degrees.

We intend to keep our products broadly compatible with a variety of
host computer configurations, other network security products and other network
applications. In addition, we will introduce new products as market demand
develops for such products. We research and attempt to design our products to be
able to support emerging security standards, such as the Public Key
Infrastructure, IP Security, and Content Vector Protocol.

We will continue to seek government research and development contracts
to maintain our high technology base. We currently have research and development
contracts with government agencies, including the NSA. These contracts address
information security for operating systems, secure applications for database
management systems and security policy research. We continuously pursue
additional contracts with these organizations.

PATENTS AND PROPRIETARY TECHNOLOGY

We rely on patent, trademark, copyright and trade secret laws, employee
and third-party non-disclosure agreements and other methods to protect our
proprietary rights. We currently hold seventeen patents and have 11 patent
applications pending in the United States relating to computer security software
and hardware products. We have also filed patent applications in the European
Union, Canada, Japan, Germany, and the United Kingdom. We believe that our

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patents are broad and fundamental to network security computer products. While
we believe that the pending applications relate to patentable devices or
concepts, there are no guarantees that any pending or future patent applications
will be granted . There is also the risk that a current or future patent,
regardless of whether we are an owner or a licensee of such patent, may be
challenged, invalidated or circumvented . In addition, there are no guarantees
that the rights granted under a patent or under licensing agreements will
provide competitive advantages to Secure Computing.

Our success depends, in part, upon our proprietary software and
security technology. We also rely on trade secrets and proprietary know-how
which we seek to protect, in part, through confidentiality agreements with
employees, consultants and other parties. There are no guarantees that these
agreements will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets will not otherwise become known to or
independently developed by competitors. In addition, under their contract with
Secure Computing, U.S. government agencies have the right to disclose certain
technology developed with government funding to our competitors as part of the
establishment by the government of second-source manufacturing arrangements or
competitive bidding.

We are not aware of any third party claims that Secure Computing 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.

We have received or applied for trademark protection in the United
States for our SafeWord, SecureOS, SecureSupport, SecureZone, Sidewinder,
SmartFilter, SofToken, e.id, Strikeback, Type Enforcement, "e.security for
all business" and "Nobody Comes Close" trademarks.

REGULATION AND GOVERNMENT CONTRACTS

Other than regulations generally applicable to businesses and
regulations applicable to our government contracts described above under
"Advanced Technology Contracts," we are not currently subject to direct
regulation by any government agency. Currently, there are few laws or
regulations directly applicable to access to or commerce on the Internet.
However, 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

EMPLOYEES

At September 30, 1999, Secure Computing had 311 employees. No employee
of Secure Computing is represented by a labor union or is subject to a
collective bargaining agreement. We believe that we maintain good relations with
our employees.

LITIGATION

On April 2, 9, 12, 14 and 20, 1999, purported class action complaints
were filed in the United States District Court for the Northern District of
California by Myron Goldstein, Herbert Silverberg, William Preiner, Charles
McInnis, and George H. Rosenquist and Melvin Freedenberg, respectively, against
Secure Computing Corporation, and certain of its officers and directors. Each
complaint alleges that defendants made false and misleading statements about our
business condition and prospects during a purported class period of November 10,
1998 - March 31, 1999, and asserts claims for violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Each complaint
seeks damages of an unspecified amount. By stipulated Order dated August 19,
1999, the Court consolidated these actions, appointed lead plaintiffs, and
approved the retention of lead counsel. Pursuant to the parties' stipulation,
plaintiffs are scheduled to serve a consolidated complaint no later than October
25, 1999.

There has been no discovery to date and no trial is scheduled in any of
these consolidated actions. We believe that we have meritorious defenses to the
actions and intend to defend them vigorously. However, if we do not obtain a
favorable resolution of the claims set forth in the actions it could have a
material adverse effect on our business, results of operations and financial
condition, which cannot be reasonably estimated.

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<PAGE>

INDEMNIFICATION OF OFFICERS AND DIRECTORS

Our Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. Our Bylaws provide
that we will indemnify our officers and directors and may indemnify our
employees and other agents to the fullest extent permitted by Delaware law. We
have entered into indemnification agreements with our officers and directors
containing provisions which are in some respects broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements require us, among other things to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance, if available on
reasonable terms. We believe that these agreements are necessary to attract and
retain qualified persons as directors and officers.

Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation and with respect to any criminal action, had no reasonable cause
to believe his or her conduct was unlawful.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.

PROPERTIES

We are headquartered in approximately 13,000 square feet of office
space in San Jose, California. The annual rent for this facility is
approximately $296,000. We have three separate facilities with a combined square
footage of approximately 73,000 in St. Paul, Minnesota that are occupied by
production, research and development, and administration with an annual base
rent of $960,000. We have a research facility located in Concord, California
that occupies 8,000 square feet at an approximate annual cost of $100,000. We
occupy these premises under leases expiring at various times through the year
2006. Not included in the aforementioned space is 29,500 square feet that has
been sublet. In support of our United States field sales and professional
services organizations, we also lease 11,000 sq. ft. of office space in Vienna,
Virginia; Dallas, Texas; and Seattle, Washington, with an approximate total
annual cost of $324,000. We also have foreign offices in London, England,
Sydney, Australia, and Munich, Germany, with an approximately annual cost of
$300,000.

28
<PAGE>

MARKET FOR SECURE COMPUTING'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

Our common stock is listed on the Nasdaq National Market. As of June
30, 1999, there were approximately 542 registered holders of Secure Computing's
common stock. We believe, however, that many beneficial holders of our common
stock have registered their shares in nominee or street name. The low price and
high price of our common stock during the last eight quarters, are as follows:

================================================================================
Low Price High Price
--------- ----------
- --------------------------------------------------------------------------------
Quarter ended September 30, 1997......................... $5.50 $9.22
Quarter ended December 31, 1997.......................... $8.69 $14.81
Quarter ended March 31, 1998............................. $8.00 $15.25
Quarter ended June 30, 1998.............................. $7.75 $13.75
Quarter ended September 30, 1998......................... $6.38 $13.63
Quarter ended December 31, 1998.......................... $8.88 $22.50
Quarter ended March 31, 1999............................. $9.94 $29.00
Quarter ended June 30, 1999.............................. $2.25 $6.75
Quarter ended September 30, 1999......................... $3.00 $3.25
================================================================================

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.

29
<PAGE>

SELECTED FINANCIAL DATA

The consolidated statement of operations data set forth below for the
fiscal years ended December 31, 1996, 1997 and 1998 and the consolidated balance
sheet data at December 31, 1997 and 1998 are derived from the audited
consolidated financial statements included elsewhere in this prospectus. The
consolidated statement of operations data set forth below for the fiscal years
ended December 31, 1994 and 1995 and the consolidated balance sheet data at
December 31, 1994, 1995 and 1996 are derived from audited consolidated financial
statements which are not included in this prospectus. The consolidated statement
of operations for the fiscal years ended December 31, 1994 and 1995 and the
consolidated balance sheet data at December 31, 1994 and 1995 have been restated
to give effect to the acquisition of Border Network Technologies, Inc. and
Enigma Logic, Inc. in August 1996. The consolidated statement of operations data
for the six months ended June 30, 1998 and 1999 has been derived from unaudited
consolidated financial statements which, in the opinion of management, include
all adjustments, consisting solely of normal recurring adjustments, necessary
for a fair presentation of the financial information shown in these statements.
The results for the six months ended June 30, 1999, are not necessarily
indicative of the results to be expected for the full year or for any future
period. 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
prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
(In thousands, except per share amounts) JUNE 30,
------------------------------------------------------------ ---------------------
1994 1995 1996 1997 1998 1998 1999
------------------------------------------------------------ ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Revenue:
Products and services $ 4,051 $ 13,081 $ 23,290 $ 33,203 $ 51,500 $ 22,020 $ 11,329
Advanced technology contracts 13,744 14,849 16,972 13,773 9,942 5,280 2,410
------------------------------------------------------------ ---------------------
Total revenue 17,795 27,930 40,262 46,976 61,442 27,300 13,739
Gross profit 7,120 13,079 21,465 28,210 40,304 17,874 857
Acquisition costs -- -- 13,069 -- -- -- --
Operating income/(loss) 1,220 (633) (26,473) (5,734) (4,933) (7,070) (28,807)
Net income/(loss) 1,541 (632) (25,094) (4,251) (3,262) (6,396) (29,406)
Net income/(loss) per share:
Basic and Diluted .17 (.05) (1.76) (.27) (.20) (.40) (1.71)

<CAPTION>
BALANCE SHEET DATA: December 31
------------------------------------------------------------ June 30,
1994 1995 1996 1997 1998 1999
------------------------------------------------------------ --------
Working capital $ 1,991 $ 34,292 $ 18,886 $ 17,175 $ 34,017 $ 13,134
Total assets 7,727 44,261 36,775 31,054 54,348 31,796
Long-term debt, less current
Portion and redeemable
Convertible preferred stock 10,659 1,879 -- -- -- --
Stockholders' equity/(deficit) (5,996) 36,208 26,232 24,800 43,053 21,509
</TABLE>

30
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future.
Forward-looking statements include, without limitation, statements regarding the
extent and timing of future revenues and expenses and customer demand.

We base all forward-looking statements in this document on information
available to us as of the date hereof, and we assume no obligation to update any
such forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including the risk factors detailed in our Annual Report on Form 10-K
for the year ended December 31, 1998, filed with the SEC, the risk factors set
forth in this prospectus beginning on page 3, as well as the factors identified
in Forward Looking Statements below.

OVERVIEW

We develop and sell computer network "security" products and services
designed to provide secure access control for organizations engaged in
electronic commerce/business. Our products provide solutions to assure the
integrity and security of transactions and communications over public networks
such as the Internet. Our products can also be used to prevent unauthorized
access to private corporate and government networks. Our products generally fall
into two broad categories: (i) those intended to prevent unauthorized access to
computer and network based data and information; and (ii) those intended to
authenticate or identify network users and control access to resources or
applications.

PRODUCTS AND SERVICES. We market a range of interoperable,
standards-based commerce security products and services to the global
marketplace. Our customers include Fortune 500 companies, small branch offices,
and government agencies all of whom rely on our suite of network security
solutions to maximize their productivity on the Internet without compromising
information security. We expect that the percentage of our revenues derived from
products and related services will increase in future years as we increasingly
focus on product sales.

ADVANCED TECHNOLOGY CONTRACTS. From the time of our organization, we
have been engaged in research and development of information security technology
by acquiring and executing contracts with departments and agencies of the United
States government. We expect that the percentage of our revenues derived from
advanced technology contracts will decrease in future years as the we increase
our focus on product and services sales.

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:

31
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1996 1997 1998 1998 1999
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Products and Services 57.8% 70.7% 83.8% 80.7% 82.5
Advanced technology contracts 42.2 29.3 16.2 19.3 17.5
---------------------------------------------------------
Total revenue 100.0 100.0 100.0 100.0 100.0
Cost of revenue 46.7 39.9 34.4 34.5 93.8
---------------------------------------------------------
Gross profit 53.3 60.1 65.6 65.5 6.2
Operating expenses:
Selling and marketing 45.8 43.6 37.2 42.2 111.2
Research and development 23.8 18.6 12.2 13.7 37.7
General and administrative 17.1 8.2 8.1 6.9 32.6
Stock option expense -- 1.9 3.5 -- 34.5
Restructure expense -- -- 12.7 28.6 --
Acquisition costs 32.4 -- -- -- --
Total operating expenses 119.1 72.3 73.7 91.4 216.0
Operating loss (65.8) (12.2) (8.1) (25.9) (209.8)
Interest and other income 3.8 1.1 0.8 .2 2.2
Interest expense (0.3) -- -- -- --
Loss before income taxes (62.3) (11.1) (7.3) (25.7) (207.6)
Income tax benefit -- 2.1 2.0 2.3 (6.6)
Net loss (62.3)% (9.0)% (5.3)% (23.4)% (214.2)
================================================================================================
</TABLE>

RESULTS OF OPERATIONS

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998.

Significant additional expense charges of $11.7 million in aggregate
are included in the 1999 statement of operations. These expenses relate to
rationalizing our product line, refocusing on e-commerce products and
streamlining our executive management structure. The following table compares
the six months ended June 30, 1999 income statement items including and
excluding the significant additional expense charges:

<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
(In thousands, except per share amounts)
Including Excluding
Significant Significant Significant
Charges Charges Charges
-------------------------------------------
<S> <C> <C> <C>
Gross profit $ 857 $ (4,700) $ 5,557

Operating expenses:
Selling and marketing 15,272 4,047 11,225
Research and development 5,173 281 4,892
General and administrative 4,479 1,801 2,678
Stock option expense 4,740 -- 4,740
------------------------------------------
29,664 6,129 23,535

------------------------------------------
(28,807) (10,829) (17,978)
Net interest income 301 -- 301
------------------------------------------
Loss before income taxes (28,506) (10,829) (17,677)

Income tax expense (900) (900) --
------------------------------------------
Net loss $(29,406) $(11,729) $(17,677)
==========================================
Net loss per share - basic and diluted $ (1.71) $ (.66) $ (1.05)
==========================================
</TABLE>

32
<PAGE>

REVENUE. Our revenue decreased 49.7% to $13,739,000 for the first six
months of 1999 down from $27,300,000 in the same period of 1998. Products and
services revenue was $11,329,000 for the six months, a decrease of 48.6% over
1998, and reflects delays in purchasing decisions based on "Year 2000" concerns
and lengthening of sales cycles. We expect revenue from products and services
for the remainder of 1999 to increase from the second half of 1999. However,
these levels will be less than that from the second half of 1998. Advanced
technology contract revenue was $2,410,000 for the first six months, a decrease
of 54.4% from the second quarter of 1998, which reflects a reduced focus on
government contract business that does not complement our products and services
offerings. For this reason, we expect revenue from advanced technology contracts
for the remainder of 1999 to decrease slightly from the first half of 1999.

GROSS PROFIT. Gross profit as a percentage of revenue decreased from
65.5% in the first half of 1998 to 6.2% in 1999. Excluding significant charges
related to discontinued products, total gross profit as a percentage of revenue
decreased from 65.5% in the first half of 1998 to 40.4% of revenue in 1999. The
decrease resulted primarily from reduced volumes and relatively fixed
manufacturing and amortization costs. We believe that gross profit will trend
higher for the remainder of the year as revenues increase.

SELLING AND MARKETING. Selling and marketing expense increased 32.5% to
$15,272,000 in the first half of 1999 up from $11,527,000 in the same period of
1998. As a percentage of revenue, selling and marketing expense was 111.2% for
the six months compared to 42.2% in the same period of 1998.

Excluding significant charges resulting from discontinued product
activities and severance pay associated with the streamlining of our management
structure, selling and marketing expense decreased 2.6% to $11,225,000 in the
first half of 1999 down from $11,527,000 in the same period of 1998. As a
percentage of revenue, selling and marketing expense was 81.7% for the first
half compared to 42.2% in the same period of 1998. The decreased spending levels
resulted primarily from decreased discretionary marketing efforts. We expect
that selling and marketing expense levels for the rest of 1999 will remain at
levels comparable to those of the first half of 1999.

RESEARCH AND DEVELOPMENT. Research and development expense increased
38.3% to $5,173,000 in the first half of 1999 up from $3,740,000 in the same
period of 1998. As a percentage of revenue, research and development expense was
37.7% for the first half compared to 13.7% in the same period of 1998.

Excluding significant charges mainly for employee relocation expense,
research and development expense increased 30.8% to $4,892,000 in the first half
of 1999 up from $3,740,000 in the same period of 1998. As a percentage of
revenue, research and development expense was 35.6% for the first half compared
to 13.7% in the same period of 1998. The increased spending levels resulted
primarily from increased investment in quality assurance activities. We expect
that research and development expense levels for the rest of 1999 will remain at
levels comparable to those of the first half of 1999.

GENERAL AND ADMINISTRATIVE. General and administrative expense
increased 138.6% to $4,479,000 in the first half of 1999 up from $1,877,000 in
the same period of 1998. As a percentage of revenue, general and administrative
expense was 32.6% for the first half compared to 6.9% in the same period of
1998.

Excluding significant charges mainly for severance pay associated with
the streamlining of our management structure and litigation settlements, general
and administrative expense increased 42.7% to $2,678,000 in the first half of
1999 up from $1,877,000 in the same period of 1998. As a percentage of revenue,
general and administrative expense was 19.5% for the first half compared to 6.9%
in the same period of 1998. The increased spending levels resulted primarily
from duplicative executive compensation during our chief executive officer
transition period. We expect that general and administrative expense levels for
the rest of 1999 will remain at levels comparable to those of the first half of
1999.

NET INTEREST INCOME. Net interest income was $301,000 in the first half
of 1999, an increase from $57,000 in the same period of 1998. The increase
reflects higher average cash and investment balances in 1999 as compared to
1998.

33
<PAGE>

INCOME TAXES. We recognized an income tax expense in the first half of
1999 of $900,000 compared to an income tax benefit of $617,000 in the same
period of 1998. The expense is a result of anticipated reduced government
contract revenue. We believe it is more likely than not that deferred tax
assets, which total $2.7 million at June 30, 1999, will be realized. The
computation of our deferred tax assets and valuation allowance are based in part
on taxable income we expect to earn on government contracts and projected
interest income. The amount of the deferred tax assets considered realizable
could be reduced in the near term if estimates of future taxable income are
reduced.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997.

REVENUE. Our revenue increased 30.8% to $61.4 million in 1998, up from
$47.0 million in 1997. Products and services revenue was $51.5 million in 1998,
an increase of 55.1% over 1997, and was attributable to increased sales of
firewall and authentication products and related services as well as increased
professional services. The decrease in advanced technology contracts revenue in
1998 reflects the continuation of efforts to reduce reliance on government
contracts.

GROSS PROFIT. Gross profit as a percentage of revenue increased to
65.6% in 1998 from 60.1% in 1997. The increase in 1998 was primarily the result
of increased products and services revenue which carries a higher gross margin
than government contracts.

SELLING AND MARKETING. Selling and marketing expenses as a percent of
revenue decreased to 37.2% in 1998 from 43.6% in 1997. The decrease was due
primarily to sustained revenue growth resulting from prior year selling and
marketing efforts.

RESEARCH AND DEVELOPMENT. Research and development expenses as a
percent of revenue decreased to 12.2% in 1998 from 18.6% in 1997. The decrease
resulted primarily from improved efficiencies due to consolidation of our
operations.

GENERAL AND ADMINISTRATIVE. General and administrative expenses as a
percent of revenue decreased to 8.1% in 1998 from 8.2% in 1997.

STOCK OPTION COMPENSATION EXPENSE. The stock option compensation
expense in 1998 and 1997 reflects vesting by a certain portion of performance
based options triggered by stock price targets being met.

RESTRUCTURE COSTS. In the first quarter of 1998, we announced plans to
implement a restructuring plan designed to facilitate further integration of
acquired businesses, and recorded a pre-tax expense of $7.8 million to account
for these actions, which include costs of lease terminations, streamlining our
product offerings and reducing our cost structure to increase operational
efficiency. The plan resulted in the separation of some employees worldwide and
the closing of certain facilities.

INTEREST AND OTHER INCOME. The difference in interest and other income
between the periods reflects interest we earned in 1998 on declining cash and
investment balances for the first half of the year.

INCOME TAX BENEFIT. We recognized income tax benefits in 1998 and 1997
related to reductions in the valuation allowance against our deferred tax
assets. The allowance was reduced based on the estimate of the amount of net
operating loss carryforwards more likely than not to be utilized to offset
future taxable income. We believe it is more likely than not that net deferred
tax assets, which total $3.6 million at December 31, 1998, will be realized. The
computation of our deferred tax assets and valuation allowance are based in part
on taxable income we expect to earn on existing government contracts and
projected interest income. The amount of the deferred tax assets considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced. We had total net operating loss carryforwards of
approximately $44.4 million at December 31, 1998. Of these carryforwards, $11.4
million relates to stock option exercises. As these deductions are realized, the
benefit will not reduce income tax expense, rather it will be recorded as
additional paid-in-capital. Of the remaining benefit associated with the
carryforwards, approximately $24.0 million had yet to be recognized as a benefit
in the statement of operations. However, there are no assurance that these
carryforwards will be available to offset future income tax expense when taxable
income is realized.

34
<PAGE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996.

REVENUE. Our revenue increased 16.7% to $47.0 million in 1997, up from
$40.3 million in 1996. Products and services revenue was $33.2 million in 1997,
an increase of 42.6% over 1996, and was attributable mainly to increased sales
of authentication products and related services. The decrease in advanced
technology contracts revenue in 1997 reflects the continuation of efforts to
reduce reliance on government contracts.

GROSS PROFIT. Gross profit as a percentage of revenue increased to
60.1% in 1997 from 53.3% in 1996. The increase in 1997 was primarily the result
of increased products and services revenue which carries a higher gross margin
than government contracts.

SELLING AND MARKETING. Selling and marketing expenses increased 11.1%
to $20.5 million in 1997, from $18.4 million in 1996. The increase was due
primarily to additions to our sales and marketing staff and higher expenditures
for advertising, trade shows and seminars, and product literature.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased
by 8.8% to $8.7 million in 1997 from $9.6 million in 1996. The decrease resulted
primarily from improved efficiencies due to consolidation of our operations.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by 44.1% to $3.8 million in 1997 from $6.9 million in 1996. The
decrease was primarily the result of improved efficiencies from the
consolidation of our operations.

ACQUISITION COSTS. Certain acquisition costs were recognized in the
second quarter of 1996 relating to the Webster, Border and Enigma acquisitions.
Purchased research and development in process of $3.9 million was expensed in
connection with the Webster acquisition. Also, $9.2 million of acquisition costs
were recorded for investment banking, professional fees and other expenses for
the Border and Enigma acquisitions.

INTEREST AND OTHER INCOME. The difference in interest and other income
between the periods reflects interest we earned in 1997 on declining cash and
investment balances.

STOCK OPTION COMPENSATION EXPENSE. The stock option compensation
expense in 1997 reflects vesting by a certain portion of options triggered by
stock price performance.

INCOME TAX BENEFIT. We recognized an income tax benefit in 1997
compared to no income tax expense or benefit in 1996. The income tax benefit
recognized in 1997 related to a reduction in the valuation allowance against our
deferred tax assets. The allowance was reduced based on our estimate of the
amount of net operating loss carryforwards more likely than not to be utilized
to offset future taxable income. We believe it is more likely than not that net
deferred tax assets, which total $2.4 million at December 31, 1997, will be
realized. The computation of our deferred tax assets and valuation allowance is
based in part on taxable income we expect to earn on existing government
contracts and projected interest income. The amount of the deferred tax assets
considered realizable could be reduced in the near term if estimates of future
taxable income are reduced. We had total net operating loss carryforwards of
approximately $38.9 million at December 31, 1997. Of these carryforwards, $9.9
million relates to stock option exercises. As these deductions are realized, the
benefit will not reduce income tax expense, rather it will be recorded as
additional paid-in-capital. Of the remaining benefit associated with the
carryforwards, approximately $23.0 million had yet to be recognized as a benefit
in the statement of operations. However, there are no assurance that these
carryforwards will be available to offset future income tax expense when taxable
income is realized.

LIQUIDITY AND CAPITAL RESOURCES

Since our organization, we have financed our operations through the
issuance of equity securities and notes to stockholders, long-term debt,
short-term borrowings and cash generated from operations. Our cash and cash
equivalents increased by approximately $5.1 million from 1997 to 1998. The
increase resulted primarily from $15.3 million of proceeds from the sale of
preferred stock and $4.1 million of proceeds from sales of common stock, the
proceeds from sales of common stock being primarily from employees upon exercise
of stock options.

35
<PAGE>

The increase was partially offset by $2.0 million of purchases of capital
equipment and $10.9 million of investments in commercial paper. Our cash and
cash equivalents and short term investments decreased by $9.6 million from
December 31, 1998 to June 30, 1999. The decrease resulted primarily from the use
of cash to fund operations and purchase capital equipment that was partially
offset by proceeds from stock option exercises. As of December 31, 1998 and June
30, 1999, we had working capital of $34.0 million and $13.1 million
respectively, as well as an unused $5 million line of credit. 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.

Capital additions in the first half of 1999 were $808,000 and were
primarily made up of computer equipment, office furniture and leasehold
improvements. We expect to invest approximately $750,000 additional throughout
the remainder of 1999 mainly for computer equipment, facilities and business
systems upgrades.

At our current level of operations, we believe that we have sufficient
financial resources available to fund our current working capital and capital
expenditure requirements through the end of the fiscal year.

On October 4, 1999, we entered into the investment agreement providing
for financing to us of up to $25 million through October 2001.

INFLATION

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

YEAR 2000 COMPLIANCE

We have completed testing of our products and systems and believe that
our products and systems sold after December 31, 1998, are and will be Year 2000
compliant. For non-compliant products introduced prior to this date, we have
provided customers with a migration path in the form of an update/upgrade
option. We have also verified that third party computer software and hardware
that we use are Year 2000 compliant. We have not verified Year 2000 compliance
of certain semiconductors embedded in other third-party equipment used by us,
nor have we established the costs and risks associated with such third party
equipment.

Since our Year 2000 compliance verification efforts are virtually
complete, the estimated future expenditures for compliance activities are
insignificant.

FORWARD LOOKING STATEMENTS

Certain statements made above, which are summarized below, are
forward-looking statements that involve risks and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include those identified below:

* WE EXPECT REVENUE FROM PRODUCTS AND SERVICES FOR THE REMAINDER OF 1999
TO INCREASE FROM THE FIRST HALF OF 1999. HOWEVER, THESE LEVELS WILL BE
LESS THAN THAT FROM THE SECOND HALF OF 1998. Meeting this expectation
depends upon our ability to achieve a higher level of products and
services revenue. We may be unable to meet this expectation for a
variety of reasons, including general market conditions for our
products and services, delays or difficulties in the development,
inability to obtain market acceptance of our new products, and
introduction of products by competitors.

* WE BELIEVE THAT GROSS PROFIT WILL TREND HIGHER FOR THE REMAINDER OF THE
YEAR AS REVENUES INCREASE. Meeting this expectation depends upon our
ability to achieve a higher level of products and services revenue. We
may be unable to meet this expectation for a variety of reasons,
including general market conditions for our products and services,
delays or difficulties in the development, inability to obtain market
acceptance of our new products, and introduction of products by
competitors.

* WE EXPECT THAT SELLING AND MARKETING EXPENSE LEVELS FOR THE REST OF
1999 WILL REMAIN AT LEVELS COMPARABLE TO THOSE OF THE FIRST HALF OF
1999. This expectation depends on us maintaining the current
anticipated level of selling and marketing expenses, which may not
occur due to unexpected increases in such costs or because

36
<PAGE>

of a need to accelerate a full scale product marketing and branding
campaign, or decreased products and services revenue resulting in lower
selling expense. Fluctuations in revenue from quarter to quarter will
likely have an increasingly significant impact on our results of
operations. Additionally, meeting this expectation depends upon our
ability to control costs and achieve a higher level of revenue. This
expectation may not occur for a variety of reasons, including general
market conditions for our products and services, development and
acceptance of our new products, and introduction of products by
competitors.

* WE EXPECT THAT RESEARCH AND DEVELOPMENT EXPENSE LEVELS FOR THE REST OF
1999 WILL REMAIN AT LEVELS COMPARABLE TO THOSE OF THE FIRST HALF OF
1999. This expectation depends on us maintaining the current
anticipated level of product development, which may not occur due to
unexpected increases in such costs or because of a need to accelerate
or begin new product development. Fluctuations in revenue from quarter
to quarter will likely have an increasingly significant impact on our
results of operations. Additionally, meeting this expectation depends
upon our ability to control costs and achieve a higher level of
revenue. This expectation may not occur for a variety of reasons,
including general market conditions for our products and services,
development and acceptance of our new products, and introduction of
products by competitors.

* WE EXPECT THAT GENERAL AND ADMINISTRATIVE EXPENSE LEVELS FOR THE REST
OF 1999 WILL REMAIN AT LEVELS COMPARABLE TO THOSE OF THE FIRST HALF OF
1999. This expectation depends on us to maintain the current
anticipated level of spending which may not occur due to unexpected
increases in such costs.

* WE BELIEVE IT IS MORE LIKELY THAN NOT THAT DEFERRED TAX ASSETS, WHICH
TOTAL $2.7 MILLION AT JUNE 30, 1999, WILL BE REALIZED. This expectation
depends primarily on us maintaining, at current levels, our existing
government contract business. If these contracts are lost or adjusted
downward, deferred tax assets would be expected to be written down with
a corresponding charge to income tax expense recorded.

* WE EXPECT TO INVEST APPROXIMATELY $750,000 ADDITIONAL THROUGHOUT THE
REMAINDER OF 1999 MAINLY FOR COMPUTER EQUIPMENT, FACILITIES AND
BUSINESS SYSTEMS UPGRADES. This expectation depends primarily on us to
maintain our current level of investment in property and equipment.
Unexpected changes in our structure could change the level of
expenditures.

* AT OUR CURRENT LEVEL OF OPERATIONS, WE BELIEVE THAT WE HAVE SUFFICIENT
FINANCIAL RESOURCES AVAILABLE TO FUND OUR CURRENT WORKING CAPITAL AND
CAPITAL EXPENDITURE REQUIREMENTS THROUGH THE END OF THE FISCAL YEAR.
Several factors may affect the availability of sufficient cash
resources to fund our product development and marketing and sales plans
for the remainder of 1999, including:

- our ability to generate revenue as currently expected;

- unexpected expenses;

- the need for additional funds to react to changes in the
marketplace;

- unexpected increases in personnel costs;

- unexpected increases in selling and marketing expenses; or

- currently unplanned acquisitions.

* SINCE OUR YEAR 2000 COMPLIANCE VERIFICATION EFFORTS ARE VIRTUALLY
COMPLETE, THE ESTIMATED FUTURE EXPENDITURES FOR COMPLIANCE ACTIVITIES
ARE INSIGNIFICANT. Failure of third-party equipment to operate properly
in the Year 2000 and thereafter could require us to incur unanticipated
expenses to remedy any problems, which could have a material adverse
effect on our business, operating results and financial condition. We
have verified Year 2000 compliance with third party suppliers of the
components we use in our products. However, we have limited or no
control over the actions of these third-party suppliers. The

37
<PAGE>

failure of these suppliers to properly address their internal systems
and components could cause a material disruption to our business.

To the extent our customers use third-party software and other products
that are not Year 2000 compliant, it could adversely affect their business,
operating results and financial condition. We do not have nor is it possible to
obtain any insurance policy providing material coverage for potential injuries
or damages related to or caused by the Year 2000 issue.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have material exposure to quantitative and
qualitative market risks because it does not own any risk sensitive financial
instruments.

MANAGEMENT

Our directors and executive officers, and their ages as of September
30, 1999, are as follows:

DIRECTORS AGE POSITION WITH SECURE COMPUTING CORPORATION
- --------------------------------------------------------------------------------
Robert J. Frankenberg 52 Director
Stephen M. Puricelli 47 Director
Eric P. Rundquist 52 Director
Alexander Zakupowsky, Jr. 52 Director
John McNulty 53 Chief Executive Officer and Chairman of the Board
Timothy McGurran 37 Senior Vice President of Operations and
Chief Financial Officer

ROBERT J. FRANKENBERG has been a director of Secure Computing since
December 1996. Mr. Frankenberg is the President & Chief Executive Officer of
Encanto Networks, Inc., an internet e-commerce provider. From April 1994 to
August 1996, he was President, Chief Executive Officer and a director of Novell,
Inc. Mr. Frankenberg was also chairman of the Board of Novell, Inc. from August
1994 to August 1996. From April 1991 to April 1994, he was Vice President and
General Manager of Personal Information Products Group at Hewlett Packard
Company. Mr. Frankenberg currently serves as director of Electroglas, Inc., Wall
Data, Inc., Daw Technologies, Inc., and Caere Corp.

STEPHEN M. PURICELLI has been a director of Secure Computing since
February 1990. Mr. Puricelli has been a General Partner of Costine Associates,
L.P., which is the corporate general partner of Corporate Venture Partners,
since its inception in April 1988. Corporate Venture partners is a venture
capital fund headquartered in Ithaca, New York.

ERIC P. RUNDQUIST has been a director of Secure Computing since August
1996. From 1994 to August 1996, Mr. Rundquist was a director of Enigma Logic,
Inc. In 1991, Mr. Rundquist founded and since that time has been President and
Chief Executive Officer of Eric Thomas, Inc., a firm that assists medium to
large corporations in managing their federal and state income, sales and
property tax matters.

ALEXANDER ZAKUPOWSKY, JR. has been a director of Secure Computing since
October 1998. Mr. Zakupowsky is a member of the law firm of Miller & Chevalier,
Chartered. He has been with the law firm since March 1984.

JOHN McNULTY, is our Chairman and Chief Executive Officer. Mr. McNulty
first joined us as President and Chief Operating Officer on May 3, 1999, and
assumed the positions of Chairman of the Board and Chief Executive Officer on
July 1, 1999. From February 1997 until February 1999, he served as Senior Vice
President Sales, Services, and Business Development at Genesys
Telecommunications Laboratories, a leading independent software company in the
computer telephony integration environment. Mr. McNulty was also previously with
Intel Corporation, the world's leading semiconductor manufacturer, where he held
a number of positions, including Director of Marketing and Business Development
for the Enterprise Server Group, which he launched.

38
<PAGE>

TIMOTHY P. MCGURRAN has been the Senior Vice President of Operations
and Chief Financial Officer of Secure Computing since May 1996. Mr. McGurran was
at Ernst & Young LLP from December 1984 to May 1996, where his last position was
Senior Manager.

None of the directors is related to any other director or to any
executive officer of Secure Computing.

39
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth the total compensation for the fiscal
years ended December 31, 1996, 1997 and 1998 for the Chief Executive Officer and
each of the four other most highly compensated executive officers of Secure
Computing who served as executive officers at fiscal year end and who received
salary and bonuses of $100,000 or more. None of the named executive officers
earned any bonuses or compensation for these fiscal years other than as set
forth in the table or received any restricted stock awards, stock appreciation
rights or long-term incentive plan payouts. Except for Mr. McGurran, each of the
following named executive officers resigned in 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
Fiscal Year ---------------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION Ended December 31, SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- --------------------------------------- ------------------ ------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
Jeffrey H. Waxman (1) 1998 $387,500 $641,178 200,000 (10) $ 12,000(7)
Chief Executive Officer and Director 1997 337,500 0 --
1996 50,000 34,600 750,000

Timothy P. McGurran (2) 1998 225,867 104,053 54,461 (11) $103,920(8)
Senior Vice President of Operations 1997 136,749 0 60,000
and Chief Financial Officer 1996 72,193 27,500 (3) 100,000

Christine Hughes (4) 1998 244,823 171,809 66,511 (11) $ 12,565(9)
Senior Vice President of Marketing 1997 225,567 0 60,000
and Business Development 1996 29,615 12,500 200,000

Gary Taggart (5) 1998 266,897 65,000 37,051 $ 7,538(9)
Vice President of Sales 1997 213,144 0 60,000
1996 29,916 28,750 40,000

Howard Smith (6) 1998 87,179 70,833 240,000 (11)
Executive Vice President of Research
& Product Group
</TABLE>

- -------------------------------------------------

Unless otherwise indicated, all amounts reflect compensation earned as
annual incentive bonus. Such compensation is actually paid to the recipient in
the year following the year earned. See "Executive Compensation--Report of the
Compensation Committee."

(1) Mr. Waxman joined Secure Computing in November 1996 and
resigned as a director and chairman of the board on June 30,
1999.

(2) Mr. McGurran joined Secure Computing in May 1996.

(3) Represents a $20,000 signing bonus in addition to compensation
earned as an annual incentive bonus.

(4) Ms. Hughes joined Secure Computing in November 1996 and
resigned on June 30, 1999.

(5) Mr. Taggart joined Secure Computing in October 1996 and
resigned on September 30, 1999.

(6) Mr. Smith joined Secure Computing in January 1998 and resigned
on March 31, 1999.

(7) Represents annual automobile allowance.

(8) Represents $13,807 vacation payout based on change of policy
and $90,113 of taxable moving expenses.

(9) Represents vacation payout based on change of policy.

(10) Represents net of 300,000 performance options granted less
100,000 options that expired before year end.

(11) Represents net of total options granted less 20,000 options
that expired before year end.

40
<PAGE>

The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended December 31, 1998, to the
executive officers named in the Summary Compensation Table. Since inception,
Secure Computing has not granted any stock appreciation rights.

Options listed below are granted pursuant to the Omnibus Stock Plan at
an exercise price equal to the fair market value as determined by the Board of
Directors on the date of grant. Unless otherwise indicated, each option becomes
exercisable with respect to one-third of the shares of common stock covered
thereby on each of the first through third anniversaries of the date of grant,
commencing on the first anniversary of such date. Each option has a maximum term
of ten years, subject to earlier termination in the event of the optionee's
cessation of service with Secure Computing.

The potential realizable value is based on a 10-year term of each
option at the time of grant. Assumed stock price appreciation of five percent
and ten percent is mandated by rules of the SEC and is not intended to forecast
actual future financial performance or possible future appreciation. The
potential realizable value is calculated by assuming that the deemed fair value
of Secure Computing's common stock for financial statement presentation purposes
on the date of grant appreciates at the indicated rate for the entire term of
the option and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
PERCENT OF TOTAL ASSUMED ANNUAL RATES OF STOCK
NUMBER OF OPTIONS GRANTED PRICE APPRECIATION FOR OPTION
SECURITIES TO EMPLOYEES IN EXERCISE OR TERM
UNDERLYING OPTIONS FISCAL BASE PRICE EXPIRATION -----------------------------
NAME GRANTED(#) YEAR ($/SH) DATE(3)(4) 5% 10%
- ---------------------- ------------------ ---------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey H. Waxman 300,000 (1) 15.8% $10.2500 12/31/98 $1,933,851 $4,400,758
Timothy P. McGurran 60,000 (2) 3.3% $9.1250 12/31/98 344,320 872,574
14,461 .8% $10.6250
Christine Hughes 60,000 (2) 3.3% $9.1250 12/31/98 344,320 872,574
26,511 1.4% $10.6250
Gary Taggart 12,051 .6% $10.6250 5/27/98 80,525 204,066
25,000 1.3% $12.0625
Howard Smith 60,000 (2) 3.3% $9.1250 12/31/98 344,320 344,320
5,000 1.3% $9.5000
</TABLE>

- --------------------------------------

(1) Pursuant to the terms of the option agreements, the options
vested with respect to 200,000 shares of stock on December 31,
1998.

(2) Pursuant to the terms of the option agreements with these
people, the options vested with respect to 40,000 shares of
stock for each of these people on December 31, 1998.

(3) The options for Mr. Waxman and Ms. Hughes expired on September
27, 1999.

(4) The options for Mr. Smith and Mr. Taggart shall expire on
December 31, 1999.

The following table sets forth information regarding the number and
value of options exercised during the fiscal year ended December 31, 1998, and
of unexercised options held by the named executive officers on December 31,
1998.

41
<PAGE>

Market value of underlying securities is based on the closing price of
Secure Computing's common stock on December 31, 1998 (the last trading day of
fiscal year 1998) on the Nasdaq National Market of $19 1/16 minus the exercise
price.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTION AT FISCAL MONEY OPTIONS AT FISCAL YEAR
SHARES ACQUIRED AGGREGATE VALUE YEAR END END($)
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey H. Waxman -- -- 449,999 500,001 4,996,862 6,468,763
Timothy P. McGurran -- -- 103,334 111,127 1,216,883 1,372,631
Christine Hughes -- -- 136,667 189,844 1,648,129 2,336,807
Gary Taggart -- -- 40,000 200,000 397,500 1,912,500
Howard Smith -- -- 56,666 120,385 733,116 1,354,802
</TABLE>

- ----------------------------------------------------

Secure Computing did not make any awards during the fiscal year ended
December 31, 1998, to any of the executive officers named in the Summary
Compensation Table under any long-term incentive plan providing compensation
intended to serve as incentive for performance to occur over a period longer
than one fiscal year, excluding the stock options set forth above.

DIRECTOR COMPENSATION

Effective June 1999, each member of the Board of Directors who is not
an employee of Secure Computing (an "Outside Director") following an Annual
Meeting of Stockholders, is granted, by virtue of serving as an Outside
Director, an option to purchase 10,000 shares of Secure Computing common stock
at an exercise price equal to the fair market value of the common stock on the
date of grant. These stock options become fully exercisable on the date of the
Annual Meeting of Stockholders next following the grant of the option and expire
ten years from the date of grant. Outside Directors who are elected between
Annual Meetings of Stockholders of Secure Computing are granted an option on
terms similar to those awarded at an Annual Meeting, except that the number of
shares covered by such option is pro-rated to reflect the number of months that
have expired from the date of the prior Annual Meeting. In addition, each
Director receives an annual stipend in the amount of $10,000.

During 1998, the Compensation Committee of the Board of Directors
granted each Outside Director an option to purchase 35,000 shares of Secure
Computing common stock.

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee (the "Committee") of the Board of Directors
is responsible for establishing compensation policy and administering the
compensation programs of Secure Computing's Chief Executive Officer. The
Committee is comprised of three non-employee directors. The Committee meets
periodically to review executive compensation, the design of compensation
programs, stock option programs, and individual salary and awards for the Chief
Executive Officer. The purpose of this report is to inform stockholders of our
compensation policies and the rationale for the compensation paid to our current
and former Chief Executive Officer and other executive officers in 1998.

* Compensation Philosophy

Our compensation program is designed to motivate and reward executives
responsible for attaining the financial and strategic objectives essential to
our long-term success and continued growth in stockholder value. The
compensation program has been designed to provide a competitive level of total
compensation and offers incentive opportunities directly linked to our
performance and stockholder return. The Committee believes it is in the best
interests of the stockholders to reward executives when our performance
objectives are achieved and to provide significantly less compensation when

42
<PAGE>

these objectives are not met. Therefore, a significant portion of executive
compensation is comprised of "at risk" incentives.

Key objectives of the compensation program are to:

- provide a strong, direct link between our financial
and strategic goals and executive compensation;

- align the financial interest of executives with those
of its stockholders through equity-based plans;

- motivate executives to achieve operating goals
through an emphasis on performance-based
compensation; and

- provide competitive total compensation that
recognizes individual performance and that can
attract and retain high caliber key executives
critical to Secure Computing's long-term success.

To maintain a competitive level of total executive compensation, the
Committee periodically evaluates the compensation packages of competitor
companies. This analysis provides the Committee with competitive data on the mix
of compensation elements and overall compensation levels.

We participate each year in the Annual Radford Benchmark Salary Survey
sponsored by Alexander & Alexander Consulting Group. This survey includes data
from 429 high technology companies located outside of the San Francisco Bay area
which are used for comparison. The Committee's intent is to target total
compensation for executives at an average for competitor companies and to exceed
average compensation when performance goals are exceeded.

* Executive Officer Compensation Program

The key components of our executive officer compensation program are
base salary, annual incentive bonus and long-term incentives. These elements are
described below. In determining compensation, the Committee considers all
elements of an executive's compensation package.

BASE SALARY. The Committee annually reviews the base salary of the
Chief Executive Officer. In determining appropriate salary levels, the Committee
considers individual performance, level of responsibility, scope and complexity
of the position, and internal equity and salary levels for comparable positions
at the peer companies. In determining the base salary increase for the Chief
Executive Officer, the Committee also considers strategic planning, team
building and operating results. The Chief Executive Officer, in consultation
with the Committee, annually reviews the base salary of the other executive
officers based on the same criteria.

ANNUAL INCENTIVE BONUS. The purpose of our annual incentive bonus is to
provide a direct financial incentive in the form of an annual cash bonus to the
executive officers and key managers who achieve performance goals that the
Committee establishes. The Committee determines the annual incentive bonus of
the Chief Executive Officer and the Chief Executive Officer, in consultation
with the Committee, determines the annual incentive bonus of the other executive
officers.

Executives are eligible for target awards under the annual incentive
program with maximum payouts ranging from 15% to 100% of base salary, with 100%
possible in the case of the Chief Executive Officer only. The size of the target
award is determined by the executive's position and competitive data for similar
positions at the peer companies. We set high goals and, therefore, the resulting
awards decrease or increase substantially if actual employee performance in
achieving our goals fails to meet or exceeds target levels. For 1998,
performance was assessed against target measures of team building, strategic
planning and financing goals. For 1998, Mr. Waxman received incentive bonus
awards totaling $641,178.

STOCK OPTIONS. We provide long-term performance incentives to
executives through our Amended and Restated 1995 Omnibus Stock Plan (the
"Omnibus Stock Plan"). The Committee administers the Omnibus Stock Plan. The
Committee is authorized to award stock options to Secure Computing employees,
non-employee directors and certain advisors and consultants to Secure Computing.
At least annually, the Committee considers whether awards will be made to
executive officers under the Omnibus Stock Plan. Such awards are based on the
scope and complexity of the position, competitive compensation data and the
maintenance of our stock at a target share price. The Committee has broad
discretion to select the optionees and to establish the terms and conditions for
the grant, vesting and exercise of each

43
<PAGE>

option. The Committee's practice has been to grant incentive stock options to
employees vesting over three years. However, recently, we have begun to grant
options as follows:

- a portion of the option vests if our common stock
reaches a price by the first anniversary of the date
of grant which is $16.00 greater than its fair market
value on the date of grant and maintains such price
for a period of ten consecutive business days;

- a portion of the option vests if our common stock
reaches a price by the second anniversary of the date
of grant which is $18.00 greater than its fair market
value on the date of grant and maintains such price
for a period of ten consecutive business days; and

- a portion of the option vest if our common stock
reaches a price by the second anniversary of the date
of grant which is $20.00 greater than its fair market
value on the date of grant and maintains such price
for a period of ten consecutive business days.

Options granted to executives vest immediately upon the occurrence of
an "Event" as defined in the Omnibus Stock Plan.

PROFIT SHARING AND RETIREMENT PLAN. Our Profit Sharing and Retirement
Plan (the "Retirement Plan") was made effective as of February 1, 1994. The
Retirement Plan is intended to be a qualified retirement plan under Section 401
of the Internal Revenue Code of 1986, as amended, so that contributions by
employees or by Secure Computing to the Retirement Plan, and income earned
thereon, are not taxable to employees until withdrawn from the Retirement Plan
(except for contributions under the 401(k) component, which are subject to
Social Security withholding); and so that contributions by Secure Computing, if
any, will be deductible when made. The purpose of the Retirement Plan is to
enable eligible employees, including executive officers, to save for retirement
and to provide incentives to increase corporate financial performance by
establishing a direct link between profit sharing contributions to employees and
corporate financial performance. It may also provide certain benefits in the
event of death, disability, or other termination of employment. The Retirement
Plan is for the exclusive benefit of eligible employees and their beneficiaries.
There are two components to the Retirement Plan, a 401(k)-type component and a
Secure Computing profit sharing component.

Under the 401(k) component, employees may contribute up to 12% of their
annual compensation, subject to a federally imposed annual maximum which is
currently $10,500. Secure Computing may provide additional matching
contributions of up to $1.00 for every dollar contributed by that employee in a
given year under this component. The plan trustee, at the direction of each
participant, invests funds in any of six investment options. In 1998, Secure
Computing did not contribute to Mr. Waxman's account under this component of the
Retirement Plan.

EMPLOYEE STOCK PURCHASE PLAN. Our Employee Stock Purchase Plan (the
"Purchase Plan") was approved by Secure Computing's stockholders at the 1996
Annual Meeting and became effective July 1, 1996. The purpose of the Purchase
Plan is to provide eligible employees with an opportunity to acquire a
proprietary interest in Secure Computing through the purchase of its common
stock and, thus, to develop a stronger incentive to work for Secure Computing's
continued success. The Purchase Plan is an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Committee administers the Purchase Plan.

Any Secure Computing employee or, subject to approval by the Board of
Directors, any employee of a Secure Computing parent or subsidiary corporation
is eligible to participate in the Purchase Plan for any Purchase Period (as
defined below) so long as, on the first day of such Purchase Period, the
employee has completed at least six months of continuous service and is
customarily employed at least twenty hours per week. "Purchase Period" means
each quarter of Secure Computing's fiscal year.

Any eligible employee may elect to become a participant in the Purchase
Plan by authorizing payroll deductions of a specified whole percentage from one
percent to ten percent of the employee's gross cash compensation. Under an
amendment to the current program, the Board of Directors approved an increase of
the top contribution limit to 20% effective for quarter 3 and quarter 4 of
fiscal year 1999 for non-executives. The special amendment to the program
expires as of 12/31/99. We currently have approximately 311 employees who are
eligible to participate in the Purchase Plan. Amounts withheld under the
Purchase Plan will be held by Secure Computing as part of its general assets
until the end of the Purchase Period and will be used to purchase Secure
Computing common stock as of the last day of the Purchase Period at a price
equal to 85% of the lesser of the fair market value of a share of common stock
on either the first or last day of the Purchase Period. All amounts so withheld
will be used to purchase the number of shares of common

44
<PAGE>

stock (including fractional shares), that can be purchased with such amount,
unless the participant has properly notified us that he or she elects to
purchase a lesser number of shares of common stock or to receive the entire
amount in cash. If all participants' purchases would exceed the number of shares
of common stock available for purchase under the Purchase Plan, each participant
will be allocated a ratable portion of such available shares of common stock.
Any amount not used to purchase shares of common stock will be refunded to the
participant in cash.

Shares of common stock acquired by each participant will be held in a
general account maintained for the benefit of all participants. Certificates for
the number of whole shares of common stock purchased by a participant will be
issued and delivered to him or her only upon the request of such participant or
his or her representative.

A participant may not purchase more than $25,000 in fair market value
(determined on the first day of the respective Purchase Periods) of shares of
common stock under the Purchase Plan and all other employee stock purchase
plans, if any, of Secure Computing and any parent or subsidiary corporation of
Secure Computing in each calendar year.

OTHER. Pursuant to the terms of his employment agreement, Mr. Waxman is
entitled to receive a monthly car allowance of up to $1,000, relocation
expenses, and temporary living quarters in the general vicinity of Secure
Computing's headquarters. In 1998, Mr. Waxman received car allowance payments of
$12,000 and did not receive any relocation expenses.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Stephen M. Puricelli, a director of Secure Computing, is the Chairman
of the Compensation Committee of the Board of Directors. Betsy A. Atkins, a
private investor, is a member of the Compensation Committee of the Board of
Directors. This report of the Compensation Committee was presented by Ms. Atkins
and Mr. Puricelli. As of the date of this prospectus, Eric Rundquist, Alexander
Zakupowsky and Stephen M. Puricelli, directors of Secure Computing, are members
of the Compensation Committee of the Board of Directors.

COMPENSATION COMMITTEE

Stephen M. Puricelli, Chairman
Betsy S. Atkins

EMPLOYMENT CONTRACTS; SEVERANCE, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS

EMPLOYMENT AGREEMENTS. Secure Computing has employment agreements with each of
the Named Executive Officers.

JEFFREY H. WAXMAN. Mr. Waxman had an employment agreement with Secure
Computing during the last fiscal year. Mr. Waxman resigned from Secure Computing
in June, 1999. Accordingly, his employment agreement with Secure Computing has
been terminated.

JOHN McNULTY. Secure Computing and Mr. McNulty entered into a one year
employment agreement on May 3, 1999, pursuant to which Mr. McNulty serves as
Secure Computing's President and Chief Operating Officer. Mr. McNulty's annual
base salary is $300,000, subject to upward adjustment by the Board of Directors.
Under the terms of the agreement, Mr. McNulty is entitled to a cash performance
bonus of up to 100% of annual base salary with respect to each fiscal year,
subject to Board approval. Under the terms of the agreement, Mr. McNulty was
granted options to purchase 350,000 shares of common stock under Secure
Computing's Omnibus Stock Plan vesting on one-third increments on the first
three anniversaries of the date of the agreement. In addition, Mr. McNulty is
eligible to participate in the Executive Incentive Option Program. Under this
program, he earns an additional 250,000 shares of stock (100,000 each year for
the first two years and 50,000 for the third year) based on the following
performance criteria:

* 100,000 shares to vest only in the event our stock price is at
or above $14.250 for ten consecutive business days by May 3,
2000;

* 100,000 shares to vest only in the event our stock price is at
or above $24.250 for ten consecutive business days by May 3,
2001; and

* 50,000 shares to vest only in the event our stock price is at
or above $34.250 for ten consecutive business days by May 3,
2002.

Notwithstanding the foregoing vesting schedule, in the event the stock
price criteria are not met for whatever reason, the shares will vest and become
exercisable on May 3, 2004. Either party may terminate the

45
<PAGE>

agreement. However if Secure Computing terminates the agreement without cause,
Mr. McNulty will be entitled to an amount equal to twelve months of his base
salary.

TIMOTHY P. MCGURRAN. Secure Computing and Mr. McGurran entered into a
three-year employment agreement on August 27, 1996, as amended, pursuant to
which Mr. McGurran serves as Secure Computing's Senior Vice President of
Operations and Chief Financial Officer. This agreement renews annually, unless
terminated earlier. Mr. McGurran's annual base salary is $237,600, subject to
upward adjustment by the Chief Executive Officer of the Company. Mr. McGurran's
annual base salary was increased in 1997 to account for a cost of living
increase in connection with his relocation to San Jose, California. Mr. McGurran
is also eligible to receive an annual bonus of up to 50% of his base salary if
certain performance goals established by the Chief Executive Officer are met.
Such percentage is subject to upward adjustment by the Chief Executive Officer
of Secure Computing. Under the terms of the agreement, Mr. McGurran was granted
options to purchase 100,000 shares of common stock under our Omnibus Stock Plan
vesting in one-third increments on the first three anniversaries of the date of
the agreement. Such options were repriced to an exercise price of $6.125 per
share on February 13, 1997. Either party may terminate the agreement. However,
if Secure Computing terminates the agreement without cause, Mr. McGurran will be
entitled to an amount equal to twelve months of his base salary. Upon
termination or expiration of the agreement, Secure Computing shall have the
option to retain Mr. McGurran as a consultant.

CHRISTINE HUGHES. Ms. Hughes had an employment agreement with Secure
Computing during the last fiscal year. Ms. Hughes has resigned from Secure
Computing. Accordingly, her employment agreement with Secure Computing has been
terminated.

HOWARD SMITH. Mr. Smith had an employment agreement with Secure
Computing during the last fiscal year. Mr. Smith has resigned from Secure
Computing. Accordingly, his employment agreement with Secure Computing has been
terminated.

GARY TAGGART. Mr. Taggart had an employment agreement with Secure
Computing during the last fiscal year. Mr. Taggart has resigned from Secure
Computing. Accordingly, his employment agreement with Secure Computing has been
terminated.

PERFORMANCE EVALUATION

The graph below compares total cumulative stockholders' return on the
common stock for the period from the close of the NASDAQ Stock Market U.S.
Companies on the date of Secure Computing's initial public offering of common
stock (November 17, 1995) to December 31, 1997, with the total cumulative return
on the Computer Index for the NASDAQ Stock Market - U.S. Companies (the
"Computer Index") and the Composite Index for the NASDAQ Stock Market (the
"Composite Index") over the same period. The index level for the graph and table
was set to 100 on November 17, 1995, for the common stock, the Computer Index
and the Composite Index and assumes the reinvestment of all dividends.

<TABLE>
<CAPTION>
11/17/95 12/31/95 6/30/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nasdaq Computer Index 100 96.2 113.2 135.9 115.9 162.5 224.2 333.3

Nasdaq Composite Index 100 101.4 110.4 121.4 141.4 123.9 181.3 209.8

Secure Computing Corp. 100 116.1 47.4 18.9 12.2 24.5 20.5 39.5
</TABLE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of common stock, including shares of Secure Computing
Canada Ltd., a corporation incorporated under the laws of Ontario and a
wholly-owned subsidiary of Secure Computing which shares are exchangeable into
shares of Secure Computing's common stock (the "Exchangeable Shares") as of June
30, 1999, (unless otherwise noted below), by each director of Secure Computing,
by each executive officer of Secure Computing named in the Summary Compensation
Table herein, by all directors and current executive officers as a group, and by
each stockholder who is known by Secure Computing to own beneficially more than
five percent of Secure Computing's outstanding common stock, including
Exchangeable Shares.

46
<PAGE>

The following table is based upon information directors, officers and
principal shareholders supplied. Applicable percentage ownership for each
shareholder is based on 18,079,594 shares of common stock outstanding as of June
30, 1999, together with applicable options for such shareholders. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities, subject to the
community property laws where applicable. Shares of common stock subject to
options are deemed outstanding for the purpose of computing the percentage
ownership of the person holding such options, but are not treated as outstanding
for computing the percentage ownership of any other person.

<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF SHARES OF SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED OWNED
- ----------------------------------------------------------- ------------ ------------
<S> <C> <C>
Robert J. Frankenberg (1) 81,458 *
Timothy P. McGurran (2) 308,003 1.7
John McNulty (3) 667,300 3.7
Stephen M. Puricelli (4) 146,056 *
Eric P. Rundquist (5) 190,497 1.1
Alexander Zakupowsky, Jr. (6) 33,333 *
All directors and executive officers as a group (6 persons) 1,426,647 7.9

Other beneficial owners: 1,330,101 7.4
Swenson Ventures, Inc.,
701 North First Street
San Jose, California 95110
</TABLE>

- ------------------------------------------

*Less than one percent.

(1) Includes 71,458 shares of common stock covered by options
which are exercisable within 60 days of June 30, 1999. None of
these options were exercised prior to the date of this
prospectus.

(2) Represents 2,542 shares owned personally by Mr. McGurran, and
152,487 shares of common stock covered by options which are
exercisable within 60 days of June 30, 1999. None of these
options were exercised prior to the date of this prospectus.

(3) Represents 67,300 shares owned personally by Mr. McNulty and
stock options not exercisable within 60 days of June 30, 1999.

(4) Represents 51,681 shares owned personally by Mr. Puricelli,
and 84,375 shares of common stock covered by options which are
exercisable within 60 days of June 30, 1999. None of these
options were exercised prior to the date of this prospectus.

(5) Represents 96,653 shares owned personally by Mr. Rundquist,
and 83,844 shares of common stock covered by options which are
exercisable within 60 days of June 30, 1999. None of these
options were exercised prior to the date of this prospectus.

(6) Includes 23,333 shares of common stock covered by options
which are exercisable within 60 days of June 30, 1999. None of
these options were exercised prior to the date of this
prospectus.

47
<PAGE>

CERTAIN TRANSACTIONS

In January 1998, we agreed to guarantee a loan by Norwest Bank to
Jeffrey Waxman, Secure Computing's Chairman and Chief Executive Officer, in an
amount of $250,000. The guarantee expired upon Secure Computing paying a bonus
to Mr. Waxman in the amount of $250,000.

In January 1998, Secure Computing agreed to loan $231,250 to Timothy
McGurran, Secure Computing's Senior Vice President of Operations and Chief
Financial Officer, for the purchase of a home in connection with his relocation
to San Jose, California. The loan was to have been repaid within five years of
the date of the loan. In 1999, this loan was placed on a forgiveness plan over a
three year period from the relocation date. In addition, Secure Computing is
reimbursing Mr. McGurran for the tax liabilities incurred as a result of the
forgiveness plan.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires that Secure Computing's
directors, executive officers and persons who own more than ten percent of a
registered class of Secure Computing's equity securities ("10% Stockholders") to
file with the SEC and the National Association of Securities Dealers, Inc.
reports of ownership on Form 3 and reports on change in ownership on Form 4 or
Form 5. Such directors, executive officers and 10% Stockholders are also
required by SEC rules to furnish Secure Computing with copies of all Section
16(a) forms that they file. To our knowledge based solely on a review of copies
of forms submitted to us, or written representations from certain reporting
persons we believe all required reports were filed on a timely basis during
1998, except that Betsy Atkins, Timothy McGurran, Howard Smith, and Gary Taggart
each failed to file a Form 4 once each in a timely manner.

DESCRIPTION OF CAPITAL STOCK

As of the date of this prospectus, the authorized capital stock of
Secure Computing consists of 50,000,000 shares of common stock, $0.01 par value,
and 2,000,000 shares of preferred stock, $0.01 par value.

COMMON STOCK

As of September 28, 1999, there were 20,962,952 shares of common stock
outstanding held of record by approximately 542 registered stockholders. We
believe however, that many beneficial holders of our common stock have
registered their shares in nominee or street name, and that there are
substantially more than 50 beneficial owners. The holders of common stock are
entitled to one vote per share on all matters to be voted on by stockholders,
except that holders may cumulate their votes in the election of directors.
Subject to preferences that may be applicable to any outstanding preferred
stock, common stockholders are entitled to receive ratably such dividends as may
be declared by the Board of Directors in its discretion from funds legally
available therefor. In the event of a liquidation, dissolution, or winding up of
Secure Computing common stockholders are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding preferred stock. Common stockholders have no preemptive rights and
have no rights to convert their common stock into any other securities. The
outstanding shares of common stock are fully paid and non-assessable.

PREFERRED STOCK

The Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of Secure Computing or making removal of management more
difficult without further action by the shareholders and could adversely affect
the rights and powers, including voting rights, of the holders of common stock.
These provision could also affect the market price of our common stock.

48
<PAGE>

On June 30, 1998, we sold 16,000 shares of newly issued Series C
convertible preferred stock for an aggregate of $16 million to two investors,
Marshall Capital Management, Inc., an affiliate of investment bank Credit Suisse
First Boston, and CC Investments, LDC, an affiliate of Castle Creek Partners, a
Chicago-based private investment partnership. In connection with the investment
we also issued to the investors warrants to acquire 174,464 shares of our common
stock.

The material terms of the Series C preferred stock are that each share
of Series C preferred stock has a face value of $1000 and is convertible, at the
election of the holder, into that number of shares of our common stock equal to
$1000 divided by the conversion price. The conversion price is equal to the
lower of:

* the average closing price for our common stock for the five
trading days immediately prior to the conversion date;

* the average closing price for our common stock for the fifteen
trading days immediately prior to the conversion date; and

* a fixed conversion price of $19.0035 per share, subject to
adjustment.

The following is an example of how the conversion price works. If the
average closing price for the five day period immediately prior to the
conversion date is $2 each share of Series C preferred stock would convert into
500 shares of our common stock. If the average closing price for the fifteen day
period is $3 then each share of Series C preferred stock would convert into
approximately 333 shares of our common stock. These averages will be adjusted
and recalculated based on each separate conversion date. Based on the $19.0035
fixed conversion price each share of Series C preferred stock would convert into
approximately 52 shares of our common stock. Since the holder can choose the
conversion price, in this example the holder would choose the five day period
closing price because the $2 average results in the holder receiving the
greatest number of shares of common stock upon conversion of the shares of
Series C preferred stock.

The significance of having conversion factors based upon average
closing prices of our common stock is that it allows the holder to receive a
greater number of shares of common stock if our common stock price declines. The
significance of having both the five and fifteen day period is that it protects
the holder from sudden drops in our share price while providing benefits if the
price increases quickly. Finally, the significance of having a fixed conversion
price substantially higher than our historical stock price is that it ensures
that the holder will receive at least a minimum number of shares upon conversion
if our stock price rises significantly.

The conversion price of the Series C preferred stock is subject to
modification and adjustment. For example, in addition to adjustment for stock
splits and distributions, the Series C conversion price is subject to adjustment
upon any public announcement by us that we intend to engage in a change of
control transaction or if any person publicly announces a tender offer to
purchase 50% or more of our common stock. If that occurs, the conversion price
will be the lower of the average closing price for our common stock for the five
trading days immediately preceding the announcement date and the conversion
price that would otherwise apply.

Under the terms of the Series C preferred stock, we must deliver the
shares of common stock issuable on conversion to the selling shareholders within
seven business days of their conversion request. If we do not deliver the shares
of common stock within that time, then we must pay the selling stockholders a
penalty equal to 24% of the face value of the shares of Series C preferred. In
addition, if we fail to deliver the shares for more than ten business days then
the selling stockholder may either withdraw its request to convert its shares of
Series C preferred stock to shares of common stock or reduce the conversion
price of the Series C preferred stock by one percent for each additional day
that the shares are undelivered, up to a maximum of 50%.

The Series C preferred stock has a liquidation preference equal to the
face value, and is senior to our Series A and Series B convertible preferred
stock in respect of the right to receive dividend payments and liquidation
preferences.

The Series C preferred stock is subject to redemption at a premium
following a request by either the selling stockholders of Series C preferred or
ourselves. The stockholders of Series C preferred can request redemption upon
the occurrence of events described in the transaction documents, including our
failure to timely deliver shares of common stock upon request or our entering
into any "leveraged buy-out," merger or other business combinations. Following a
stockholder redemption request, we will pay the stockholders of Series C
preferred an amount equal to the greater of:

49
<PAGE>

* 125% of the price of shares of Series C preferred stock
requested to be redeemed; or

* the face value of the shares of Series C preferred stock
requested to be redeemed, divided by the conversion price on
the redemption date and multiplied by the average closing
price of our common stock for the five trading days
immediately prior to the redemption date.

We may request redemption if, during any twenty consecutive trading
days, the average closing price for our common stock is less than $5.00.
Following our redemption request, we will pay the stockholders of Series C
preferred an amount equal to the face value of the Series C preferred stock
being redeemed plus a 13% annualized rate of interest on the amount redeemed. If
we fail to pay this amount, the stockholders of Series C preferred may require
us to pay an additional 24% annualized rate of interest on the amount due. If we
fail to pay the redemption price for more than ten business days, in lieu of
receiving cash the stockholders of Series C preferred may elect to receive
shares of our common stock equal to the amount of the redemption price due
divided by the conversion price in effect. In addition, if we fail to pay the
redemption price for more than ten business days then the conversion price will
be reduced by one percent for each additional day that we fail to deliver either
the shares of common stock or the redemption price, up to a maximum of 50%.

WARRANTS

WARRANTS ISSUED TO HOLDERS OF SERIES C PREFERRED. These warrants may be
exercised until the earlier of either June 29, 2001, or our consolidation,
merger or other business combination with or into another entity pursuant to
which we are not the surviving company. The exercise price for our common stock
related to the warrants is $11.9223 per share. The number of shares of common
stock issuable under the warrants is subject to adjustment for stock dividends,
recapitalization or reclassification of our common stock, and distributions or
dividends (other than from earned surplus or net profits). In addition, in the
event of a merger or consolidation, sale of all or substantially all of our
assets, or a similar event, the holders of the warrants will be entitled to
exercise the warrants prior to the occurence of such event in exchange for the
class and type of securities or other assets received for the common stock.

The following is an example of how the warrants may be exercised.
Assuming that the price of our shares of common stock exceeded the exercise
price of $11.9223 per share, then the warrant holders would be able to convert
the warrant into shares by paying the exercise price. This would result in an
immediate gain to the warrant holders equal to the amount that the share price
exceeded the exercise price. If the price of our common stock was less than the
exercise price, exercise of the warrant would result in an immediate loss to the
warrant holders equal to the amount that the share price was less than the
exercise price.

WARRANT ISSUED TO MANCHESTER. In connection with the investment
agreement, on October 5, 1999 we issued a warrant to Manchester having an
aggregate strike price of $1,875,000. The exercise price per share of common
stock is, at Manchester's option, equal to 120% of the average of the closing
bid prices of our common stock for the 10 trading days starting (i) September
29, 1999, or (ii) the trading day following the day we file our quarterly report
on Form 10-Q with the SEC for the quarter ending September 30, 1999. As
calculated in accordance with clause (i) above, the number of shares would be
526,685 and the exercise price per share would be $3.56.

CERTAIN ANTI-TAKEOVER PROVISIONS

As described on page 9 of the risk factors section of this prospectus,
certain provisions of our certificate of incorporation, Delaware law, and our
agreement with the holders of our Series C preferred stock restrict takeovers.

LEGAL MATTERS

The legality of the issuance of the securities being offered hereby is
being passed upon for Secure Computing by Heller Ehrman White & McAuliffe, A
Partnership of Professional Corporations, Menlo Park, California.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1997 and 1998, and for each of
the three years in the period ended December 31, 1998, as set forth in their
report. We have included our financial statements and schedule in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.

50
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors...............................................F-2

Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(unaudited)..................................................................F-3

Statements of Operations for the years ended December 31, 1996, 1997
and 1998 and the six months ended June 30, 1998 and 1999 (unaudited).........F-4

Statements of Shareholders' Equity for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1999 (unaudited).......F-5

Statements of Cash Flows for the years ended December 31, 1996, 1997
and 1998 and the six months ended June 30, 1998 and 1999 (unaudited).........F-6

Notes to Financial Statements................................................F-7

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Secure Computing Corporation

We have audited the accompanying consolidated balance sheets of Secure Computing
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Secure
Computing Corporation at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
January 29, 1999

F-2
<PAGE>

SECURE COMPUTING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
ASSETS
December 31, December 31, June 30,
1997 1998 1999
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ......................................................... $ 4,880 $ 9,992 $ 2,329
Investments ....................................................................... -- 10,886 8,905
Accounts receivable, (net of allowance for doubtful
accounts of 1997 -- $417; 1998 -- $900; 1999 -- $1,709) ........................... 13,553 19,712 9,792
Deferred income taxes ............................................................. 2,113 1,323 187
Inventories ....................................................................... 1,123 2,361 658
Other current assets .............................................................. 1,760 1,038 1,550
------------ ------------ ------------
Total current assets ........................................................... 23,429 45,312 23,421

PROPERTY AND EQUIPMENT
Equipment ......................................................................... 8,008 7,261 7,826
Furniture & fixtures .............................................................. 2,595 2,059 2,094
Leasehold improvements ............................................................ 1,301 1,037 444
------------ ------------ ------------
11,904 10,357 10,364
Accumulated depreciation .......................................................... (6,286) (6,563) (6,837)
------------ ------------ ------------
5,618 3,794 3,527
INTANGIBLE ASSETS (net of accumulated amortization of 1997 - $561; -
1998 -- $522; 1999 -- $453) ......................................................... 1,221 1,971 1,737
Deferred income taxes ............................................................... 290 2,277 2,515
Employee notes receivable ........................................................... -- 481 --
Other assets ........................................................................ 496 513 596
------------ ------------ ------------
Total assets ...................................................................... $ 31,054 $ 54,348 $ 31,796
============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable .................................................................. $ 2,175 $ 3,820 $ 3,402
Accrued payroll liability ......................................................... 1,170 3,004 1,851
Other accrued liabilities ......................................................... 1,094 1,918 2,706
Deferred revenue .................................................................. 1,815 2,553 2,328
------------ ------------ ------------
Total current liabilities ...................................................... 6,254 11,295 10,287

STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share:
Authorized---2,000,000 shares; issued and outstanding shares - December 31, 1997
- None
December 31, 1998 - 16,000 and June 30, 1999 - 11,950 .......................... -- -- --

Common stock, par value $.01 per share:
Authorized - 50,000,000 shares; issued and outstanding shares --
June 30, 1999 - 18,079,594; December 31, 1998 - 16,545,987 and
December 31, 1997 - 15,762,820 ................................................. 158 165 181
Additional paid-in capital ........................................................ 68,131 89,730 97,596
Accumulated deficit ............................................................... (43,378) (46,640) (76,046)
Accumulated other comprehensive income ............................................ (111) (202) (222)
------------ ------------ ------------
Total stockholders' equity ..................................................... 24,800 43,053 21,509
------------ ------------ ------------
Total liabilities and stockholders' equity ..................................... $ 31,054 $ 54,348 $ 31,796
============ ============ ============
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>

SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------------------------------- ------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Products and Services .................... $ 23,290 $ 33,203 $ 51,500 $ 22,020 $ 11,329
Advanced technology contracts ............ 16,972 13,773 9,942 5,280 2,410
------------------------------------- ------------------------
40,262 46,976 61,442 27,300 13,739
COSTS OF REVENUE ............................... 18,797 18,766 21,138 9,426 12,882
------------------------------------- ------------------------
GROSS PROFIT ................................... 21,465 28,210 40,304 17,874 857

OPERATING EXPENSES
Selling and marketing .................... 18,425 20,469 22,835 11,527 15,272
Research and development ................. 9,575 8,736 7,477 3,740 5,173
General and administrative ............... 6,869 3,839 4,965 1,877 4,479
Stock option expense ..................... -- 900 2,160 -- 4,740
Restructure costs ........................ -- -- 7,800 7,800 --
Acquisition costs ........................ 13,069 -- -- -- --
------------------------------------- ------------------------
47,938 33,944 45,237 24,944 29,664
------------------------------------- ------------------------
OPERATING LOSS ................................. (26,473) (5,734) (4,933) (7,070) (28,807)
Interest expense ......................... (129) -- -- -- --
Interest and other income ................ 1,508 506 474 57 301
------------------------------------- ------------------------
Loss before income tax benefit ........... (25,094) (5,228) (4,459) (7,013) (28,506)
Income tax benefit ....................... -- (977) (1,197) 617 900
------------------------------------- ------------------------
NET LOSS ....................................... $(25,094) $ (4,251) $ (3,262) $ (6,396) $(29,406)
===================================== ========================

NET LOSS PER SHARE -- BASIC AND DILUTED ........ $ (1.76) $ (0.27) $ (0.20) $ (0.40) $ (1.71)

WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC AND DILUTED ......................... 14,222 15,480 16,106 15,945 17,203
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>

SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
Accumulated
Other Total
Preferred stock common stock Additional Compre- stock-
--------------------- --------------------- paid-in hensive Accumulated holders'
Shares Amount Shares Amount capital Income Deficit equity
--------- --------- ---------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 ............. -- $ -- 12,542,196 $ 125 $ 50,116 $ -- $ (14,033) $ 36,208

Exercise of incentive stock options .. -- -- 426,394 4 991 -- -- 995

common stock issued under
Employee Stock Purchase Plan ....... -- -- 34,155 -- 277 -- -- 277

Compensation expense on options ...... -- -- -- -- 197 -- -- 197

common stock issued .................. -- -- 1,142,908 12 6,350 -- -- 6,362

Exercise of common stock warrants .... -- -- 955,499 10 7,277 -- -- 7,287

Net loss for the year ................ -- -- -- -- -- -- (25,094) (25,094)
--------- --------- ---------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 ............. -- -- 15,101,152 151 65,208 -- (39,127) 26,232

Comprehensive loss

Net loss for the year .............. -- -- -- -- -- -- (4,251) (4,251)

Foreign currency translation
adjustment ....................... -- -- -- -- -- (111) -- (111)
---------
Total comprehensive loss ............. (4,362)

Exercise of incentive stock options .. -- -- 552,111 6 1,447 -- -- 1,453

common stock issued under
Employee Stock Purchase Plan ....... -- -- 109,557 1 576 -- -- 577

Compensation expense on options ...... -- -- -- -- 900 -- -- 900
--------- --------- ---------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 ............. -- -- 15,762,820 158 68,131 (111) (43,378) 24,800

Comprehensive loss

Net loss for the year .............. -- -- -- -- -- -- (3,262) (3,262)

Foreign currency translation
adjustment ....................... -- -- -- -- -- (91) -- (91)
---------
Total comprehensive loss ............. (3,353)

Exercise of incentive stock options .. -- -- 687,995 6 3,295 -- -- 3,301

common stock issued under
Employee Stock Purchase Plan ....... -- -- 95,172 1 799 -- -- 800

Compensation expense on options ...... -- -- -- -- 2,160 -- -- 2,160

Preferred stock issued ............... 16,000 -- -- -- 15,345 15,345
--------- --------- ---------- --------- --------- --------- --------- ---------
</TABLE>

SEE ACCOMPANYING NOTES.

F-5
<PAGE>

SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
Accumulated
Other Total
Preferred stock common stock Additional Compre- stock-
--------------------- --------------------- paid-in hensive Accumulated holders'
Shares Amount Shares Amount capital Income Deficit equity
--------- --------- ---------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 ............. 16,000 $ -- 16,545,987 $ 165 $ 89,730 $ (202) $ (46,640) $ 43,053

Comprehensive loss

Net loss for the year to date ...... -- -- -- -- -- -- (29,406) (29,406)

Foreign currency translation
adjustment ....................... -- -- -- -- -- (20) -- (20)
---------
Total comprehensive loss ............. (29,426)

Exercise of incentive stock options .. -- -- 415,504 4 2,736 -- -- 2,740

common stock issued under
preferred stock conversions ........ (4,050) -- 1,004,545 11 -- 11

Employee Stock Purchase Plan ....... -- -- 113,558 1 390 -- -- 391

Compensation expense on options ...... 4,740 4,740
--------- --------- ---------- --------- --------- --------- --------- ---------
BALANCE, JUNE 30, 1999 ................. 11,950 $ -- 18,079,594 $ 181 $ 97,596 $ (222) $ (76,046) 21,509
========= ========= ========== ========= ========= ========= ========= =========
</TABLE>

SEE ACCOMPANYING NOTES.

F-6
<PAGE>

SECURE COMPUTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
Six Months Ended June 30,
Year Ended December 31, (unaudited)
------------------------------------ -------------------------
1996 1997 1998 1998 1999
------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ....................................................... $(25,094) $ (4,251) $ (3,262) $ (6,396) $(29,406)
Adjustments to reconcile net loss to net cash used in operating
activities:
Purchased research and development in process and
goodwill write-off ....................................... 4,994 -- -- -- --
Depreciation ............................................... 2,030 2,373 1,533 563 741
Loss on disposals of property and equipment ................ -- 159 1,724 2,171 334
Loss on disposals of intangible assets ..................... 187 731 268 77 402
Amortization ............................................... -- -- 325 134 303
Deferred income tax ........................................ 409 (1,030) (1,197) (617) 898
Stock option expense ....................................... -- 900 2,160 -- 4,740
Changes in operating assets and liabilities:
Accounts receivable ........................................ (1,348) (6,455) (6,159) (1,463) 9,920
Inventories ................................................ (1,302) 785 (1,238) 297 1,703
Other current assets ....................................... (1,315) (485) 722 363 (512)
Accounts payable ........................................... 1,608 (1,552) 1,645 1,001 (418)
Accrued liabilities and reserves ........................... 2,009 (2,797) 2,491 2,965 (365)
Deferred revenue ........................................... 290 60 738 173 (225)
------------------------------------ -----------------------
Net cash used in operating activities ..................... (17,532) (11,562) (250) (732) (11,887)

INVESTING ACTIVITIES
Purchases of investments ................................... (8,645) -- (10,886) -- --
Proceeds from sales of investments ......................... 3,000 5,935 -- -- 1,981
Cash paid in purchase of Webster Network Strategies, Inc. .. (759) -- -- -- --
Cash paid in purchase of remaining interest in Border
Network Technologies Europe Ltd. ......................... (989) -- -- -- --
Purchase of property and equipment ......................... (5,030) (2,304) (1,994) (1,197) (808)
Increase in intangibles and other assets ................... (885) (1,238) (1,842) (1,082) (73)
------------------------------------ -----------------------
Net cash provided by (used in) investing activities ...... (13,308) 2,393 (14,722) (2,279) 1,100

FINANCING ACTIVITIES
Payments on notes payable and long-term debt ............... (1,943) -- -- -- --
Proceeds from issuance of preferred stock .................. -- -- 15,345 15,432 --
Proceeds from issuance of common stock ..................... 11,989 2,030 4,101 1,784 3,142
Proceeds from sales-lease-back transaction ................. -- -- 729 729 --
------------------------------------ -----------------------
Net cash provided by financing activities ................ 10,046 2,030 20,175 17,945 3,142

EFFECT OF FOREIGN CURRENCY TRANSLATION ............................ -- (111) (91) (4) (20)
------------------------------------ -----------------------
Increase (decrease) in cash and cash equivalents ........... (20,794) (7,250) 5,112 14,930 (7,663)
Cash and cash equivalents beginning of year ................ 32,924 12,130 4,880 4,880 9,992
------------------------------------ -----------------------
Cash and cash equivalents end of year ...................... $ 12,130 $ 4,880 $ 9,992 $ 19,810 $ 2,329
==================================== =======================
</TABLE>

SEE ACCOMPANYING NOTES.

F-7
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

We develop and sell computer network "security" products and services
designed to provide secure access control for organizations engaged in
electronic commerce/business. Our products provide solutions to assure the
integrity and security of transactions and communications over public networks
such as the Internet. Our products can also be used to prevent unauthorized
access to private corporate and government networks. Our products generally fall
into two broad categories: 1) those intended to prevent unauthorized access to
computer and network based data and information, and 2) those intended to
authenticate/identify network users and control access to network resources or
applications.

BASIS OF PRESENTATION

The consolidated financial statements are presented giving retroactive
effect to our 1996 acquisitions of Border Network Technologies Inc. (now known
as Secure Computing Canada Ltd.) and Enigma Logic, Inc., which have been
accounted for under the pooling of interests method (see Note 2.). The
consolidated financial statements include the accounts of Secure Computing and
our subsidiaries. All inter-company balances and transactions have been
eliminated in consolidation.

INTERIM FINANCIAL STATEMENTS

The interim financial statements for the six months ended June 30, 1998
and 1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles. In the opinion of our management, the unaudited interim
financial statements contain all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the results
of the entire year.

REVENUE RECOGNITION

PRODUCTS AND SERVICES

We recognize product revenues at the time of shipment in instances
where we have evidence of a contract, the fee charged is fixed and determinable
and collection is probable. We have entered into customer support and
maintenance agreements with various customers. We recognize the related revenues
either ratably as the obligations are fulfilled or upon completion of
performance.

Revenue generated through traditional channels with a right of return
for stock balancing and rotations is reduced by a reserve for estimated returns.
These reserves are based on estimates made by our management and are subject to
change.

ADVANCED TECHNOLOGY CONTRACTS

Advanced technology contract revenues for cost-plus-fixed-fee contracts
are recognized on the basis of costs incurred during the period plus the fee
earned. Award fees are recognized based upon the percentage of completion and
forecasted profit. A provision is made for the estimated loss, if any, on the
contracts.

F-8
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Under our advanced technology contracts, we bear the risk that
increased or unexpected costs required to perform specified services may reduce
our profitability. In addition, recoverable expenses we bill for government
contracts are subject to review and audit by the Defense Contract Audit Agency,
which could result in amounts previously billed being renegotiated. Pursuant to
their terms, these contracts are generally also subject to termination at the
convenience of the applicable government agency. If the contract is terminated,
we would typically be reimbursed for our costs to the date of our termination
plus the cost of an orderly termination, and paid a portion of the fee.

At December 31, 1997 and 1998, we had deferred revenue of $144 and
$102, respectively, related to advanced technology contracts.

CASH EQUIVALENTS

We consider all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

INVENTORIES

Inventories consist mainly of purchased components and prepaid licenses
and are valued at the lower of cost, (first-in, first-out method) or market.

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost. Depreciation is calculated
using straight line and accelerated depreciation methods with estimated useful
lives ranging from three to ten years.

INTANGIBLE ASSETS

Intangible assets consist of patents and trademarks and are amortized
using the straight-line method over the estimated useful lives of the assets,
which range up to ten years.

IMPAIRMENT OF LONG-LIVED ASSETS

We review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. 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.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

Foreign assets and liabilities are translated using the year-end
exchange rate. Results of operations are translated using the average exchange
rates throughout the year. Translation gains or losses, net of applicable
deferred taxes, are accumulated as a separate component of stockholders' equity.

F-9
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.

Based on our product development process, technological feasibility is
established upon completion of a working model. Costs that we incur between
completion of the working model and the point at which the product is generally
available for sale are capitalized and amortized over their estimated useful
life of three years. We have capitalized software development costs net of
accumulated amortization of $547 and $1,304 at December 31, 1997 and 1998,
respectively. Amortization and expense was $187, $682 and $366 for the years
ended December 31, 1996, 1997, and 1998, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

NET LOSS PER SHARE

Basic earnings per share is computed using the weighted average number
of common shares outstanding. Diluted earnings per share is computed using the
combination of dilutive common share equivalents and the weighted average number
of common shares outstanding. Diluted earnings per share is not presented as the
effect of outstanding options, warrants and preferred stock are antidilutive.

COMPREHENSIVE INCOME

As of January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement No. 130
established new rules for the reporting and display of comprehensive income and
our components. However, the adoption of this Statement had no impact on our net
income or stockholders' equity. Statement 130 requires the foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.

STOCK OPTIONS

We follow the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
regarding disclosure of pro-forma information for stock compensation. As
permitted by Statement No. 123, we measure compensation cost using the methods
described in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."

2. ACQUISITIONS

In May 1996, we acquired Webster Network Strategies, Inc. ("Webster"),
a Florida based Internet software developer, for 102,000 shares of common stock
and $749 cash, which included expenses of $249, in exchange for all outstanding
common stock of Webster. The acquisition has been accounted for using the
purchase method. Subsequent to the acquisition, we expensed all purchased
research and development in process of $3,894 based upon an independent
appraisal.

F-10
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

In August 1996, we acquired network security software developers Border
Network Technologies, Inc. ("Border") and Enigma Logic, Inc. ("Enigma"). Both
Border and Enigma were merged directly into Secure Computing in a pooling of
interests. As a result of the mergers, we exchanged approximately 6,000,000
shares of common stock for all of the outstanding common stock of Border and
approximately 2,060,000 shares of common stock for all of the outstanding common
stock of Enigma. In addition, outstanding Border and Enigma stock options were
converted into options to purchase approximately 1,160,000 shares of our common
stock. Separate results of operations for the periods prior to the mergers are
as follows:

SIX MONTHS ENDED
JUNE 30, 1996
Revenue: (UNAUDITED)
--------------------
Secure ................. $ 13,438
Border ................. 4,506
Enigma ................. 2,478
--------------------
Combined .................. $ 20,422
====================
Net loss:
Secure ................. $ (9,189)
Border ................. (4,474)
Enigma ................. (2,857)
--------------------
Combined .................. $ (16,520)
====================

Also, in May 1996, we acquired the remaining 68% interest we did not
own in Border Network Technologies Europe Limited for 40,908 shares of common
stock and $989 in cash. Goodwill of $1,100 that was recorded in this transaction
was subsequently expensed as acquisition costs.

3. INVESTMENTS

At December 31, 1998, investments consisted of commercial paper with
maturities of less than one year. The investments are considered available for
sale and are stated at cost plus accrued interest which approximates fair market
value.

4. ACCOUNTS RECEIVABLE

Approximately nine percent of accounts receivable were due from the
United States government at December 31, 1998 and 1997. Unbilled accounts
receivable from all customers were $644 and $2,254 at December 31, 1997 and
1998, respectively.

We may take various forms of action to manage our receivables such as
selling our receivables at a discount to a third party that we entered into an
agreement with in 1998.

F-11
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

5. LINE OF CREDIT

We have a $5,000 line of credit agreement with a bank. Borrowings under
the line of credit incur interest at the prime rate plus 0.5%. The line of
credit expires in April, 2001. As of December 31, 1998, the line of credit has
no borrowings under it.

6. LEASES

We lease office space for all of our locations. Future lease payments
for all operating leases, excluding executory costs such as management and
maintenance fees, are as follows:

Future Lease Subleases Net Future Lease
Obligations Obligations
---------------- ----------------- ----------------
1999 $ 2,472 $ (252) $ 2,220
2000 2,352 (210) 2,142
2001 1,950 (156) 1,794
2002 1,900 (168) 1,732
2003 1,802 (168) 1,634
Thereafter 3,876 (476) 3,400
---------------- ----------------- ----------------
$ 14,352 $ (1,430) $ 12,922
================ ================= ================

Rent expense was $2,488, $2,191 and $1,865 for the years ended December
31, 1996, 1997 and 1998, respectively.

In addition, in February 1998, we entered into a sales-lease-back
agreement pertaining to certain previously acquired computer equipment and
software. Proceeds from the sale were $729, which approximated the assets
carrying value. The remaining lease term of approximately thirteen months, with
monthly rental payments of $32, results in a remaining future minimum lease
obligation of $416.

7. CAPITAL STOCK

On November 30, 1998, the Stockholders, at a special meeting approved
an amendment to our Restated Certificate of Incorporation to increase the common
shares authorized from 25,000,000 to 50,000,000. In addition, 16,000 shares of
Series C preferred stock were designated for the June 1998 issuance described
below.

8. PREFERRED STOCK

In June 1998, we sold 16,000 shares of Series C convertible preferred
stock, resulting in net proceeds to us of approximately $15,432,000, net of
$568,000 in transaction costs. In connection with the sale of the Series C
convertible preferred stock, we also issued warrants to purchase 174,464 shares
of our common stock. The warrants may be exercised until (i) the earlier of June
29, 2001, and (ii) a merger involving us in which we are not the surviving
entity. The exercise price of the warrants is $11.92. The preferred stock is
convertible into the number of shares of common stock which may be purchased for
the stated value of $1,000 per share of preferred stock at a per share price
equal to the lower of a) the average closing bid price of the common stock for
the five trading days immediately prior to the date of conversion, b) the
average closing bid price of the common stock for the fifteen trading days
immediately prior to the date of conversion, and c) a fixed conversion price of
$19.0035 per share. In the second quarter of 1999, 4050 shares of the preferred
stock were converted into 1,004,545 shares of Secure Computing's common stock
leaving 11,950 outstanding preferred shares. As of July 12, 1999, 4,150 shares
of

F-12
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

Series C preferred remain outstanding and an additional 7,800 shares of the
Series C preferred were converted to 2,726,820 shares of our common stock in
July.

9. STOCK OPTIONS

In September 1995, our Board of Directors and stockholders approved our
1995 Omnibus Stock Plan (the "Stock Plan"). Under the terms of the Stock Plan,
key employees and non-employees may be granted options to purchase up to
7,744,131 shares of our common stock. The majority of options granted typically
have ten year terms and vest annually over three years. In addition, we have
programs where options are subject to accelerated vesting based on the
performance of our stock price over a specified period of time ranging from one
to three years.

A summary of changes in outstanding options and common shares reserved
under the Plan are as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE PER SHARE
--------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 .............. 372,149 1,251,961 $ 2.14
Shares authorized ...................... 2,084,570 -- --
Granted ................................ (2,397,152) 2,397,152 10.29
Exercised .............................. -- (426,394) 2.33
Canceled ............................... 188,188 (188,188) 6.88
--------------------------------------------------
Balance at December 31, 1996 .............. 247,755 3,034,531 $ 9.01
Shares authorized ...................... 1,300,000 -- --
Granted ................................ (3,282,073) 3,282,073 6.44
Exercised .............................. -- (552,111) 2.71
Canceled ............................... 1,866,233 (1,866,233) 11.96
--------------------------------------------------
Balance at December 31, 1997 .............. 131,915 3,898,260 $ 6.24
Shares authorized ...................... 2,500,000 -- --
Granted ................................ (1,896,307) 1,896,307 10.41
Exercised .............................. -- (687,995) 4.86
Canceled ............................... 859,380 (859,380) 7.91
--------------------------------------------------
Balance at December 31, 1998 .............. 1,594,988 4,247,192 $ 7.75
==================================================
</TABLE>

The following table summarizes information about the stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ------------------------------
Weighted- Weighted- Weighted-
Number Average Remaining Average Number Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .01 - $ 3.02 158,368 5.0 years $ 1.11 158,368 $ 1.11
$ 3.03 - $ 6.05 139,846 8.1 years 5.51 120,973 5.53
$ 6.06 - $ 9.07 2,398,951 8.1 years 6.35 869,937 6.24
$ 9.08 - $12.10 1,322,179 9.2 years 10.10 329,158 9.88
$12.11 - $15.13 151,634 9.7 years 13.18 5,514 12.88
$15.14 - $18.15 33,714 9.9 years 17.00 -- --
$18.16 - $21.18 42,500 8.7 years 19.02 -- --
- -------------------------------------------------------------------------------------------------------------------
$ .01 - $21.18 4,247,192 8.4 years $ 7.75 1,483,950 $ 6.47
===================================================================================================================
</TABLE>

F-13
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

Options outstanding under the Stock Plan expire at various dates from
2000 to 2008. The number of options exercisable as of December 31, 1996, 1997
and 1998 were 1,062,920, 693,520, and 1,483,950 at weighted average exercise
prices of $3.32, $6.31, $6.47, respectively. The weighted average fair value of
options granted and the weighted average remaining contractual life of options
granted during 1996, 1997 and 1998 are $10.29, $5.05, and $8.09 and 9.5, 8, and
8.4 years, respectively.

We also have an executive stock option program under which 1,110,000
options are subject to accelerated vesting based on the performance of our stock
price over a period ranging from one to three years. The number of options
exercisable under this program, as of December 31, 1998 was 500,000 of which
180,000 have an exercise price of $6.125 and 320,000 have an exercise price of
$10.25. For the year ended December 31, 1997 and 1998, we recognized $900 and
$2,160 respectively, of compensation expense related to the accelerated vesting
of options under this program.

We also have an employee stock purchase plan under which 400,000 shares
have been reserved for purchase by employees. The purchase price of the shares
under the plan is the lesser of 85% of the fair market value on the first or
last day of the offering period. Offering periods are each three months.
Employees may designate up to ten percent of their compensation for the purchase
of stock under the plan.

Pro forma information regarding net loss and loss per share is required
by Statement No. 123, and has been determined as if we had accounted for our
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996,
1997 and 1998, respectively: risk-free interest rates of 6.0%; volatility
factors of the expected market price of our common stock of .80, .80, 1.00; and
a weighted average expected life of the option of five years.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information is as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
-------------------------------------

Pro forma net loss $(30,217) $(9,105) $(10,739)
=====================================

Pro forma basic and diluted loss
per share $ (2.12) $ (.59) $ (.67)
=====================================

The pro forma effect on the net loss for all years shown is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.

F-14
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

10. INCOME TAXES

The tax benefit of $977 for the year ended December 31, 1997,
represents current foreign income taxes of $53 and a deferred federal benefit of
$1,030. Our income tax benefit for the year ended December 31, 1998, consists of
a deferred benefit of $1,197.

The effective tax rate differs from the statutory tax rate primarily as
a result of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
---------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate .............. $ (8,785) $ (1,778) $ (1,516)
State taxes, net of federal benefit ......... (1,255) (223) (150)
Foreign taxes ............................... -- (180) --
Change in valuation allowance ............... 5,539 (1,110) 440
Non-deductible acquisition costs ............ 4,470 -- --
Other ....................................... 31 94 29
---------------------------------------
Income tax benefit .......................... $ -- $ (977) $ (1,197)
=======================================
</TABLE>

Deferred income tax assets and liabilities result from temporary
differences between the carrying values of assets and liabilities for financial
statement and income tax purposes. Significant components of our net deferred
tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
--------------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities ................................... $ 492 $ 465
Stock option compensation expense ..................... 360 1,224
Contract loss reserve ................................. 70 23
Payroll liabilities ................................... 187 149
Tax over book amortization ............................ (124) (463)
Book over tax depreciation ............................ 114 171
Income tax credits .................................... 478 478
Net operating loss carryforward ....................... 15,675 17,754
--------------------------
Total deferred tax assets before valuation allowance ..... 17,252 19,801
Less valuation allowance ................................. (14,849) (16,201)
--------------------------
Net deferred tax assets .................................. $ 2,403 $ 3,600
==========================
</TABLE>

SFAS 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. We believe it is more
likely than not that the net deferred tax assets of $3,600 at December 31, 1998,
will be realized. 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.

F-15
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

At December 31, 1998, we had net operating loss carryforwards (NOL) of
$44,400 which are available to offset taxable income through 2013. These
carryforwards are subject to the limitations of Internal Revenue Code Section
382. This section provides limitations on the availability of net operating
losses to offset current taxable income if significant ownership changes have
occurred for federal tax purposes. Included in the NOL is approximately $11,400
related to stock option exercises. These deductions currently have a full
valuation allowance and, when realized for financial statement purposes, they
will not result in a reduction in income tax expense. Rather, the benefit will
be recorded as an increase to additional paid-in-capital.

Federal income taxes were not paid in 1996, 1997 or 1998.

11. EMPLOYEE BENEFIT PLAN

We have a voluntary defined contribution plan under Section 401(k) of
the Internal Revenue Code which covers substantially all U.S. employees. We also
have voluntary defined contribution plans which cover substantially all
employees. Contributions to the latter are limited to the employer's
discretionary annual contribution.

We recognized expense for contributions to the plans as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
-------------------------------------
<S> <C> <C> <C>
Defined contribution plan (401K) ........... $ 61 $ 50 $275
Voluntary contribution plans ............... 367 -- --
-------------------------------------
$428 $ 50 $275
=====================================
</TABLE>

12. FOREIGN SALES

Sales to foreign customers accounted for 21%, 32% and 24% of total
revenue in the years ended December 31, 1996, 1997 and 1998, respectively.

13. CONTINGENCIES

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

F-16
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

14. RESTRUCTURING

Early in 1998, we announced plans to implement a restructuring plan
designed to facilitate further integration of acquired businesses, and recorded
a pre-tax expense of $7,800 to account for these actions, which include costs of
lease terminations, streamlining our product offerings and reducing our cost
structure to increase operational efficiency. The plan resulted in the
separation of some employees worldwide and the closing of three North American
facilities. As of December 31, 1998, approximately 45 employee terminations were
related to restructuring actions.

As of June 30, 1999, the restructure reserve was fully utilized. Asset
impairment and restructuring costs as of June 30, 1999, are as follows:

<TABLE>
<CAPTION>
Total Cash Write-
Costs Related To: Charges Payments Downs
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation costs for severance and
other termination benefits ................ $ 1,333 $ 1,333 $ --

Consulting and legal costs ................... 739 739 --

Write-off of property, plant and
equipment ................................. 1,764 -- 1,764

Write-off of other assets .................... 761 -- 761

Lease termination costs ...................... 853 853 --

Facility reconfigurations .................... 328 328 --

Employee relocations ......................... 474 474 --

Canceled contracts ........................... 536 300 236

Additional travel ............................ 196 196 --

Other charges ................................ 816 816 --
------------------------------------------
Total Costs ................................ $ 7,800 $ 5,039 $ 2,761
==========================================
</TABLE>

F-17
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

15. SEGMENT INFORMATION

We have two reportable segments consisting of Products and Services and
advanced technology. Our products and services segment markets a range of
interoperable, standards-based network security products and services to the
global marketplace including customers from Fortune 500 companies, small branch
offices, and government agencies. Our advanced technology segment engages in
research and development of information security technology by acquiring and
executing contracts with departments and agencies of the United States
government. Cash, investments, deferred tax assets, merger related intangibles,
general and administrative expenses, acquisition costs and stock option
compensation costs cannot be readily identified to the two business segments,
therefore, they are presented separately in a corporate segment.

We evaluate segment performance based on gross profit. Resources are
allocated based on contractual requirements as the advanced technology segment
is reimbursed on a cost plus basis from the various agencies of the United
States government. The accounting policies of the reportable segments are the
same as those described in Note 1, "Summary of Significant Accounting Policies."
Revenue is recognized at time of shipment and/or when performance of services
are complete for the Products and Services segment. For advanced technology,
contract revenue is recognized on the basis of costs incurred for the government
contracts serviced by advanced technology and intersegment transfers are
recorded at cost; there are no intercompany profits or losses recorded on
intersegment transfers.

Our reportable segments are business units that offer distinct product and
services to very different customer groups. The reportable segments are each
managed separately because they require different managerial skill sets and are
focused toward different markets.

Significant components of our segments are as follows:

YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers .......... $ 23,290 $ 16,972 $ -- $ 40,262
Depreciation expense ...................... 1,030 958 42 2,030
Segment gross profit ...................... 17,231 4,234 -- 21,465
Segment operating income/(loss) ........... 1,034 (7,569) (19,938) (26,473)
Interest income ........................... -- -- 1,508 1,508
Segment assets ............................ 12,412 4,701 19,662 36,775
Expenditures for long lived assets ........ 3,451 2,364 100 5,915
- ---------------------------------------------------------------------------------------------------------

YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- -----------------------------------------------------------------------------------------------------------

Revenues from external customers .......... $ 33,202 $ 13,773 $ -- $ 46,976
Depreciation expense ...................... 1,533 809 31 2,373
Segment gross profit ...................... 24,033 4,177 -- 28,210
Segment operating income/(loss) ........... 1,267 (2,262) (4,739) (5,734)
Interest income ........................... -- -- 506 506
Segment assets ............................ 20,906 2,720 7,428 31,054
Expenditures for long lived assets ........ 3,166 346 30 3,542
- ---------------------------------------------------------------------------------------------------------
</TABLE>

F-18
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

YEAR ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers .......... $ 51,500 $ 9,942 $ -- $ 61,442
Restructuring charge ...................... -- -- 7,800 7,800
Depreciation expense ...................... 1,241 273 19 1,533
Segment gross profit ...................... 37,174 3,130 -- 40,304
Segment operating income/(loss) ........... 10,689 (697) (14,925) (4,933)
Interest income ........................... -- -- 474 474
Segment assets ............................ 27,594 2,227 24,527 54,348
Expenditures for long lived assets ........ 3,674 137 25 3,836
- ---------------------------------------------------------------------------------------------------------
</TABLE>

F-19
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

SIX MONTHS ENDED JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers .......... $ 22,020 $ 5,280 $ -- $ 27,300
Restructuring charge ...................... -- -- 7,800 7,800
Depreciation expense ...................... 426 126 11 563
Segment gross profit ...................... 16,448 1,426 -- 17,874
Segment operating income/(loss) ........... 3,498 (891) (9,677) (7,070)
Interest income ........................... -- -- 57 57
Segment assets ............................ 21,389 2,320 22,467 46,176
Expenditures for long lived assets ........ 1,001 180 16 1,197
- ---------------------------------------------------------------------------------------------------------

SIX MONTHS ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------------------------
Products and Advanced
Services Technology
Segment Segment Corporate Total
- -----------------------------------------------------------------------------------------------------------

Revenues from external customers .......... $ 11,329 $ 2,410 $ -- $ 13,739
Depreciation expense ...................... 680 51 10 741
Segment gross profit ...................... 910 (53) -- 857
Segment operating income/(loss) ........... (16,643) (2,945) (9,219) (28,807)
Interest income ........................... -- -- 301 301
Segment assets ............................ 16,551 1,381 13,864 31,796
Expenditures for long lived assets ........ 773 24 11 808
- ---------------------------------------------------------------------------------------------------------
</TABLE>

International sales accounted for 28% and 27% of total revenue for the
six months ended June 30, 1998 and 1999 respectively and 21%, 32% and 24% of
total revenue for the years 1996, 1997 and 1998 respectively. Major foreign
markets for our products include Europe and the Pacific Rim, with the United
Kingdom, Germany, Scandinavia and Japan being particularly strong. In each
country, we have independent channel partners who are responsible for marketing,
selling and supporting our products to resellers and end-users within their
defined territories.

The following table summarizes information about our international and
domestic sales and operations:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
- ----------------------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Revenues:
United States sales ........................... $ 31,683 $ 31,944 $ 46,464 $ 19,608 $ 10,044
International sales ........................... 8,579 15,032 14,978 7,692 3,695
-------------------------------- ---------------------
$ 40,262 $ 46,976 $ 61,442 $ 27,300 $ 13,739
================================ =====================
Identifiable Assets:
United States operations ...................... $ 32,259 $ 28,905 $ 53,463 $ 45,062 $ 30,932
International operations ...................... 4,516 2,149 885 1,114 864
-------------------------------- ---------------------
$ 36,775 $ 31,054 $ 54,348 $ 46,176 $ 31,796
================================ =====================
</TABLE>

F-20
<PAGE>

SECURE COMPUTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(SIX MONTH DATA UNAUDITED)

16. RELATED PARTY TRANSACTIONS

In 1998, we relocated several key employees to California. To mitigate
cost of living differences, we provided interest free loans totaling $481 to
these employees. In 1999, these loans were placed on a forgiveness plan over a
three year period from the relocation date. In addition, we are reimbursing the
employees for the tax liabilities incurred as a result of the forgiveness plan.

In January 1998, we agreed to guarantee a bank loan to our Chairman and Chief
Executive Officer, in an amount of $250. The guarantee expired upon our payment
of bonuses in 1998.

F-21
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except for the Securities and Exchange Commission
Registration Fee.

Securities and Exchange Commission Registration Fee ... $ 3,888
Accounting Fees ....................................... 50,000
Legal Fees and Disbursements .......................... 400,000
Miscellaneous ......................................... 10,000
--------
Total: ......................................... $463,888
========

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

II-1
<PAGE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On June 30, 1998, we sold 16,000 shares of newly issued Series C
convertible preferred stock (the "Series C preferred") and warrants to acquire
174,464 shares of common stock to two investors affiliated with Credit Suisse
First Boston and Castle Creek Partners for an aggregate cash consideration of
approximately $15,345,000. The offer and sale of these securities were completed
pursuant to the exemption provided by Regulation D under the Securities Act of
1933.

The Series C preferred is convertible at the election of the holder
into shares of common stock beginning six months after issuance. As of September
28, 1999, 12,400 shares of the Series C preferred had been converted into
3,937,324 shares of common stock leaving 3,600 outstanding shares of Series C
preferred. The average conversion price for shares of Series C preferred
previously converted was $3.15 per share of common stock. A more comprehensive
description of the rights and preferences of the Series C preferred is contained
in the Company's Registration Statement on Form S-3 dated August 14, 1998 and
August 6, 1999 as well as Form 8-K filed with the Commission on July 15, 1998. A
copy of the Certificate of Designation of Series C preferred stock is filed as
an exhibit to the Report on Form 8-K.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.

A. Exhibits

II-2
<PAGE>

10.2 Purchase Agreement among ITI Incorporated, Grotech Partners II, L.P.,
Ideas Inc. and Bernard Farkas dated July 14, 1989. (13)
10.3 Purchase Agreement among ITI Incorporated and Corporate Venture
Partners dated December 13, 1989. (14)
10.4 First Amendment dated December 13, 1989 among ITI, Incorporated,
GroTech Partners II, L.P., Ideas, Inc., and Bernard Farkas and
Corporate Venture Partners to Registration Rights Agreement among ITI,
Incorporated, Grotech Partners II, L.P., Ideas, Inc. and Bernard
Farkas dated July 14, 1989. (15).
10.5 Software Agreement between AT&T Information Systems Inc. and ITI,
Incorporated, Agreement No. SOFT-01701, dated April 2, 1990, including
Supplement No. 1, UNIX System V Release 3.0, Supplement No. 2 dated
August 10, 1990; Sublicensing Agreement between AT&T Information
Systems, Inc.; Letter between UNIX System Laboratories, Inc. and ITI,
Inc. dated April 15, 1991; Letter Agreement modifying Software
Agreement No. SOFT-01701 dated October 22, 1992; and Software
Agreement between AT&T Information Systems Inc. and ITI, Incorporated,
Agreement No. SOFT-02036, dated July 26, 1991. (16)
10.6 Agreement and Plan of Merger and Reorganization among ITI Incorporated
and Secure Computing Technology Company dated May 29, 1992. (17)
10.7 Employment Agreement between Secure Computing and John E. McNulty
dated May 3, 1999. (18)
10.8 Registration Rights Agreement between Manchester Securities Corp. and
Secure Computing Corporation dated as of October 4, 1999. (11)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Heller Ehrman White & McAuliffe (contained in opinion filed
as Exhibit 5.1).*
24.1 Power of Attorney (see Page II-8)

- ---------------------------
* To be filed by amendment.

(1) Incorporated by reference to Appendix A to Secure Computing's
Definitive Proxy Statement dated August 5, 1996 and filed August 7,
1996 with the Securities and Exchange Commission (File No. 0-27074).

(2) Incorporated herein by reference to Exhibit 2.3 to Secure Computing's
Current Report on Form 8-K filed September 12, 1996 (File No.
0-27074).

(3) Incorporated herein by reference to Exhibit 3.1 to Secure Computing's
Form 10-K filed on March 28, 1996 (File No. 0-27074), as amended
pursuant to (i) the Certificate of Designation of Series A Preferred
Stock, incorporated herein by reference to Exhibit 4.1 to Secure
Computing's Form 8-K filed on September 12, 1996, (ii) the Certificate
of Designation of Series C Preferred Stock, incorporated herein by
reference to Exhibit 3.1 to Secure Computing's Form 8-K filed in July
15, 1998, (iii) the Amended and restated Certificate of Designation of
Series B Preferred Stock, incorporated herein by reference to Exhibit
1 to Secure Computing's Form 8-A filed on November 9, 1998, and (iv)
the Certificate of Amendment filed with the Delaware Secretary of
State on December 11, 1998, incorporated herein by reference to
Exhibit 4.1 to Secure Computing's Registration Stated on Form S-8
filed on February 5, 1999.

(4) Incorporated herein by reference to Exhibit 3.3 to Secure Computing's
Registration Statement on Form S-1 (Registration Number 33-97838.).

(5) Incorporated herein by reference to the same numbered Exhibit to
Amendment No. 2 to Secure Computing's Registration Statement on Form
S-1 (registration Number 33-97838).

(6) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on July 15, 1998.

(7) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on July 15, 1998.

(8) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on July 15, 1998.

(9) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Form 8-K filed on November 9, 1998.

(10) Incorporated herein by reference to Exhibit 4.7 to Secure Computing's
Registration Statement on Form S-8 dated February 5, 1999.

II-3
<PAGE>

(11) Incorporated herein by reference to the Exhibits to Secure Computing's
Current Report on Form 8-K filed on October 8, 1999.

(12) Incorporated herein by reference to Exhibit 10.2 to Secure Computing's
Registration Statement on Form S-1 (Registration Number 33-97838).

(13) Incorporated herein by reference to Exhibit 10.4 to Secure Computing's
Registration Statement on Form S-1 (Registration Number 33-97838).

(14) Incorporated herein by reference to Exhibit 10.6 to Secure Computing's
Registration Statement on Form S-1 (Registration Number 33-97838).

(15) Incorporated herein by reference to Exhibit 10.7 to Secure Computing's
Registration Statement on Form S-1 (Registration Number 33-97838).

(16) Incorporated herein by reference to Exhibit 10.9 to Secure Computing's
Registration Statement on Form S-1 (Registration Number 33-97838).

(17) Incorporated herein by reference to Exhibit 10.12 to Secure
Computing's Registration Statement on Form S-1 (Registration Number
33-97838).

(18) Incorporated herein by reference to Exhibit 10.1 to Secure Computing's
Quarterly Report on Form 10-Q filed on May 12, 1999.

B. Financial Statement Schedule.

Valuation and Qualifying Accounts

II-4
<PAGE>

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Less Balance at
Description of Year Expenses Deductions End of Year
- ----------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Contract loss reserves ....................... $ 250,000 $ -- $ -- $ 250,000
Warranty reserves ............................ 120,000 35,000 (90,000) 65,000
Sales return allowance ....................... 70,000 50,000 -- 120,000
Allowance for doubtful accounts .............. 131,000 462,000 (303,000) 290,000
Inventory reserve ............................ -- 150,000 -- 150,000
====================================================================
Total .................................... $ 571,000 $ 697,000 $ (393,000) $ 875,000
====================================================================

Year ended December 31, 1997:
Contract loss reserves ....................... $ 250,000 $ -- $ (74,000) $ 176,000
Warranty reserves ............................ 65,000 -- (35,000) 30,000
Sales return allowance ....................... 120,000 -- (120,000) --
Allowance for doubtful accounts .............. 290,000 179,000 (52,000) 417,000
Inventory reserve ............................ 150,000 60,000 (160,000) 50,000
====================================================================
Total .................................... $ 875,000 $ 239,000 $ (441,000) $ 673,000
====================================================================

Year ended December 31, 1998:
Contract loss reserves ....................... $ 176,000 $ -- $ (118,000) $ 58,000
Warranty reserves ............................ 30,000 -- -- 30,000
Sales return allowance ....................... -- 527,000 -- 527,000
Allowance for doubtful accounts .............. 417,000 1,152,000 (669,000) 900,000
Inventory reserve ............................ 50,000 67,000 -- 117,000
Restructure reserve .......................... -- 7,800,000 (7,182,000) 618,000
====================================================================
Total .................................... $ 673,000 $ 9,546,000 $ (7,969,000) $ 2,250,000
====================================================================
</TABLE>

II-5
<PAGE>

ITEM 17. UNDERTAKINGS.

A. The undersigned Secure Computing Corporation hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;

(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement;

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;

Provided, however, that paragraphs (i) and (ii) shall not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by Secure Computing
Corporation pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

B. That, for purposes of determining any liability under the Securities
Act of 1933, each filing of Secure Computing Corporation's annual
report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offering therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of Secure Computing Corporation pursuant to the provisions
described under Item 14 above, or otherwise, Secure Computing
Corporation has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by Secure Computing Corporation of expenses incurred or
paid by a director, officer or controlling person of Secure Computing
Corporation in the successful defense of any action, suit or
proceeding) is asserted against Secure Computing Corporation by such
Director, officer or controlling person in connection with the
securities being registered, Secure Computing Corporation will, unless
in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Secure
Computing Corporation certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in San Jose, State of California, on the 14th day of October
1999.

Secure Computing Corporation
By: /s/ Timothy McGurran
--------------------
Timothy P. McGurran, Senior Vice President
of Operations and Chief Financial Officer

II-7
<PAGE>

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John McNulty and Timothy McGurran, or
either of them, with the power of substitution, her or his attorney in fact, to
sign any amendments to this Registration Statement (including post-effective
amendments), and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

October 11, 1999 /s/ John McNulty
-----------------------------------------------
Chief Executive Officer (Principal Executive
Officer) and Chairman of the Board of Directors
John McNulty

October 14, 1999 /s/ Timothy McGurran
-----------------------------------------------
Senior Vice President of Operations and Chief
Financial Officer (Principal Financial and
Accounting Officer) Timothy P. McGurran

October 12, 1999 /s/ Steven M. Puricelli
-----------------------------------------------
Director Steven M. Puricelli

October 10, 1999 /s/ Eric P. Rundquist
-----------------------------------------------
Director Eric P. Rundquist

October 8, 1999 /s/ Robert J. Frankenberg
-----------------------------------------------
Director Robert J. Frankenberg

October 8, 1999 /s/ Alexander Zakupowsky, Jr.
-----------------------------------------------
Director Alexander Zakupowsky, Jr.

II-8
<PAGE>

SECURE COMPUTING CORPORATION
EXHIBIT INDEX

A. Exhibits

Exhibit Description
- ------- ----------------------------------------------------------------------
2.1 Agreement and Plan of Merger among Secure Computing Corporation, Owl
Acquisition, Inc. and Enigma Logic, Inc. dated as of June 24, 1996, as
amended as of July 31, 1996. (1)
2.2 Acquisition and Pre-Amalgamation Agreement among Secure Computing
Corporation, Edge Acquisition Inc. and Border Network Technologies,
Inc. dated as of May 28, 1996, as amended as of July 31, 1996.(1)
2.3 Amalgamation Agreement dated as of August 29, 1996. (2)
3.1 Restated Certificate of Incorporation of Registrant. (3)
3.2 By-Laws of the Registrant. (4)
4.1 Specimen of common stock certificate. (5)
4.2 Securities Purchase Agreement dated June 30, 1998. (6)
4.3 Registration Rights Agreement dated June 30, 1998. (7)
4.5 Warrant to purchase shares of common stock dated June 30, 1998. (8)
4.6 Amended and Restated Rights Agreement dated October 22, 1998. (9)
4.7 Amended and Restated 1995 Omnibus Stock Plan. (10)
4.8 Common Stock Investment Agreement between Manchester Securities Corp.
and Secure Computing Corporation dated as of October 4, 1999. (11)
4.9 Warrant to purchase common stock dated October 5, 1999. (11)
5.1 Opinion of Heller Ehrman White & McAuliffe. *
10.1 Registration Rights Agreement among ITI, Incorporated, GroTech
Partners II, L.P., Ideas, Inc. and Bernard Farkas dated July 14, 1989.
(12)
10.2 Purchase Agreement among ITI Incorporated, Grotech Partners II, L.P.,
Ideas Inc. and Bernard Farkas dated July 14, 1989. (13)
10.3 Purchase Agreement among ITI Incorporated and Corporate Venture
Partners dated December 13, 1989. (14)
10.4 First Amendment dated December 13, 1989 among ITI, Incorporated,
GroTech Partners II, L.P., Ideas, Inc., and Bernard Farkas and
Corporate Venture Partners to Registration Rights Agreement among ITI,
Incorporated, Grotech Partners II, L.P., Ideas, Inc. and Bernard
Farkas dated July 14, 1989. (15).
10.5 Software Agreement between AT&T Information Systems Inc. and ITI,
Incorporated, Agreement No. SOFT-01701, dated April 2, 1990, including
Supplement No. 1, UNIX System V Release 3.0, Supplement No. 2 dated
August 10, 1990; Sublicensing Agreement between AT&T Information
Systems, Inc.; Letter between UNIX System Laboratories, Inc. and ITI,
Inc. dated April 15, 1991; Letter Agreement modifying Software
Agreement No. SOFT-01701 dated October 22, 1992; and Software
Agreement between AT&T Information Systems Inc. and ITI, Incorporated,
Agreement No. SOFT-02036, dated July 26, 1991. (16)
10.6 Agreement and Plan of Merger and Reorganization among ITI Incorporated
and Secure Computing Technology Company dated May 29, 1992. (17)
10.7 Employment Agreement between Secure Computing and John E. McNulty
dated May 3, 1999. (18)
10.8 Registration Rights Agreement between Manchester Securities Corp. and
Secure Computing Corporation dated as of October 4, 1999. (11)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Heller Ehrman White & McAuliffe (contained in opinion filed
as Exhibit 5.1).
24.1 Power of Attorney (see page II-8).

- ------------------------------
* To be filed by amendment.

(2) Incorporated herein by reference to Exhibit 2.3 to Secure Computing's
Current Report on Form 8-K filed September 12, 1996 (File No.
0-27074).

II-9
<PAGE>

Certificate of Designation of Series B Preferred Stock, incorporated
herein by reference to Exhibit 1 to Secure Computing's Form 8-A filed
on November 9, 1998, and (iv) the Certificate of Amendment filed with
the Delaware Secretary of State on December 11, 1998, incorporated
herein by reference to Exhibit 4.1 to Secure Computing's Registration
Stated on Form S-8 filed on February 5, 1999.